Key terms, ‘The double entry system of book-keeping ensures each business transaction has equal and opposite effects in atleast two diferent accounts in the accounting system. ‘An accountis a record in ledgers, used to collect and store debit and credit. amounts relating to an asset, a liability, capital, an income or an expense, For example, every transaction that involves machinery will be recorded in the: machinery account. Posting is the act of using ‘one book to transfer entries into accounts in another book, thereby performing or completing double entry. Ledgers are books that collect groups of similar accounts, The double entry system of book-keeping Ue eee cer kok Pe Ce cee] sere Corie Caan) Peer ied ees ee Cea + balance ledger accounts as required and make transfers to financial Peon Peer ede ae ee eeu Rica Tce} + recognise the division of the ledger into the sales ledger, the purchases ree Rau uc ad Double entry system of book-keeping In Chapter 2, you saw that business transactions had two effects on the accounting equation and the statement of financial position. It is impossible to prepare a statement of financial position after every transaction as the number of transactions a business undertakes in one financial year are too numerous to make this possible. This is where the double entry system of book-keeping is used. The very first stage of the accounting process is collecting and recording financial data. Data, after being collected from source documents such as invoices (you will learn more about these in Chapter 4), will then be recorded using the double entry system. The system requires that each transaction is recorded in two different accounts. The act of using one book to transfer entries into accounts in another book, in order to complete double entry, is known as posting. This ensures that the accounting equation always balances after the recording of a transaction. Processing accounting data using the double entry system Accounts are records that are usually represented by an individual page in the ledgers. Every asset, liability, income, expense and capital will have its own individual page. On this page, debit and credit entries are made in date order whenever transactions that affect that asset, liability, income, expense or capital account take place. To begin the process of setting up a double entry system, a business will need ‘to make a list of all the accounts in which it will be recording transactions. For every transaction, the business can then choose two (or more) accounts to make entries in. Accounts may be added, if needed, or deleted, once closed and not needed anymore. Because of the double entry system, each transaction of a business will affect a combination of two or more accounts from the statement of financial position and/or the income statement.Key info Ian asset inereases, it should be debited. Ifan asset decreases, it should be credited It liability oF capital increases, it should be credited. Ifa Uability or capital decreases, it should be debited, Preparing ledger accounts Table 3.1 shows some of the possible accounts that a business could open. Table Ponsa acount bunnes could open See es Aaset ccount ath machinery ade Ince acount aes, eommision reccnatcs super invemory premise, _ncenabes meres socewale sen iby acount ren paybie Wade” Expense acauns wages sly. er copa see een eet Capital and drawings Double entry records for statement of financial position accounts ‘As mentioned in Chapter 2, every transaction increases or decreases the value of assets, liabilities or capital in accounts concerned with the statement of financial position. Preparing ledger accounts The ‘T’ Account - a graphic representation of a ledger account Every page of a ledger that bears an account is divided into half. The debits, abbreviated to ‘dr, are shown on the left and the credits, abbreviated to ‘cr’, on the right. The name of the account is placed above the . If an account is to be debited, an entry is made on the left-hand side of the account. If an account is to be credited, an entry is made on the right-hand side. The layout of an account is shown below: Dr Name of the account cr. Date Details “Amount Date Details “Amount Let us now look at how the rules of double entry work for statement of financial position items: or account cr Increases recorded here Decreases recorded here Dr Name of the (ability) account cr Decreases recorded here Increases recorded here Try to memorise the accounting equation: + Liabilities ner’s equi Memorising the accounting equation will make it easy to remember when to debit or credit an account. If an asset's value has increased as a result of a transaction, then the left-hand side of the equation increases and the asset is debited (left-hand side of an account). If the value of a liability has increased as a result of a transaction, then the right-hand side of the equation is increased3. THE DOUBLE ENTRY SYSTEM OF BOOK-KEEPING and the liability is credited (right-hand side of an account). Remember, too, for every account debited, another account should be credited with the same amount. Activity 1 opy and complete the folowing table by entering ‘true’ ar false’ for each statement Statement ‘True/False 1 Han asset increases, the asset account should be debited. 2 la liability increases, the liability account should be debited. 3 If an asset decreases, the asset account should be debited 4& ira liability decreases, the lability account should be credited 5 If capital (owner's equity) increases, the capital account should be debited Posting transactions to the ledger accounts When making entries, it is important to write the date and the details along with the amount. The entry is not complete if any of this is missing. The detail is the name of the other account involved in the transaction and is mentioned so that a cross-reference can be made. ) _ Remember, once an account is opened, all further entries relating to this asset, Key info “S. liability, etc., are made in this account. It is not necessary to keep opening a new Iryouhave a transaction account for every new transaction. with eee» Worked example 1 pbankaccountthatwil Accounts from the statement of financial position and not a ‘cheque’ ‘2018 ~~ ‘Transactions Acc account a oe nye aieie [May1 Helen deposited $45000 into the business Bank Capital capital (owner's equity) bank account int to be account or the drawings | May$ The business bought a motor vehicle, paying Motorvehicle. Bank account. Ifthe owner by cheque $7000. is bringing resources May 10 The business bought furniture from Offset Ltd Furniture Offset Ltd into the business, then $4500 on credit, the capital account is credited. If, however, the owner is withdrawing May 15 The business received a loan of $7800 from Bank KL. Loans KL Loans by cheque. resources fram the May 30 The business paid Offset Ltd $4500 by cheque Offset Ltd Bank business for personal for debt owing to it. Hise) then theldeawngs! May30 The owner withdrew cash $4000 fromthe Drawings Bank account is debited business bank account for personal use,Posting transactions to the ledger accounts Bank account Date Details $] Date $ 2018 2018 May1 Capital 45000 | May Motor vehicle 7900 May 15. K.L. Loans 700] May30 offset Ltd 4500 May30 Drawings 4000 Date Details Details 2018 2018 May! Bank 45000 Motor vehicle account Date Details ‘$Date Details $ 2018 2018 May5 Bank 7000 Furniture account Date Details $Date Details $ 2018 2018 May 10 Offset Ltd 4500 Offset Ltd account Date Details $Date Deta $ 2018 2018 think about it! g Risk sted ___M BE 4500 [May 10 Furniture 4500 Da ae Fae weieanumalgny Ket beans account Perea ens Date Det $Date Details $ loan, an accounts opened [MMEAIEY 2018 oars May 15 Bank 7800 Ne aa WW Drawings account ee ces DORRIT Date Details Details 3 eee eae] a8 a1 30May Bank 40003. THE DOUBLE ENTRY SYSTEM OF BOOK-KEEPING At the end of the year, if all transactions are recorded correctly, the total of all debit entries should be equal to the total of all credit entries. Activity 2 A business provides the information shown below. Copy and complete the table by filling inthe names of the accounts to be debited and credited Transactions 1 The owner deposited $270000 in the business bank account 2 The business bought furniture $4500 on credit from, Neural Furniture, 3 The business repaid a loan from Omni Loans $6700 by cheaue. 4 The business took a loan in cash {rom Tabloid Finance $8000 5 Somli,a credit customer, paid the business $500 in cash, 6 The business returned some furniture valued at $700, to Neural Furniture 7 The owner paid a business creditor, Pascal, $300 from her personal funds. Double entry records for expenses and income The rule to be followed is: Debit all expenses and credit all income. ees G) ; Revenves increase oliners equity and expenses decrease it, Owner's equity is shown BB on the right-hand side of the accounting equation. Hence, it makes sense that income is iKey info credited (when increased) and expenses are debited (when increased). De you agree? ‘The tite of income accounts is always accompanied theca neccheu an” Let us now look at how the rules of double entry work for income statement items ‘received’ to differentiate it - (expenses and income): fromanenpense account, pp income accounts cr EO Decreases recorded here Increases recorded here: will be a rent account’ and: “rent received as income will be ‘rent receivable or © account i accounts cr Increases recorded here Decreases recorded herePosting transactions to the ledger accounts Mime Accounts from the business’ income statement and statement of financial position 2018 ‘Transactions ‘Accounttobe Account to be ite credited Jun 1 Paid salaries $5000 by cheque, Salary Bank Jun & Paid insurance $400 in cash Insurance Cash Jun 10 Received interest $3900 by cheque. Bank Interest receivable Jun 29 Received rentiin cash $5000 for rooms Cash Rent receivable rented out, Paid motor expenses in cash $30 Motor expenses Cash Salary account Date Details Date Details $ 2018 2018 Jun? Bank 5000 Bank account Date Details $Date Details $ 2018 2018 Jun 10 Interest receivable 3900 | Jun Salary 5000 nce account Date Details $]Date Detaits 2018 2018 Juné Cash 400 Cash account Date $Date Details $s 2018 2018 Jun 29 Rent receivable 50000 | Jun 6 Insurance 400 Jun30 Motor expenses. 