ACCCOUNTING

Accounting is the process of recording, summarising, analysing, and reporting financial transactions
pertaining to a business.

ASSETS - resources that the business owns

Assets can be:
1. Fixed - cannot easily be converted into cash
Eg. Land, Building, Equipment, Motor Vehicle

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2. Current - assets that are expected to turn into cash within a year

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Eg. Inventory, Accounts Receivables, Bank, Cash

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LIABILITIES - debts owed by the business
Liabilities can be:

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1. Long-term liabilities - debts paid over more than one year

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Eg. Mortgage, bank loan (long-term)

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2. Short-term liabilities - debts paid within less than a year
Eg. Accounts payables, bank overdraft, bank loan (short-term)

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CAPITAL - total resources invested into the business by its owner(s)

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Accounting equation: CAPITAL = Assets - Liabilities

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STEPS IN ACCOUNTING CYCLE

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1. Collect source documents
2. Journalising

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3. Posting to ledger
4. Prepare Trial Balance
5. Identify errors
6. Prepare Updated Trial Balance
7. Prepare Financial Statements

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ACCOUNTING CONCEPTS AND CONVENTIONS

1. Accruals/ Matching Concept

Revenues/ expenses are recorded when the transaction occurs, rather than when payment is made or
received.
Eg. Prepaid expense, accrued revenue, prepaid revenue, accrued expense

2. Economic Entity/ Business Entity Concept

A business and its owner should keep its financial transactions separate and apart from each other
Eg. If the owner of a business purchases stationery for his own use, he should not record this expense in the

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business’ books

3. Going Concern Concept

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This concept assumes that the business will continue in operation for a fairly long time

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4. Consistency Concept

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This concept prescribes that the same accounting principles and standards should be maintained from one

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accounting period to another
Eg. An asset should not be depreciated using the straight line method, and then suddenly be depreciated

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using the reducing balance method

5. Duality Concept

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Every debit entry has a corresponding credit entry

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Eg. If a business purchases goods on credit, the double entry would be Debit Purchases account, Credit
Accounts Payable account

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6. Prudence Concept
When two values of a transaction are available, the lower value should be recorded. Therefore, assets/ profit

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should not be overstated and liabilities should not be understated.

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DOUBLE ENTRY SYSTEM - DEALER

DEA - DEBIT (Opening entries / increases) - For decreases, do the opposite !

D - Drawings
E - Expenses
A - Assets

LER - CREDIT(Opening entries / increases) - For decreases, do the opposite !

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L - Liabilities

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E - Equity
R - Revenue

Suspense account note:

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When the debit columns and the credit columns do not equal each other in the Trial Balance, a Suspense

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Account is opened to account for the difference between both sides.
Example:

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Land $60,000

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Sundry expenses $2,000

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Accounts payable $38,000

Capital $85,000

Motor vehicle

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$92,000 $123,000

Clearly, the debit side and the credit side do not equal each other. Therefore, a suspense account must be
opened with an entry of $31,000 on the debit side to account for the difference.

DEBIT CREDIT

Land $60,000

Sundry expenses $2,000

Accounts payable $38,000

Capital $85,000

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 DEBIT CREDIT

Motor vehicle $30,000

Suspense $31,000

$123,000 $123,000

Now, both sides equal each other.

The next step is to go through all the entries and determine where the error has been made, with a goal to
closing off the Suspense Account.

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BOOKS OF ORIGINAL ENTRY

1. Sales Book/ Sales Journal

The Sales Book records all goods sold on CREDIT. Below you will see what a sales book looks like
Eg. H.S.M Ltd. sold goods worth $500 on credit to Jaheim

2. Purchases Book/ Purchases Journal

The Purchases Book records all goods purchased on CREDIT

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Eg. H.S.M. Ltd purchased goods worth $850 on credit from Faith

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3. Sales Returns Book/ Sales Returns Journal

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The Sales Returns Book records all goods sold on credit which are returned to the business

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Eg. Jaheim returned $250 worth of goods to H.S.M. Ltd.

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4. Purchases Returns Book/ Purchases Returns Journal

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The Purchases Returns Book records all goods purchased on credit which are returned to the business’

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suppliers
Eg. H.S.M. Ltd returned $100 worth of goods to Faith

5. Cash Book

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The Cash Book records all the business’ cash and bank transactions

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Eg. H.S.M. Ltd paid its insurance expenses via cheque

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6. Petty Cash Book
The Petty Cash Book is used to record small/ relatively minor cash payments by a business.
Eg. H.S.M Ltd. makes payments for stationery, cleaning supplies, travelling etc.

7. General Journal
The General Journal is used where it would not be appropriate to enter the transactions in the other books of
original entry
Eg. H.S.M. Ltd. purchased a motor vehicle on credit from Massy Motors.

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CASH BOOK

The Cash Book records all the business’ cash and bank transactions.

Notes:
1. Typically, bank carries a debit balance as bank is an asset and assets carry debit balances. However,
where the question indicates there is a credit balance in the bank account, or that the bank account is in
overdraft (that is the business