30 Interest receivable account Date Details $] Date Details $ 2018 2018 Jun 10 Bank 3900 Rent receivable account Date Details $Date Details $ 2018 2018 Jun 29 Cash 50000 Motor expenses account Date Details $|pate Detaits $ 2018 2018 Jun30 Cash 303. THE DOUBLE ENTRY SYSTEM OF BOOK-KEEPING Activity 3 ZA business provides the information shown below. Copy and complete the table. Transactions “Account to be debited Account tobe credited 1 Paid salaries by cheque $6000 Paid rentin cash $7000 Received commission $500 cash Received rent by cheque $20000 Paid motor expenses in cash $50 Accounts linked to inventory Inventory purchased for resale is normally sold at a price above that of the purchase price. This enables the business to make a profit. However, sometimes the selling price is below the cost price and this will result in a loss. Whether the business makes a profit or a loss, there is a difference in how inventory is valued: » Inventory bought will be valued at cost price » Inventory sold (if the business is profitable) will be valued at selting price. Hence, separate accounts must be opened, as shown in Table 3.2 Table 3.2 Accounts linked ta inventory ‘When inventory increases ‘When inventory decreases Purchases account This accounts debited Sales account This account is with the cost of goods credited with the bought for resale. selling prices of goods bought for resale and now sold. Sales returns This account is debited Purchases returns This account is account/Returns with the value of, account/Returns credited with the inwards account goods returned tothe outwards account value of goods business by customers returned to suppliers Purchases account This account is used to record purchases, or goods bought by a trader for resale. The value of the goods will be recorded at cost price as a debit in the purchases account. Table 3.3 gives details of the double entries to be posted for purchases of goods for resale. Key term Purchases refer to the value of goods bought for resale. For example, to a used car dealer, a car bought for resale. Tab 3 Double ent ies for purchases ‘Type of purchase of goods Accounts affected Goods purchased for cash The purchases account will be debited and the cash account credited with the cost price of the purchases. Goods purchased for cheque The purchases account will be debited and the bank account payment will be credited with the cost price of the purchases, Goods purchased on credit The purchases account will be debited and the supplier's from a supplier account will be credited with the cost price of the purchases,Posting transactions to the ledger accounts Not all purchases go into a purchases account. The purchase of a non-current asset, for instance, will be debited to the asset account and not the purchases account. It is only when the business purchases goods or inventory for resale that the purchases account is debited. If a car was bought by a cake shop business, the purchases account would not be debited. Car account (a non-current asset account) would be debited. GA ks A business’ purchases of goods for resale 2018 Transactions ‘Account tobe Account to be debited credited ‘Aug 1 Bought inventory paying by cash $400 Purchases Cash ‘Aug 10 Bought inventory paying by cheque $300 Purchases Bank ‘Aug 28 Bought inventory on credit from Bombastic Ltd $670 Purchases Bombastic La} ‘Aug 30_Paid Bombastic Ltd $670 cash Bombastic Ltd_Cash In the example above, the supplier, Bombastic Ltd, is called a trade payable. When the debt is paid, this trade payable’s account will be closed. Here are the ledger accounts for the transaction in Worked example 3. Purchases account Date Details § [Date Details $ 2018 2018 Aug] Cash 400 ‘Aug 10 Bank 300 ‘Aug 28 Bombastic Ltd 670 Cash account Date Deta $] Date Det $ 2018 2018 Aug Purchases 400 Aug 30 Bombastic Ltd 670 Bank account Date Details $Date Detaits $s 2018 2018 ‘Aug 10 Purchases 300 Bombastic Ltd account Date Details $] Date Details 2018 2018 ug30 Cash 670 | Aug 28 Purchases 6703. THE DOUBLE ENTRY SYSTEM OF BOOK-KEEPING Sales account PTT Sales are defined as the sale of goods that were bought for resale by a trader. Trtenpmetemen a Though purchases are valued at cost price, sales are valued at selling price. The sales account is credited with the value of the sales revenue earned from the sale of inventory. Table 3.4 gives details of the double entries to be posted for the sale of inventory purchased for resale. Cree eae pera et cee ena nee Table 3.4 Double entries for sales Inventory sold for cash The cash account will be debited and the sales account will be credited with the selling price of the inventory sold, Inventory sold for cheque The bank account will be debited and the sales account will, payment be credited with the selling price ofthe inventory sold, Inventory sold to a customer, Selwyn Shoes, the customer, will be debited and the Selwyn Shoes, on credit sales account will be credited with the selling price of the inventory sold, > Worked example 4 Sale of goods purchased for resale 2018 Transactions ‘Accounttobe Account to be Sept2 Sold inventory for cash $4000 Cash Sept 10 Sold inventory $300 receiving a cheque payment Bank Sept 20 _Sold inventory to Mark Garments on credit$280_Mark Garments _Sales Sales account Date Details $] date Details $ 2018 2018 Sept? Cash 46000 Sept10 Bank 300 Sept 20. Mark Garments 20 Cash account $Date Details $ 2018 2018 Sept? Sales 4000Key info When a return is made, the business to whom the return is made must acknoviledge receipt of the return, They also must accept the reason for the return as being a valid reason, Anote is sent to the person or business making the return, giving full allowance [refunding the whole mount) for the value af the goods returned. Posting transactions to the ledger accounts Date Details $ | Date Details $ 2018 2018 Sept 10 Sales 300 Date ils $ | Date Details $ 2018 2018 Sept 20. Sales 280 Returns Inventory purchased is sometimes returned for any of the following reasons: »» The wrong size of the product was shipped. » The product did not match the catalogue description » The customer ordered the wrong product. »» Customers sometimes order more than they need to take advantage of bulk discounts and therefore may return products surplus to their needs. »» The product was damaged. » The product was not delivered on time. The business could return goods to suppliers or a customer of the business could return goods to the business. When the business returns goods to suppliers, a returns outwards or purchases returns account is opened. As the supplier is a creditor, the liability of the business (trade payables) will be reduced by the value of the goods returned to the supplier. The returns outwards account is credited with the value of the goods returned. The supplier's account is debited, showing the reduced liability. Alternatively, customers of the business could return goods to the business. The account opened in this case is called the sales returns account or the returns inwards account. As the customer is a debtor, the debt now owing to the business will be reduced by the value of the goods returned by the customer. The sales return account will be debited. The customer's (trade receivables) account will be credited with the value of goods returned, therefore showing a reduction in the debt owing by this customer. Table 3.5 summarises the entries and the accounts involved in a returns inventory. Table 3.5 Entries for return af inventory Returns ma ‘Account to 4 ‘Account to be credite by customer sales returns/returns inwards customer's account to supplier supplier's account purchases returns/returns outwards3. THE DOUBLE ENTRY SYSTEM OF BOOK-KEEPING > Worked example 5 Return of inventory 2018 Transactions ‘Account to ‘Account to eres Oct7 The business sold goods to Coventry Traders Coventry Traders Sales $5600 on credit Oct 13 Purchased goods fram Govinda Ltd $500.0n Purchases Govinda Ltd credit Oct 19 Coventry Traders returned goods $900, full Salesreturns/ Coventry allowance given return inwards Traders Oct 23 The business returned goods to Govinda Lid Govinda Ltd Purchases $80, full allowance given returnsireturn outwards Coventry Traders account Date Details $Date Details $ 2018 2018 oct? Sales 5600 | Oct 19 Sales returns, 900 Sales account Date Details $date Details $ 2018 2018 oct? Coventry Traders 53400 Purchases account Date Details $ [Date Details $ 2018 2018 Oct13 Govinda Les 500 Govinda Ltd account Date Details $Date Details $ 2018 2018 ct23. Purchases returns 80 | oct 13 Purchases 500 Sales returns account Date Details $] Date Details $ 2018 2018 ct 19 Coventry Traders 900 Date Details Details $ 2018 Govinda Ltd 80Balancing ledger accounts and transfers to financial statements Activity 4 business provides the information shown below. Copy and complete the table, naming the accounts to be debited and credited in the business’ books. Transactions ‘Accounttohe Account to be debited credited 1 Purchased inventory for cash $500 2 Purchased goods on credit $700 from Aslam Traders 3 Purchased a motor vehicle paying by cheque $6980, 4 Sold goods for cash $230 5 Paid motor expenses in cash $56 4 Sold inventory on credit to Jalan and Sons $239 7 Returned goods to Aslam Traders $34 8 Jalan and Sons returned goods $45 49 Sold goods to Mason on credit $4500 Mason returned goods to us $450 cer C) Balancing ledger accounts and transfers to i ~ financial statements answer these questions: At the end of each accounting period, the debit side of each account is compared with the credit sides. Let us look at a debtor, Nevlin’s account: CoE eee ere ere ae eee es Pare are Nevlin's account at the end of a financial Weer Date Details S]pate eta 3 2018 2018 Sept] Sales 5000 | Sept 10 Cash 000 Sept 13 Sales 3400 |Sept 20 Bank 3400 On inspection, the total debits equal the total credits. This means that Nevlin has paid us for all the goods sold to him on credit and therefore owes us nothing. His account should not appear in the statement of financial position because it is not necessary to show a figure for trade receivables if it is zero. Therefore, Neviin's account is closed off. Here is how it is done: Neviin’saccount Date Det $] Date Details § [Asingle tines 2014 nie ran above both Sept! Sales 5000|| Sept 10 Cash 5000 13 Sales sung] 20 Bank 3400/T7pe totals should Er HOE | be written on the same ine. [A double line should be drawn under the totals — itis called ruling of ‘A.Closing off an account3. THE DOUBLE ENTRY SYSTEM OF BOOK-KEEPING If an account has only one entry on each side and they are equal, then there is rno need to write the total line. The account is simply ruled off. For example: Nevlin’s account Date Details $Date Details $ 2018 2018 Sept? Sales 3000|Sept10 Cash 5000 When the debit side is not equal to the credit side, then the difference is entered asa balance. Here are the steps to follow to balance an account: 1 Total up the debit and credit sides. Write these total in pencil at the top of each column. It should be written in pencil as it is a part of your working. 2 Write the larger total on both sides of the account on the total line, with a single line above and a double line below. 3 Find the difference between the two totals and enter this on the side with the smaller total, just above the total line. This will make the two sides equal 4 In the date column, enter the last day of the accounting period. In the details column, write the phrase ‘balance carried down’ or ‘balance c/d’. 5 Now bring the balance down by writing the phrase ‘balance brought down’ or ‘balance b/d. This entry is made on the opposite side of the balance c/d. The entry will be dated the first day of the next accounting period and the amount will be the same as the balance ¢/d. Key terms: Abalance c/d on the credit side of an account represents a debit balance. Itis the result of the total debits being more than the | [Slope Shaira's account Step total cred see ‘balance c/don the debit side ofan account Date Detats $| pas “Betas represents a credit 14 coo [ora op [Stp? balance. tis the resut of the ttol debts bing less Sep, Bank 3000 |] sept 10 Purchass 5000 than the total credits Sept30 Balance c/d 2000 Step 5 Apersonal account is the p 8400 309 account of @ person or business, Oct! Balance b/a 2000 ‘A Balancing an account Interpreting ledger accounts and their Key/info balances The credit balance b/d If the balance c/d is written on the credit side it is because the debit side of the ose m cater account is more than the credit side. This is a debit balance. If a personal Sear CIE account has a debit balance, it would show that the person owes money to the the month of October. An business and is therefore a debtor. The totals of all the debit balances of account usually starts with customers will be transferred to the statement of financial position as trade balance b/difanyl and receivables at the end of the financial year. ends witha balance However, if the balance ¢/d occurs on the debit side, it would mean that the e/a if any) credit side of the account is more than the debit side. This is a credit balance.Key info Accounts should always be balanced and closed off at the end of each accounting period, regardless of the number of entries in the account. Division of the ledger Ifa personal account has a credit balance, it would show that the business owes money to the person. This person is therefore a creditor. The totals of all the credit balances of suppliers will be transferred to the statement of financial position as trade payables at the end of the financial year. Activity 5 Ps business had the transactions shown below forthe month of January 2018, Enter ‘hese transactions in the personal accounts trade payables and trade receivables] only. Balance off each personal account at the end of the month, then state which ofthe balances represent trade receivables and which represent trade payables. Purchases on credit from S. Louis $560, J. Kelly $344, M. Mallasa $289 Jan3 Sales on credit to D. Makan $870, R, Stoic $720, B. Brambles $890 Jan Purchases on credit from J. Kelly $876, M. Mallasa $760, 5. Po $ 745 Jan 12 Sales on creditto B. Brambles $560, R. Stoic $850, S. Llama $932 Jan 16 Return inwards from B. Brambles $45, R. Stoic $50 Jan20 Goods returned to J. Kelly $34, M. Mallasa $56 Jan 22 Paid L. Louis by cheque $560 Jan 25S. Llama paid in cash $932 Jan29 Paid S. Poin cash $745 D. Makan paid by cheque $570 Division of the ledger The ledger contains the different accounts where the business transactions are recorded. Their balances are used in preparing financial statements at the end of the financial year. As a business grows, the number of ledger accounts will also grow. Therefore, for convenience and good organisation, accounts of the same type are maintained together. Commonly, there are three divisions of the ledger: the sales ledger, the purchases ledger and the nominal (general) ledger. Sales ledger The personal accounts of all the credit customers of the business are maintained in the sales ledger. The purpose of this ledger is to provide information about how many trade receivables the business has and the value of the debts owing to the business at any point of time. The total of the closing (debit) balances in all the trade receivables accounts, at the end of the financial year, makes up the trade receivables figure in the statement of financial position. Purchases ledger The personal accounts of all the credit suppliers of the business are maintained in the purchases ledger. The purpose of this ledger is to provide information about how many trade payables the business has and the value of the debts owing to FN3. THE DOUBLE ENTRY SYSTEM OF BOOK-KEEPING them at any point of time. The total of the closing (credit) balances in all the trade payables accounts, at the end of the financial year, makes up the trade payables figure in the statement of financial position. Nominal (general) ledger The cash account and all other accounts not contained in the sales and purchases ledgers are maintained in this ledger. The accounts of other assets and other liabilities, income, expenses, capital, sales, purchases and returns can be found in this ledger. Activity 6 Mia is a trader who maintains a {ull set of accounting records 2 State two reasons why Mia maintains accounts in diferent divisions of the ledger. 1 Copy and complete the table and name the division ofthe ledger in which each account is found Account “Premises “Dolores, acredit customer “Sales Purchases Return inwards “Harvey, 2 creait supplier Rent Larry's a trader. His financial year ends on 31 December: Larry maintains a full set of double entry records. He maintains three ledgers: a sales ledger, a purchases ledger and a nominal (general) ledger. Name the division of the ledger in which each of the following accounts would appear. a Sales account bb Reilly's account [a customer) © Purchases account. Exam-style questions The following multiple choice questions should be completed within five minutes. Four possible answers are given for each question and you must choose ‘the one most appropriate answer. 1 BK. Traders provided the following information: $ Inventory 000 Equipment 10000 Trade receivables 2500 Trade payables 3500 Bank overdraft 600Division of the ledger What was the value of total assets? ‘A $15600 B $16500 c $17100 D $20600 a) 2 A customer, Neil, pays the business by cheque for goods previously bought by him on credit. Which entries record the payment in the business’ ledgers? (1 | Account to b ‘Account to be credited UA. Trade payables “Bank | 8 Bank Trade payables iC Bank “Trade receivables | 0. Trade reejatice Bank 3 Kaye returned damaged goods to her supplier, Mungo. Which entries are made in Mungo’s books? a “Account ‘to be debited "Account to be credited : A. Sales returns Kaye B Purchases returns F Kaye | c Kaye Purchases returns Oye "Sates turns ' 4 Machinery was purchased on credit. Which entries are made to record this? [1] “Account to be debited " Aecount to be credited A. Machinery expenses Trade payables 8 Trade payables, | Machinery expenses. | c Machinery Trade payables D Machinery [Cash | 5 Which balance will be recorded as an asset in a statement of financial position? ‘A Acredit balance on the bank account B A credit balance on a supplier's account, C A debit balance on the drawings account D A debit balance on a customer's account re] The marks allotted to the structured questions on the next page are a guide to the length of time that should be taken to complete them. >3. THE DOUBLE ENTRY SYSTEM OF BOOK-KEEPING 6 On 1 August 2018 Nelly had the following transactions: * Paid $100 cash into the bank. Transferred private computer $500 to the business office for use by the staff. * Took cash, $300, as drawings. * Paid a creditor, Jason, $120 by cheque. * Paid electricity bill $300 for the month of July by credit transfer. Copy and complete the table below, stating the double entry needed to record each transaction. The first has been completed as an example [3] © Recount debited '$ Aecount credited as 1 Bank 100 Cash 400 2 3 5 7 Kelsey is a trader who makes both cash purchases and credit purchases. She provided the following information, ‘At 1 January 2018 $ ‘Amount owing to Josh, 2 credit supplier 1500 During the year ended 31 December 2018 Jan 17 Amount paid by cheque for inventory 300 Feb1 Rent received in cash 2000 Feb3 Payment made to Josh for the amount owing Jun 29 Rent received by cheque 500 Now 28 _ Inventory bought on credit from Josh 3.700 a Prepare the following accounts in Kelsey's ledgers for the year ended 31 December 2018 and balance off the accounts. i Purchases account ii Josh's account iii Rent receivable account (14) b State whether Josh is a creditor or debtor. ies] 8 Sahira Ali is a trader. Her ledger is divided into a sales ledger, a purchases ledger and a nominal (general) ledger. a State two advantages of dividing the ledger into these three sections. [2] b Name one account which would appear in the nominal (general) ledger. [1] On 1 October 2014 Sahira Ali's trade payables included the following: $ Waheed Khan 390 Iqbal Wholesalers 650Sahira Ali's transactions for October 2014 included the following: OctS Purchased goods on credit from Iqbal Wholesalers, $280, Oct 13 Purchased goods on credit from Waheed Khan, list price $420, less 20 per cent trade discount Oct 16 Returned goods, list price $210, to Waheed Khan Oct 24 Sent a cheque for $380 to Waheed Khan in full settlement of the amount owing on 1 October Oct 31__ Iqbal Wholesalers charged $6 on the overdue account © Prepare the following accounts in the ledger of Sahira Ali for the month of October 2014. Balance the accounts and bring down the balances on 1 November 2014. i. Waheed Khan account ii Iqbal Wholesalers account (9] (Adapted from Cambridge IGCSE Accounting 0452/21, October/November 2014, Q1) 9 Imran is a trader. The following information is available about Hannah, a credit customer. Mar Owed Imran $700, Maré Purchased goods, list price $320, ess 20 per cent trade discount Mar 12 Returned goods with alist price of $80, Mar 28 Paid the balance due on 1 March after deducting a cash account of 2per cent Prepare Hannah's account for March in the books of Imran. Balance the account on 31 March and bring down the balances on 1 April. 7 (Adapted from Cambridge IGCSE Accounting 0452/11, May/June 2013, 03 a & b) 10 On 1 July 2013 a trader had the following transactions: © Received $800 by cheque from subletting premises. * Took goods costing $200 for his own use. * Received $600 by cheque in full settlement of a debt of $625 from Tabitha, a credit customer. * Sold goods costing $1 000 on credit to Samir for $1 400 Complete the table below showing how these transactions are recorded, The first one has been completed as an example. 7) Transaction Debit entry (Sreditentry $ s Bank 800 Rent receivable 800 (Adapted from Cambridge IGCSE Accounting 0452/13, October/November 2013, 06)3. THE DOUBLE ENTRY SYSTEM OF BOOK-KEEPING 1 State what is meant by an asset. 2. State the difference between a nan-current asset and a current asset, 3 State what is meant by a ability & State the difference between a non-current liability and a current liability 5 6 Name two accounts which would appear in the nominal (generall ledger. Name the division of the ledger in which 2 sole trader will maintain his customers’ accounts, 7 Mai Ling is a baker. Suggest one item she would include in her non-current assets, 8 Sallyis a trader, The following account appeared in her ledger: Vera's account Date $]Date Details $ 2018 2018 Jan 10 Returns 35|Jant Balance b/d 440 Jan19 Bank 226 |Jan& Purchases 650 Discount 3 2 State the division of Sally's ledger in which the above account would appear. b Explain the entry on 10 January and state where the double entry would be made in Sally's accounts. 9 Melania is a trader, She paid her home electricily invoice from her business bank account. State how this payment was recorded in Melania’s books of account. ‘Account debited ‘Account credited erase In this chapter, you have learnt: v how a double entry system is used Pee ee ee v what a ledger is and how it is used v a business can use three different divisions of the ledger v what aT’ account is and how to use it ee eee Le eT Ca ee eee Curt ic) v how to make double entry records for inventory v when and how to prepare the purchases, sales, sales returns and eee eer ey Pace eer Acute. eectBusiness documents By the end of this chapter you will be able to: + recognise and understand the following business documents: invoice, debit note, credit note, statement of account, cheque and receipt Pee ee aC eee % understand the use of the following business documents as sources of information: invoice, credit note, cheque counterfoil, paying-in slip, cea aeons Business documents Business documents are documents that a business uses to source financial data for use in accounting records. Keune Business documents are: Assales invoice is a copy of an invoice retained by a seller when a credit sale is made. ‘A purchases invoice is the invoice received by a customer for a credit purchase made. >» invoices » notes (debit and credit) >» statements of account » cheques » receipts >» bank statements. Invoices Invoices are used by a business at the time of a credit sale. The customer who ___ teceives the original invoice uses it as a record of his/her credit purchases. The 2), supplier keeps a copy of the invoice as a record of his/her credit sales. Hence, the Key info voice her cr same document can be a sales invoice or a purchases invoice. Acashsalewillgeneratea__-Though each business may have its own version of an invoice, all invoices cash receipt. should contain the following information: >» the sellers name and address Key terms »» the buyer's name and address >» the date » a clear description of the goods or service supplied, including price and quantity. Before we look at an example of an invoice, it is necessary to distinguish between a cash discount and a trade discount. A cash discount is a discount given to customers for prompt payment. It is recorded in the books of accounts. A trade discount, which is shown as a deduction on the list price in an invoice, is not documented in accounting records. A trade discount is given to customers who buy in bulk or who have been long-standing customers. A cash discount is given to customers for paying their debts promatly. ‘A trade discount is given to customers who buy in bulk. Itis @ deduction on thelist price The list price i the price at which the trader usually sells the product.4 BUSINESS DOCUMENTS Smee Invoice From: Mason & Son 23 Lakeview Invoice No. 235/A, To. 12 July 2018 ‘Ace & Company 45 Park Street Description avantiy Price per unit ‘amount $ $ Copper wire 2rolls 30 60 Insulation tape | all 0 0 gah * aes Lose 10% discount 7 resent Invi total 2 Se aidan ne Terms: Cash discount of 2% if account paid by 31 August 2018 een Working Total due for copper wire = 2 rolls x $30 = $60 Total due for insulation tape = 1 roll x $10 = $10 Total of goods sold = $60 + $10 = $70 Trade discount = 10% x 70 = $7 Invoice total = $70 - $7 = $63 Study tip Its always a good idea to show your working. Activity 1 Look at the invoice shown in Worked example 1 above. State the name of the seller sending the invoice. State the name of the customer receiving the invoice State the rate of trade discount mentioned in the invoice. State the rate of cash discount mentioned inthe invoice Calculate the amount due if paid before 31 August 2018, State the amount due if paid after 31 August 2018, State two differences between trade discount and cash discount. State which accounts will be debited and credited in the books of Mason & Sons. State which accounts will be debited and credited in the books of Ace & Company, if the materials bought are goods for resale.Business documents 2 Copy and complete the missing items (words or figures] A to G shown on the invoice below. DA 14 Penny Road H, Hussein 15 Apri 2018 3 Manuka: Popuri Kem ‘Quantity Price per unit Total $ $ Mattresses 4 1200 a___ Beds 8 550 3300.00 ©. Less D. discount @ 2% E F ferms: 28% 6 discount for settlement within 14 days Debit and credit notes The primary aim of a note is to document returns or overcharging. If goods received by customers are not what they ordered by way of quantity or quality, or if they are damaged and faulty, then those goods will be returned. The note gives the supplier information of any shortages or the value of the faulty goods being returned. Every business will have its own style of note, but it must contain the following information: > the seller's name and address » the buyer's name and address Key info y » the date ‘The amount in a note » a clear description of the goods or service returned or overcharged, including should reflect the trade price, quantity and total value. The price mentioned in the debit note should discount allowed at the teeataecetiteurhase, be the price charged by the supplier, so ifa trade discount was allowed, this should be deducted from the price. There are two types of notes: debit notes and credit notes. Debit notes A debit note is a document issued by a customer to a supplier when returning goods originally bought on credit. A debit note is a request to the seller to reduce the total of the original invoice and issue a credit note; therefore, no entries are made in the accounting records when a debit note is received for returns. A debit note can also be issued by a seller instead of an invoice to revise (upwards) the amount of an invoice already issued. This happens when the original invoice amount was incorrectly calculated. In this case, the supplier as well as the customer will make accounting entries to record the debit note in the same way as the original invoice was recorded and the customer's account will be debited in the books of the seller.4 BUSINESS DOCUMENTS Cie eners Debit note i MeKenzie Drakes Moniey Debit No. 18 6. cassidy 6 December 2018 Union Drive Woney Betas vanity Pree noun | $s $ Diningsets [5 300.00 1500.00 Less 2% trade discount _30.00 Invoice total Reason for return: Wrong size supplied Please issue a Credit Note Working Value of dining sets returned = 5 x 300 = $1500 Trade discount = 2% x 1500 = $30 Debit note total 00 - 30 1470 Activity 2 State the name of the person sending the nate. b State the name of the person receiving the note. Answer the following questions regarding the debit note in Worked example 2 above: € State the rate of trade discount mentioned in the nate. State two reasons why a buyer may send a debit note toa seller. 2 Copy and complete the missing items (words or figures) A to E shown on the debit note below. To: Billy Hue From: M. Mans 14 Novel Way Kellywortd Gensing Debit Note 3 18 April 2019 em ‘Quantity Price per unit Total $ $ Cotton thread 2reels 150) A Packets of needles 4.00 0.09 83.00 Less¢____ Discount @ 1% D.Business documents Credit notes ‘A credit note is issued by a supplier to a customer acknowledging the receipt of goods returned and letting the customer know the value of full allowance being given for goods returned. A credit note could also be issued by a supplier to a customer when there has been an overcharge on an invoice for goods bought on credit. In either case, a credit note results in the customers account being credited in the supplier's books. The customer who receives the original credit note uses it as a source document to record the purchases return. The supplier uses a copy of the credit note as a source document to record the sales return. CS ener Credit note This is an example of a credit note that would be sent by C, Cassidy in exchange of the debit note Issued by his customer, M. McKenzie, for goods returned: ©. Cassidy Union Drive Manley Credit note number: ¢.23/M 15 January 2019 M. MeKenzie 27 Lakeside Manley Details ‘Quantity Price ‘Amount $ $ Dining sets 5 300.00 1500.00 Less 2% trade discount 20.09] 1470.00 Reason for issue of credit note: Wrong size supplied Activity 3 eer ee eeeretestenetcerer ne tees ere teeter teeters eta eared eleeceocieer a ee D State the name ofthe person recehingtheote State the rate of trade discount mentioned in the note ae ieee air stra lenriers ant eat eeees aet «State the account tobe debited andthe account tobe credited in. Cassidy's books State the account tobe debited and the account tobe creted in M. McKenze's backs.4 BUSINESS DOCUMENTS 2 Copy and complete the missing items (words or figures] A to E shown on the credit note below. To: Li Chen From:N. Raj 12 Flamorgan Credit Jenking Hushev number C56 24 May 2018 Tem ‘Guantity Price per unit Total $ $ Chairs 10 45.00) A___ Antique table lamps | B_____ 100.00 300,00 Less c Discount @ 4% D Statement of account Suppliers usually send a monthly statement of account to their customers. It is a summary of a customer's account activity, showing credit purchases, discounts allowed, retums and payments made during the month. It is a copy of the customer's account in the supplier's books. The purpose of a statement of account is to remind customers of the amount due to their suppliers. The customer can also use the statement of account to check the statement against their own records to ensure that no errors have been made by either the supplier or themselves. Every business will have its own style of statement of account, but it must contain the following information: >» the supplier's name and address >» the customer’s name and address » the date (usually the last day of the month) » the opening balance, showing the amount owing at the start of the accounting period » invoices and credit notes issued » cash discounts allowed (if any) »> payments received » the balance owing at the end of the accounting period (usually a month).Business documents Smee Kelston Retailers. Lima Furniture Suppliers: 34 Lake Road, Taka 30 June 2078 Terms: 2.5% cash Kelston Road, Kelston Date Details Debit Credi Balance 2018 $ $ s Jun Balance b/d 3400 3400 [de] Jun 6 Invoice 34/t 2400 5800Idr) Jun 10 Note 5/g 300 5500Idr) Jun 15 Cheque 6700-00 4500 o90ldr) Jun 20 Invoice 85/) 1000 2000I¢r) “Amount due: $2000 discount if account is paid by 31 July 2018 As the statement is a reproduction of an account already maintained by both the supplier and the Customer, no entries are made in either of their accounting records, unless there is an errar to be corrected, Activity 4 State one purpose of a statement of account. 2 Complete the statement of account below for M. Molly, 27 Crescent Drive, Timbucto, who is a debtor of A, Solly, 34 Lake Drive, Salento. 2018 Jul Balance brought forward $450 Jul M. Molly purchased $370 goods on credit, invoice no 45/6M JuL15—_-M, Molly paid A. Solly $400 by cheque no 4600-00 Jul27__M, Melly returned goods worth $35, full allowance given, Note X/34 Jul28___M Molly paid A. Solly $335 cheque no 4500-23 Date M. Molly 27 Crescent Drive Timbucto Date Details Credit Balance 2018 $ $ Jul Balance b/d 450 [del Jul? Invoice 45/6M Jul 15 400 Jul27 Note X/34 Jul 28 Cheque 4500-23 "Amount due Terms: 2.5% cash discount if account is paid by 31 August 2018 a4 BUSINESS DOCUMENTS Key terms ‘A standing order enables a business to order its bank topay a certain set amount of money regularly at a stated date to an individual or an organisation. A paying-in stip is a small document that a person depositing money (depositor) fills in with the date and amount of money being paid by thom into their bank account. Details such as the ddepositor’s bank account number, the date anc the detalis of the cash Inotes and coins) and cheques deposited are included. Cheque Most businesses today use electronic transfers and standing orders to make payments. However, some businesses still use the traditional method of payment = a cheque. A cheque is a signed unconditional order to a bank to pay a stated sum from the issuer's savings or current account. The payee (the person to whom the cheque has been issued) will receive payment in a way that is safe and convenient. A book of pre-printed cheques is issued to a customer by a bank. All that the customer must do is to fill in the date, the amount in words and figures and the supplier’s name. The cheque should be signed by the customer and this signature should match the one the bank has in its records. Each cheque has a perforated edge that allows it to be detached from its counterfoil. The counterfoil remains in the cheque book and is used as a source document by the payer (the customer) to record the payment in their accounting records. When the cheque is deposited in the bank, a paying-in stip is completed. This slip also has a counterfoil which is completed as well. This counterfoil is used by the supplier as a source document to make entries in the cash book. Receipt A receipt is a formal written acknowledgement that a business has received money in payment following a sale. It shows the date, goods or services sold, prices, the total amount paid and the method of payment. A cash receipt is usually provided to a customer who pays in cash. This cash receipt serves as a source document for entries in the cash books of the customer. Bank statement A bank statement is a record that summarises all the transactions in the business’ bank account since the previous statement. The statement is sent to ‘A.An example of a cheque and its counterfoll the business typically on a fixed date every month and lists the deposits, withdrawals, credit transfers, standing orders, bank charges, interest paid and RECEIPT Ne 000001] earned cheques paid into the bank and cheques pare. paid out of the bank account. It also includes Fe is the statement date, the transaction date for each DOLLARS transaction, the statement period, the business’ name Een and account number. lnec. Ou The statement starts with the opening balance a ef from the previous month, Added to it are all the ue a transactions during the month resulting in a closing A An example of a receipt balance. The transactions on a statement are listed in date order. Businesses should check their statementKey term Abank transfer takes place When funds are transferred from one bank account to another by electronic Business documents for any errors which can be detected when reconciling their own records with the bank statement (see Chapter 8). Businesses use the bank statement to keep track of their finances. Regular monitoring will help the business avoid overdraft fees and detect errors or fraud in time. FIRST BANK OF MIKI 13 James Street Vie Page | of May Jones CURRENT ACCOUNT STATEMENT Statement period 25 Dune Street Account No. 0005-145-568-00 01/01/2019 to 31/01/2019 Vic Witharawals Deposits Balance 2019 $ $ s Jan Balance b/d 3000.00 Jan Cheque 10987 500,00 2500.00 Jan 13 Deposit 00,00 3000.00 Jan 16 Cheque 2056 100,00 2900.00 Jan 7 Bank transfer: Noel 400.00 3300.00 Jan 18 Deposit 450,00 3750.00 Jan 31 Bank charges 100.00 650.00 Totals at end of period 700.00 1350.00 3650.00 A An example of a bank statement Exam-style questions The following multiple choice questions should be completed within five minutes. Four possible answers are given for each question and you must choose the one most appropriate answer. 11 Which source document issued by a business is used to prepare the sales return account? A Credit note B Debit note © Sales invoice D Statement of account 1) 2 Roxy ordered 200 computer components from Pooja. Each component was priced at $20.95. Pooja allowed a trade discount of 5 per cent. What was the total of the invoice that Roxy received? A $3580.90 B $3890.50 C $3950.80 D $3980.50 {4 >4 BUSINESS DOCUMENTS 3 Which document will a supplier issue to a customer who has been overcharged for goods supplied on credit? A Credit note B Debit note © Sales invoice D Statement of account (0 4 Lal had the following business transactions with Neena, a new customer: $ Junt Good invoiced to Neena 4000 Jun 10 Cheque received from Neena 3.000 Jun 20 Credit note issued to Nena 600 Jun29 Goods invoiced to Neena 3200 How much did Neena owe Lal on June 30? ‘A $3600 B $4200 © $6600 D $10400 a) 5 Regina sold goods to Kareena at a list price of $5000. Regina has allowed Kareena a trade discount of 5 per cent and a cash discount of 2 per cent. What was the amount of the invoice sent to Kareena by Regina? A $4566 B $4570 Cc $4655 D $4750 fa) The marks allotted to the structured questions below are a guide to the length of time that should be taken to complete them. & Hirosh is a supplier and one of her credit customers is Jay Ling. Jay Ling's account as it appears in Hirosh’s ledger is shown below. Date _ Details $ Date Details $ May! Balance b/d 3400] May15 Bank 000 May? Sales 4900| May 17 Sales returns 1000 May 19 Sales 2500] May27 Bank 2000 May27 Discount allowed 200 May31 Balance eld 4400 ST} STE} 2 Prepare a statement of account for Hirosh to send to Jay Ling. (5] b State whether the balance at 31 May is a debit balance or a credit balance. [1]Business documents 7 a Insert the missing figures in the following document. [3] CREDIT NOTE Jai Kapur 46 West Street Hightown Vijay Singh 25 Aprit 2015 11 North Road Lowtown Quantity Description Unit price [Amount $ $ 4 External doors 55 220 Less A___% trade eiscount 3 s___ 2omeves _| Floarboards 1.50 a c b Name the person who issued the credit note. 1] © Suggest one reason for the issue of the credit note. fl d Name the document which would have been issued to request a credit note. ft] © Complete the following table to show where the credit note would be recorded (4) Books of Jai Kapur Books of Vijay Singh ‘Account debited Account credited Account debited Account credited (Adapted from Cambridge IGCSE Accounting 0452/21, May/June 2015, 02) 8 Sam Sumo received a statement of his account with the Eastern Commercial Company at 30 September 2010. a State one purpose of sending a statement of account to a customer. [2] Sam's statement was as follows. >4 BUSINESS DOCUMENTS EASTERN COMMERCIAL COMPANY STATEMENT OF ACCOUNT ‘Sam Sumo 30 September 2010 Date Detait or cr Balance $ $ $ Sept! Balance bit 400.00 400.00 Sept? Sales ~ invoice 301 56.50 456.50 Sept 12 Sales - invoice 320 217.00 673.50 Sept 19 Sales returns ~ credit note 29 16.50 657.00 Sept28 Bank - Sam Sumo 392.09 265.00 Sept30. Balance cif 268.00 Terms: 2% discount for settlement within 21 days. b i State why Sam paid $392 on 28 September when the balance brought forward on 1 September was $400. Qa] ii State whether this payment was for the correct amount. Give a reason for your answer. Bl On 19 October 2010 Sam deducted the discount offered from the balance on the statement dated 30 September 2010 and paid the net amount which he considered was due. © i Calculate the amount Sam deducted from the balance due at 30 September. Show your workings. B] ii State the net amount which Sam paid on 19 October. 6] d Show the entries in the Eastern Commercial Company's accounts for the month of September to record each of the transactions shown in the statement of account. Balance Sam Sumo's account at 30 September. [10] © Sam wishes to take advantage each month of the discount terms offered by the Eastern Commercial Company. Explain how Sam can ensure he obtains the discount each month. (2) (Adapted from Cambridge IGCSE Accounting 0452/11, October/November 2010, 04)Business documents 9 Ian McDonald buys goods from Fiona Fraser. The following document was issued at the end of April 2011, ‘STATEMENT OF ACCOUNT Fiona Fraser Unit 12 Newton Industrial Bradleyford lan McDonald 30Aprit2011 High Street Seatown Date Reference Debit Credit Balance $ $ $s 2011 Apr Balance 100.00 100.00 Apr & Interest charged 2.00 192.00 Apr ig Cheque 102.00 o ‘Apr 22 Invoice 496 250.00 250.00 ‘Apr 27 Credit note 202 20.00 230.00 ‘The last amount shown in the balance column is the amount now due. ‘Terms: 2% cash discount it amount paid within 14 days of date of statement. a State the purpose of a statement of account. ft] bb Name the person who issued the above statement of account. fal (Adapted from Cambridge IGCSE Accounting 0452/21, May/June 2011, Q1) 10 Briscow has a hardware business and buys inventory on credit. He receives purchase invoices from his suppliers. a Name the book of prime entry in which Briscow will enter his purchase invoices. ft] b Briscow has received a purchase invoice from a supplier. Certain items are missing from the invoice but it is possible to complete the missing items from the other information Complete the missing items (words or figures) A-G on the suppliers invoice >4 BUSINESS DOCUMENTS tobat Supply Company Sales invoice Briscow 18 September 2011 Quantity Description Unit price Total $s $ 100 Fastenings, 280 250.00 250 Long screws A 112.50 1000 Boltheads 075 750.00 50 Wall fixings: 3.00 150.09 8 Angles 2.80 210.00 500 Wood nails 030 150.09 LessD_____ £__ discount c Total 1557.69 Terms: 23% 6, discount for payment within 14 days of invoice (Adapted from Cambridge IGCSE Accounting 0452/13, October/November 2011, 03) 11 Joe's business had the following assets and liabilities on 31 March 2011: $ Non-current assets 120000 Liabilities due within one year 25000 Current assets 35000 Liabilities due in over one year 59000 a Calculate the capital and capital employed. (2l During the month of April 2011, Joe recorded the following transactions: i Bought goods on credit from Henry, $200. ii Sold goods costing $300, to Mary for the selling price of $500, on credit. ‘iiiSent Henry a cheque for $190 in full settlement of his debt of $200. iv Mary returned goods with a selling price of $50. b Complete the grid below and show the amount and effect on capital of each transaction. The first transaction has been completed as an example. (22) Transaction [Book of | Accounts tobe [Accounts to | fect on capital primeentry | debited be credited $ i Purchases | Purchases Henry Nit journalay Business documents © State the purpose of the three documents used in transactions 2 to 4 above. i invoice ii Cheque counterfoit ‘iiiCredit note [2] {2} [2] (Adapted from Cambridge 0 Level Accounting 7110/21, May/June 2011, Q1) Chapter review questions Define and explain the purpose of each of the following source documents: a Invoice b Credit note € Debit note 4 Statement of account It was discovered that a credit customer had been charged $65 for a purchase instead fof $56. Name the document issued by the supplier to correct the error. Name the document issued to a customer by a supplier af goods on credit The table belaw shows the sales figures for Karama Retaivers for the year ended 30 June 2019, State the amount of the credit entry in the sales account? Goods Trade discount Net $ 50000 $ 2700 $ 47300 State one reason why a supplier might allow a trade discount to a customer. ABC Ltd supplies goods to Jonas and Sons. Jonas and Sons owe ABC Ltd $450 on 1 June. Below is an invoice that was sent to Jonas and Sans for additional goods purchased 2 Complete the invoice below, Sales Invoice ABC Ltd Jonas and Sons Invoice no. 2598 Uniquevite Description Quantity Lighting units ‘ Woaden cases 2 b Jonas and Sons returned some damaged goods to ABC Ltd. Complete the credit, note below, Credit Note no 258/¥ ABC Lid Description Quantity Lighting units 2 Wooden cases 4 30.00 each 10,00 each Total Price $ 30,00 each 10,00 each Total June 2019 Total $ A B 16 June 2019 Total A:4 BUSINESS DOCUMENTS Jonas and Sons paid the amount owed at the beginning of June by cheque no, 7008 on June 25 and received 2 per cent the amount of the cheque. Complete the following st ash discount. Calculate the discount and ment of account prepared by ABC Ltd and sent to Jonas and Sons. (Refer to questions 6, b and 6c above to help you} age Lea Date: Statement of Account Date Details Dr cr Balance 2019 $ $ $s Jun Balance b/d 450 (del Jun 3 Invoice 2598 Jun 18 Note 258/¥ Jun 25 Cheque 7008 Discount Terms: Cash discount ‘Amount due §. 2% if paid within 30 days 7 On 4 June 2018 Kusum received the document below from her supplier, Lui Ltd Date May 18 May 21 your workings. © State the names of the source documents sent by Lui Ltd to Kusum for the following transactions: Laila 31 May 2018 27 Ji Lang Lane, Shanghai Kusum 5 Ki Street Kan Town Date Details DF cr Balance 2018 $ $ $s May1 Balance b/é 2500 2500 (dr) May 18 Sales 500 3000 {de} May 21 Sales Returns 50 2960 Id) May 29 Bank 950 May 29 Discount 50 ‘a Name the above dacument. b Calculate the balance amount due from Kusum to Lui Ltd on 31 May 2018, Show Name of source document Calculate the percentage rate of the discount allowed to Kusum on 29 May 2018. Show your workings.Business documents Revision checklist USCC on to recognise the following business documents: invoice, debit note, Cee ote une emer ae eae beta Re eu en a eek eee Ca note, statement of account, cheque and receipt Re eu eee ce COA eeu oe eeu ee Cora nee ou Ee) eens how business documents are used as sources of information: invoice, credit note, cheque counterfoil, paying-in slip, receipt and bank Precis PSU CM tee ot Cue Ue eC Cee ao Sete es ee pete Paes eee Co eee ea Ca ng Cee ee eerste v why a trade discount is mentioned in an invoice and howit is different Eon eects v what a bank statement is and how it is used.Key terms ‘A.book of prime entry is a book where transactions are first listed in date order. ‘These entries are later posted to ledger accounts, Using the double entry system af book-keeping, ‘A cash book contains the bank and cash accounts of a business. It may be a two-column cash book, or a three-calumn cash book if itrecords discounts. Books of prime entry CU Rue cere eck CUE Uc RRL cue Cee ae explain the use of, and process, accounting data in the books of prime entry: cash book, petty cash book, sales journal, purchases journal, sales See ara see acne ace tar Peet ane ee te Cer ea ane er ee ee Ree reed CURR Cera ae ue eu eee eh aaa Pee cee Seca Ree explain the use of and record payments and receipts made by bank Renee ura Caray explain and apply the imprest system of petty cash. Advantage of using books of prime entry Ledger accounts are the sources of information from which financial statements are prepared. However, if a business were to update them after every transaction, the accounts in the nominal (general) ledger would be overcrowded. Therefore, books of prime entry are used. ‘A book of prime entry is a book in which transactions are recorded before they become a part of the double entry system of book-keeping. This saves time and aids accuracy. As we will see, it is not necessary to remember which account to debit or which to credit when making an entry in a book of prime entry. Instead of having to make double entries each time a transaction takes place, most of these subsidiary books allow for month end totals to be posted. These books serve as a device for listing the transactions as they take place, before they are forgotten. Books of prime entry can be maintained by several people, which allows for more accuracy and fewer errors. The advantages of using books of prime entry can be briefly summarised as follows: »» They prevent the accounts in the nominal (general) ledger from being overcrowded » They are a quicker way to record transactions. >» There are fewer errors. The books of prime entry are: » the cash book » the petty cash book » the sales journal >» the sales returns journal (or returns inwards journal) » the purchases journal »» the purchases returns journal (or returns outwards journal) » the general journal.Use of accounting data in books of prim Key info The nature of the transaction dictates which book it should be recorded in. ey Therefore, credit sales are entered in the sales journal, whereas cash sales will ‘Adebt does not have tobe be recorded in the cash book. Credit purchases will be recorded in the purchases paid in cash to quality for journal and purchases returns in the purchases returns journal. ‘cash discount. It could be paid by cheque or a bank transfer Itis the time factor that is important, not the mode of payment. As long as payment is mace Within the time period for itto quality for a cash dicount. aceshaiscouns — Trade discounts and cash discounts will be given, A cash discount is a discount given to customers for prompt payment. Cash discounts are recorded in the books of accounts. If the discount is given by ‘a supplier to the business for prompt payment, then it will be recorded in a discounts received account. If the discount is given to a customer by the business, for prompt payment, then it will be recorded in the discounts allowed pe aera bya | account. The rate of discount is stated as a percentage and will be mentioned in Activity 1 tate two reasons why a book al prime entry is used to make entries before transactions ate recorded using double entry in ledgers, Key terms Supplier toa business when | all sales documents as an incentive to customers to pay within a specified period. payments made'within the | Cash discounts are included in the profit and loss section of the income qualifying period. Itis an | statement and not in the trading account. Discounts allowed are an expense and income. discounts received, an income. These discounts do not affect the cost of goods Discounts allowed are sold or the sales revenue in the trading account. cash discounts given toa customer by a business for prompt payment, Itis A trade discount, which is shown as a deduction on the list price in an invoice, is not documented in accounting records. A trade discount is given to customers an expense incurred by who buy in bulk. Regular customers are often rewarded with a trade discount too. the business forhavingits | It is common for a manufacturer to quote a list price and then offer different debts settled prompt'y. _/ customers differing reductions in the price by way of trade discounts. ‘Study tip Remember, when the amount paid by a customer in full settlements less than the amount owed, the difference is a cash discount. In this case, itis a discount allowed / Activity 2 Calculate the cash discount at 4 per cent on $4500 owed. Then calculate the amount tobe paid by cheque after deducting the cash discount. 2M. Maney owed the business $500, He paid $490 in full settlement. Calculate the rate of discount? 23 The business receives $95in ful setlement of an account afer allowing Sper cent cash discount Calculate the amount ofthe cash discount 1 Key info . . . it Use of accounting data in books of prime is important to remember that trade discounts are entry not recorded in books of accounts. Therefore, the discounts allowed account. Cash book and te lacounts ceceives In Chapter 3 you learnt how accounts are maintained using the double entry account are meant tor system. You opened many accounts, including the cash account and the bank the purpose of recording ashaiscountsony, not. account. These two accounts recorded the movement of money into and from a trade discounts. The only business. It is now common practice to move these accounts out of the ledger place trade discounts are into a separate book called the cash book. The cash and bank accounts are shown mentioned would bein together side-by-side in the cash book. The debit column for cash represents the involees. debit side of a cash account and the credit column for cash therefore represents 375 BOOKS OF PRIME ENTRY The cash book is a book of prime entry that fellows the rules of double entry. the credit side of the cash account. Similarly, the debit column for bank will represent the debit side of the bank account and the credit column for bank will represent the credit side of the bank account. Dual function of the cash book The cash book has a dual function it is a book of prime entry and also a ledger account for bank and cash. The rules of double entry are still applied in the cash book. Money received, in cash or by cheque, is debited in the cash book in the cash and bank columns. Payments made by cash or cheque are credited in the cash and bank columns. Therefore, the cash book is a book of prime entry, as it the first book in which cash and bank transactions are recorded, and a book of double entry, as it acts as a ledger account for cash and bank transactions. Though the cash and bank columns appear together in the cash book, they retain their separate identities and should be balanced separately. Bank withdrawals recorded here [Bank receipts recarded here Date Details Cash Bank Date Details Cash _ Bank. 20x5 $$ 2x5 Jal Bal. Bid 450 100 Jul3. Bank = (280 Juld Sales 2,300 Jul Rent 50 Jul3_cash_ 250 Jute Bary 260 The details Jcoluma shows lwhich account has been credited [cash received recorded here [cash payments, recorded here Detaits column shows which account has been debited [e Stands fora contra entry”. These lwo entries represent one transaction Note the entry in the details column: When cash is credited, the details Bank’, which indicates the double entry account. When bank is debited, the detail is ‘Cash’, indicating the double entry account ‘A. Atwo-calumn cash book Debit side of the two-column cash book The debit side of the two-column cash book is used to record receipts. Money added to the business cash till will be entered in the cash column. Bank deposits will be recorded in the bank column, Bank deposits could be: >» cheques paid into the bank >» bank transfers/credit transfers a simple and convenient way for trade receivables to pay the business by directly transferring money into the business’ account. These funds are electronically transferred, using internet banking. Credit side of the two-column cash book ‘Any payments made by cash taken out of the business cash till or cash box are recorded in the cash column on the credit side. Similarly, bank withdrawals will be recorded on the credit side in the bank column.Key term Direct debits are an arrangement by a business with its bank for a creditor (account payables! to transfer money from the business’ account on pre- arranged dates. Use of accounting data in books of prime entry Bank withdrawals could be: »» cheques made out to business trade payables » direct debits - these represent an arrangement by a business with its bank for 2 creditor to transfer money from the business’ account on pre-arranged dates, Businesses usually pay their electricity and other bills this way » standing orders ~ these represent instructions to the business’ bank to transfer a set amount from the business’ account into that of a creditor at regular intervals. Contra entries Contra entries are used to record cash from the business’ cash till paid into the business’ bank account and cash withdrawn from the business’ bank account for business use. These transactions are called contra entries because they appear on both sides of the cash book, as explained below. Cash from the business’ cash till paid into the business’ bank account When this transaction takes place, it is necessary to debit bank and credit cash. ‘As both cash and bank accounts appear side-by-side in the cash book, both debit and credit entries are made in the same book, usually on the same page. AC’ is placed alongside both entries to show the contra entry. Cash withdrawn from a business’ bank account for business use When this transaction takes place, the cash account will be debited and the bank account credited. Again, both entries will be made in the cash book, one on the debit side and one on the credit side. Surplus cash paid into the bank account It will be necessary for businesses to deposit surplus cash into the bank to ensure that the cash till does not have too much cash. The entries to be made in the cash book are debit the bank column of the cash book and credit the cash column. A‘C is placed alongside both entries to show the contra entry Two-column cash book Seok The following transactions are written up in the form of a two-column cash book. AC’ is placed alongside some entries to show that double entries have been completed to the other accounts, 2018 Jul Cash balance $450, Bank balance $100 Jul3K.Koku, a debtor paid the business $2300, cash The business deposited $250 cash into the bank JuL7 The business paid rent $50 by cheque Jul8 Cash sales $450 paid directly into bank JuL14 The business took $60 from the cash till and paid into the bank account JuL18 The business paid motor expenses by cheque $35 Jul24 The business paid a creditor L. Lee in cash $50 Jul 28 Withdrew $300 from bank for business use Jul29___The business owner withdrew $150 from bank for personal use >5 BOOKS OF PRIME ENTRY Two-column cash book (Page 6) bate betas Cash Bank [Date Deals Tash Bank 2018 $ $ $ $ hi Balbyd 50 [usa Ws aku 200 fate so ia cash aso [jue bine we Sales 450 [Jui Motor Sepenses as sulth cash so| ire Ute so 28 Bank so fautze cash 00 129 Drawings 180 saat antefd 20025 Bw mw jug) bath 2690328 Postings tam the cash book the edgers: Sales edger K. Rohr aeaunt Date Details $| Date Details $ 2018 aore M3 Gath 200 Purchases odger L Lee's account Date Details $| Date Details $ i 2oi8 Wiz cash 0 Nomina (general ledger Sales acount Date Details $| Date Details 18 mie Jul Bank “ Date Details $| Date Details $ 18 oie Wi? Bank 0Use of accounting data in books of prim Motor expenses account Date Details ‘$]Date Details $ 2018 2018 Jul 18 Bank 35 Drawings account Date Details $]Date Details $ 2018 2018 Jul27 Bank 150 Study tip If not otherwise instructed, bank and cash balances are always assumed to be debit balances. Activity 3 ‘ook at Worked example 1, above, State whether the balances carried down in the cash ‘book on 31 July are debit or credit balances. ) Bank overdraft Key info 3 The bank column of the cash book can have a credit balance. This is when the ‘The cash column ofthe bank has extended an overdraft facility to the business, An overdraft is a type of cash book, representing ___ short-term loan that a bank gives its customers upon request. In this instance, the cash account, can never the business can withdraw more than it has deposited in the bank, resulting in have a credit balance the business having a credit balance in its bank account (in the cash book). This is because cash is a tangible asset, When Dishonoured cheque Pea pete: !* <& dishonoured cheque is also known as a bounced cheque. A cheque is dishonoured by a bank when they return it to the drawer, unpaid. The most common reason why a cheque is dishonoured is because there are insufficient funds in the drawer’s account to pay the cheque. Other reasons include: Key term Dishonoured cheque is a cheque that has been rejected for payment when deposited in the bank. > imegular signature - the signature on the cheque does not match the specimen signature held by the bank » alterations - an alteration is made, even if the alteration is initialed » the cheque is presented before the date on the cheque. For example, a cheque bearing a date of 17 July, but written on 2 July is a post-dated cheque. This cheque will be dishonoured if presented before 17 July »» the cheque is stale if it is more than six months old » the drawer has stopped payment on the cheque » the amount in words differs from the amount in figures shown on the cheque. When a cheque is dishonoured, the business makes the following entries: bank account is credited and the debtor's account debited with the amount of the cheque. This entry reverses the original entry. a5 BOOKS OF PRIME ENTRY Activity 4 Look at the details given below for M, Ngugui’s cash book, Work with your partner to: a decide where the opening bank balance will be recorded — on the debit side or credit side of the cash book. Why? bb calculate the amount that should be deposited in the bank from the cash till on 31 May. Will this be a contra entry? 2 May 1 Opening balances: Cash $2500; Bank $360 ler] May 6 Cash sales paid into bank $500 May14 Paid suppliers L. Rado by cheque $170 Cash sales $600 May 18 Received and banked cheque from Monique, @ debtor, $600, Paid wages in cash $300 May21 Monique's cheque for $600 returned unpaid by bank Deposited $600 cash into bank May28 Paid rent by cash $300 May31___Daposited all cash avar the sum of $100 into bank Activity 5 ally Mewakab maintains a two-column cash book. Transactions for the month of ‘August 2018 are shown below. 2018 ‘Aug Cash balance $6000, Bank balance $3000 (dr] Aug 7 Cash sales paid into bank $560 Aug 7 Paid MN. Supplies by cheque $700 Aug 7 Paid insurance by cheque $200 ‘Aug 12 Received and banked cheque from Henriques $500 Aug 17 Paid wages in cash $500 ‘Aug 21 Received and banked cheque $340 from Ace and Co Aug 27 Paid motor expenses by cheque $45 On 2 September 2018 Sally received the following bank statement from her bank. ‘Recount name; Sally Mewakab Date: 31 August 2018 Massey Bank IT Notingworth Southtown Statement of current account Details Debit Credit Balance $ $ $ Balance 3000 Cash 360 3560 (0450 (M.N. Supplies) 700 2860 (09850 (Insurance) 200 2660 (00670 (Henriques) 500 3160 Bank charges. 50 3110 Prepare Sally's two-column cash book for August, showing the balances carried down at 31 August 2018,Use of accounting data in books of prim Note: In the activity above, all the transactions (except for bank charges) already appear in the cash book. Therefore, only bank charges will be the extra entry recorded from the bank statement. Do not worry about the entries missing in the bank statement. These entries will be recorded in the bank reconciliation statement, a topic we will be covering in Chapter 8. Three-column cash book The three-column cash book has an extra money column to record discounts, so it has discounts, cash and bank columns on the debit side as well as on the credit side. This is to avoid too many entries being made in the nominal (general) ledger, where discounts accounts are maintained. When a debtor pays a debt promptly, and is allowed a discount, the debtor's account is credited with the whole amount of the debt, and the cash book is debited with the amount received. The discount is entered on the debit side as well in the discounts column. As the discounts column is not a part of double entry, the column total is posted to the debit side of the discounts allowed account at the end of the accounting period. This debit represents the double entry for all the individual credit entries made in the trade receivables accounts for discounts allowed When we pay a creditor, and receive a discount, the creditor's account is debited with the whole amount of the debt. The amount paid is entered on the credit side of the cash book along with the discount paid. As the discount column is not a part of double entry, the total of the discounts column at the end of the accounting period is posted to the credit of the discounts received account. This credit represents the double entry for all the individual debit entries made in the trade payables accounts for discounts received. Three-column cash book and the treatment of discount columns > Worked example 2 ‘Sammy started a business on 1 June 2018 with a capital of $4500 deposited into the business bank account. Transactions for the manth of June 2018 include the fallowing, 2018 Jun 3 Purchased machinery, paying by cheque $2000 Jun Withdrew $600 cash from bank for business use Jun 10 Received cheque for $450 from Kim and paidit into the bank account Jun 15 Cash sales paid into bank $380 Jun 17 Paid Manu by cheque $255 in full settlement of his account of $370, Jun 22 Cheque of $450 paid into bank on 10 June was relurned dishonoured by the bank Jun 26 Received cash of $245 from Casey in full settlement of her account of $250 Sammy's three-column cash book: Date Details Dis Cash Bank [Date Details Dis Cash Bank 2018 $$ $/a08 ss § Jun Capital 4500 | Jun 3 Machinery 2000 Juné Bank 600 Juné Cash 600 Jun 10 Kim 450 | Jun 17 Manu 8 355 Jun 15 Sales 380 | Jun 22 Kim 450 Jun26 Casey 5 us Jun30 Bal eld ees 1925 5 we bw Ww Jult__ Bal ofa 8651925 2 65 BOOKS OF PRIME ENTRY Wille nev business have pasta etna eae hhave opening balances? id Key terms, ‘A petty cash book is used to record low-value cach transactions such as petrol charges, cleaning expenses and postage stamps. ‘An imprest or float is a fixed amount of money with which the petty cashier starts an accounting period. Posting the discount columns to the nominal [generall ledger: Nominal {generall ledger Discounts received account Date Details S]oate Details $ 2018 2018 Jun 30. Total for the month 18 owed account Date Details $]Date Details $ Jun 30 Total for the month 5 Activity 6 Dolly isa sole trader She provides the details shown below, Prepare a three-column cash book, balance it off and ensure the relevant discount accounts in the nominal {general] ledger are prepared. Balances at 1 July 2016: Bank overdraft $1,670; Cash in hand $2,500. Transactions for the month of July were 2018 Jul Received and banked a cheque from Jan in full settlement of his account of {$500 after deducting cash discount of 2 per cent Jul§ Cash sales $400 JuL10 Dolly paid further capital into bank $6500 Paid cheques in full settlement of accounts owing to Harry $800 and Mason '$500, in each case deducting 5 per cent cash discount JuL16 Paid rent in cash $600 Cash sales banked $250 Jul20 Paid wages by cheque $200 Paid motor repairs in cash $130 Jul22 Received and banked cheque for $370 from Nena in full settlement of her account of $400 after deducting cash discount Jul 30__ Dolly withdrew $500 by cheque for personal use 2. Tatyana’s business has a bank overdraft at 31 August 2019, Suggest one way in which she could reduce or eliminate the overdralt. Analytical petty cash book As a business grows, so do its many cash transactions. These transactions include small value (or petty) cash payments and receipts that would overcrowd the cash book and cause numerous postings to the relevant accounts. Because of this, small payments such as travelling expenses, postage and stationery, cleaning expenses and small payments to trade payables are recorded in a separate book called the petty cash book. Big businesses with numerous low value transactions use the petty cash book for the following reasons: » To record small amounts received or paid out, saving frequent referrals to the main cash book. Entries are made in the main cash book only at the beginning of the accounting period when the petty cashier is given a fixed sum of money called an imprest or float.Key info ‘The petty cash book is ‘a book af double entry; ‘therefore, like the cash book, itis a b00k of prime entry as well as a ledger account with a debit and credit side. Key term Apetty cash voucher is. 3 document showing the purpose for which the money is required and the date, It is signed by the person making a claim for cash for an expense. Activity 7 b petty cash book 2 State three advantages of maintaining a petty Cash book ifthe manthly imprest is $200 and the expenses for the month total $135, how much wil the chief cashier give the petty cashier to restore the imprest? Study tip Itis important to read the questions carefully as information about which expenses columns to include on the credit side of the petty cash book ‘may be mentioned in the Use of accounting data in books of prim >» A junior member of staff, called the petty cashier, maintains the petty cash book. Any errors made due to the petty cashier's inexperience are not serious ones, since the amounts involved are ‘petty’ or small. The added advantage is that the junior petty cashier gets experience in handling a book of accounts and cash >» Since it is maintained by a junior member, the chief cashier, who handles the cash book and is better paid, is saved from routine work, enabling him to attend to more important tasks. Imprest system At the start of an accounting period, the chief cashier advances to the petty cashier a sum of money that enables him to meet petty expenses during that accounting period. These expenses normally require a cash payment. This fixed amount is called the imprest or float. The petty cashier records this amount on the debit side of the petty cash book, while the cashier records it on the credit side of the cash book. The person being paid from the float fills in a petty cash voucher, which is presented to the petty cashier along with proof of expenditure such as a receipt ‘or invoice. She signs the voucher to state that it has been paid by the petty cashier. The imprest is restored in time for the next accounting period, which allows the petty cashier to start the new accounting period with the same amount of cash. The advantage of the imprest system is that the cashier is always aware of how much petty cash is being spent in each accounting period. From time to time, the imprest can be adjusted to meet the changing needs of the business. Petty cash book analysis columns The debit side of the petty cash book records the amounts received by the petty cashier. This includes the imprest as well as small cash receipts from staff for personal phone calls, for instance. The credit side has many columns to record payments for expenses. These columns are known as analysis columns as main expenses are analysed into different categories, so for example, there will be a separate column to record travel expenses, another to record postage and another to record stationery. These amounts can then be posted to the respective accounts in the nominal (general) ledger at the end of the accounting period. Accolumn on the credit side of the petty cash book records the voucher number to which the payment relates. How to make entries in a petty cash book » When the float is received at the start of the accounting period - an entry ‘is made on the debit side of the petty cash book. The date column should be filled with the relevant date. The details column will have the words ‘cash’ or “ank’, whichever is relevant. »» When expenses are recorded during the accounting period - every payment made is entered twice: first in the total column and then in the appropriate ‘expense column. A brief description of the payment is entered in the details column, for example, if travel expenses involves a payment for petrol, the amount will be entered in the travel expenses column and ‘petrol expenses’ is entered in the details column. » When receipts are recorded during the accounting period - small payments received by the petty cashier during the accounting period are entered on the5 BOOKS OF PRIME ENTRY debit side of the petty cash book and the account to be credited is entered in the details column. For example, if a debtor makes a small cash payment and her account is credited, her account name is entered in the details column. » When totals are made at the end of the accounting period - at the end of the accounting period, the total column is totalled vertically. Each of the subsidiary columns are totalled. The totals of the subsidiary columns, when added horizontally, should of course be equal to the total of the totals paid column, » When the imprest is restored - there are two ways an imprest is restored: + after the petty cash book is balanced (balance and then restore) * before the petty cash book is balanced (restore and then balance). Steps to take if instructed to balance and then restore the imprest 1 Balance the receipts column and the total paid column in the same way as balancing a ledger account. Carry down the balance (if any). 2 Bring down the balance (if any) in the receipts column to start a new accounting period. 3 Enter the restoration of the imprest (if any) in the receipts column. This amount is the amount required to make the balance with the petty cashier (the balance b/d) equal to the float or the imprest. Steps to take if instructed to restore the imprest before balancing the petty cash book 1 Bring the balance down, if any. 2 Restore the imprest after calculating the amount of the imprest (amount in hand less amount spent). This amount is to be entered in the receipts column. 3 Balance the receipts column and the total paid column in the same way as balancing a ledger account. Carry down the balance. This balance should be equal to the imprest. Maintaining the petty cash book 1 CMe oncr This worked example demonstrates how to: > enter the month’s transactions in the petty cash book balance the petty cash book > restore the imprest. (On 1 March, the petty cashier received $150 from the chief cashier as a cash imprest. Below is a summary of Mason & Sons’ petly cash transactions: $ Voucher no. Stationery 6 1 Cleaning 8 2 Stamps 2 3 Postage 18 4 Cleaning 2 5 Stationery 15 6 Cleaning 7 7Use of accounting data in books of pri Receipts [Date [Details | V.no. [Total [Postage [Cleaning | stationery | 2018 $ $ $ $ 150] Mar | Cash Mar | Stationery [1 8 15 Maré [Cleaning [2 8 8 Mar? [Stamps [3 2 2 Mar10 [Postage [4 6 6 Mar18 | cleaning |S 20 2 Mar25 | Stationery | 6 8 15 Mar30 cleaning [7 ” ” 702] Zi B a Mar3t | Balance e/d “8 Bl Apri | Balance b/d 102| Avr __| cash Activity 8 Jala keeps an analytical petty cash book using the imprest system. The imprest amount is $150. His transactions for the month of January 2019 are shown below: Date $ Voucher no. Jant Balance 150 Jan2 Bought petrot 30 2 Jan3 Bought stamps 7 3 Jané Paid for postage : ‘ Jan8 Cleaning products ‘ 5 Jan 10 Vehicle repairs 30 ‘ Jan 15 Paid cleaners 55 7 Jan 25 Received for phone call 5 8 Jan29 Postage 3 3 1. Enter the above transactions in Bala’s petty cash book with columns for ‘postage and. stationery, ‘cleaning expenses’ and travelling expenses’ 2 Balance the petty cash book at 31 January, bringing down the balance on 1 February. 3 On 1 February, the petty cashier received an amount of cash fram the chief cashier to restore the imprest. Enter this transaction in the petty cash book. Maintaining the petty cash book 2 > Worked example 4 This worked example demonstrates how to: > enter the month's transactions in the petty cash book > restore the impreset > balance the petty cash book > post the expense accounts to the ledgers. He5 BOOKS OF PRIME ENTRY Raymond maintains his petty cash book using the imprest system. For the month of March 2018, his petty cash transactions were as follows: ore 3] Voucher no wart Patty cash balance 250 Mar? Received cash to restore the impre 4559 Maré Bought stationery 15.00 1 Mar 10 Paid creditr,Salse 6.00 2 war 15 Bought stamps 5.00 3 Mar 18 Received cash or personal telephone call 300 ‘ War 25 Bought envelopes 1.00 5 Receipts [Date [betas [VNo_[Totat [Stationery [Postage [Ledger account $| 2018 $ $ $ $ so] mart | eatbra Study tip, 45.50 |Mar2 | Cash sce Maré [stationery | 1] 1500] 15.00 Calclatd inte allowing mar 0 |Satse 2) 600 6.00 wy: Mar 15 | stamps 3) 500 s.00 Amount for restoration of ao |wecte {tee i imprests Amount sper amount received during the Mar 25 | Envelopes 5 1.00 1.00 month ater the imprest 2400 | Mar3t | cash tases elphone am| uel ww mw Mea | mar a1 fa ra 50.00 aca a 706 000 [apr | atbia Posting othe ledgers Nominal (general eager Stationery a ‘aes SSCS Details + 18 Mar31_—Tealforthe menth 6 Tae as SS=CSiY Details 3 218 Mar31 Total or the month 5 Purchases Salse’s account (page 12) Dae (Deas SS*~*~*~*«S*diate $ 218 ore Mor31_ Petty cash transfer ‘Key term, Sales journal is a book of prime entry where credit sales are recorded. ‘Study tip Remember: only crecit sales are entered in the sales journal, f Use of accounting data in books of prim Sales journal Only credit sales are entered in the sales journal. The entries are made from copies of the sales invoices sent to customers. Entries are made as follows: » The date on which the transaction occurred is entered in the date column » The name of the debtor (customer) is entered in the name/details column » The number of the sales invoice is entered in the invoice number column. » The amount, net of trade discount, is entered in the amount column. Date Name/details Tavoice number “Amount $ 4A Figure 5.2 Rulings of the sales journal Posting from the sales journal into the ledgers When a credit sale takes place: 1 The customer's account is debited in the sales ledger. 2 The details of the invoice are recorded in the sales journal. At the end of the accounting period, the total of the sales journal is credited ‘to the sales account in the nominal (general) ledger. This total forms the double entry for all the individual debit entries in the personal accounts (in the sales ledger). Activity 9 opy and complete the following sentences: 1 The _____of the sales journal is posted to the______of the account in the ledger. 2. As soon as sales takes place, the account in the Tedger is debited 3. The amount entered in the sales journal does not include discount. Sales returns journal Details of goods returned by customers are entered in the sales returns journal. It is prepared from copies of credit notes sent to the customers for goods they have returned. Entries are made as follows: » The date column records the date of the transaction. » The details column records the name of the customer. » The note number column records the number of the credit note. » The amount column records the amount of the credit note (net of trade discount). Date Name/details Note number ‘Amount $ ‘A Rulings of the sales returns journal5 BOOKS OF PRIME ENTRY Posting from the sales returns journal into the ledgers When the customer returns goods: 1 The customer's account is credited in the sales ledger. 2 Details of the credit note are recorded in the sales returns journal. At the end of the accounting period, the total of the sales returns journal is debited to the sales returns account in the nominal (general) ledger. This total forms the double entry for all the individual credit entries in the personal accounts (in the sales ledger). ‘Activity 10 1 Copy and complete the following sentences: a The ____of the sales returns journal is posted to the of the. ‘account in the edger. b As soon as goods are returned by the _____ the______ account in the ledger is credited. 2. Give two reasons why goods are returned by customers, Recording transactions in the sales journal and posting entries to the ledgers Sime oo This worked example shows how to record transactions in the sales journal and the sales relurns journal and how to post entries to the customers! accounts and the nominal [general] ledger. Credit sales to Jason $950, Mason $480, Jun 15 Goods returned by Mason $60 Credit sates to Mason $600 ‘Sales journal Invoice no. ‘Sales returns journal Date Name Note no. ‘Amount 2018 $ Jun 15 Mason 7K aKey term Purchases journal is a book of prime entry where cregit purchases are recorded, Use of accounting data in books of pri Mason's account 2018 Details $]z018 Details $ Jun é Sales 480 | Jun 1 Sales returns 6 Jun 20 Sales 600 Jason's account 2018 Details $] 2018 Details $ Jun é Sales 350 Nominat (general) tedger Sales account 2018 Details $] 2018 $ Jun30 1430 Sales returns account 2018 Details $] 2018 Details $ Jun 30 Total for the month 60 Activity 11 repare the sales and sales returns journals and record the following transactions. ‘Then post to the customer's accounts and show the transfers to the nominal (generall ledger Credit sales to Mandab $230, Yussout $670. Boods returned to us by Yussout $35, Credit sales to Mandad $500, Yussout $290. Cash purchases, Mandab $450 Goods returned to us by Mandab $56. Purchases journal Only credit purchases are entered in the purchases journal. The entries are made from copies of the invoices received from suppliers. Entries are made as follows: » The date on which the transaction occurred is entered in the date column. » The name of the creditor (supplier) is entered in the name/details column. » The number of the invoice is entered in the invoice number column. » The amount (net of trade discount) is entered in the amount column. Date Name/details Invoice number “Amount ‘A Ratings of purchases journal5 BOOKS OF PRIME ENTRY Posting from the purchases journal into the ledgers When a credit purchase takes place: 1 The supplier's account is credited in the purchases ledger. 2 Details of the purchases invoice are recorded in the purchases journal. At the end of the accounting period, the total of the purchases journal is debited to the purchases account in the nominal (general) ledger. This total forms the double entry for all the individual credit entries in the personal accounts (in the purchases ledger). Study tp Remember: only credit purchases are entered in ‘Activity 12 M Copy and complete the following sentences: the purchases journal. a The. of the purchases journal is posted to the. of the ‘account inthe ledger, b As soon as a______ purchase takes place, the ___ account in the ledger is credited. The amount entered in the purchases journal does not include discount. Purchases returns journal The purchases returns journal is also called the returns outwards journal. Details of goods returned by the business to its suppliers are entered in this journal. It is prepared from copies of credit notes received from suppliers for goods returned to them. Entries are made as follows: » The date column records the date of the transaction. » The details column records the name of the supplier. » The note number column records the number of the credit note. » The amount column records the amount of the credit note (net of trade discount). Name/details Note nut “Amount $ ‘A Rulings of the purchases returns journal Posting from the purchases returns journal into the ledgers When the business receives a credit note after returning goods to its supplier: 1 The supplier's account is debited in the purchases ledger. 2 The details of the credit note received are recorded in the purchases returns journal. At the end of the accounting period, the total of the purchases returns journal is credited to the purchases returns account in the nominal (general) ledger. This total forms the double entry for all the individual debit entries in the personal accounts (in the purchases ledger).Study tp Itis not necessary to include an invoice number column in the purchases and sales journals ané ‘a nate column in the purchases and sales returns journals, ifthe question does not ask for them to be included. Use of accounting data in books of prim Activity 13 Copy and complete the fllowing sentences a The____of the purchases returns journal is posted to the of the account in the ____ ledger. b As soon as goods are returned to the wthe ‘account in the ledger is debited. Recording transactions in the purchases and purchases returns journals and then posting entries to the ledgers > Worked example 6 This example shows you how to record transactions inthe purchases journal and the purchases. returns journal. it then shows you how to post those entries to the suppliers’ accounts and relevant accounts in the nominal general] ledger. Credit purchases: Smith $320, Agatha $150 Jun2 Cash purchases: Smith $400, Agatha $300 Jun7 Goods returned to Smith $20 Credit purchases: Smith $180, Purchases journal Date Name Invoice no. Amount 2018 $ Jun Smith v0 320 Jun Agatha wx 150 Jun 28 Smith v0 180 650 Purchases returns journal Date Name Note no. Amount 2018 $ Jun 7 Smith 700 2a 20 Purchases ledger ‘Smith's account 2018 Del $2018 Detai $s Jun 7 Purchases returns 20] Junt Purchases 320 Jun28 Purchases 180 ‘Agatha’s account 2018 De $2018 Details $ dunt Purchases 150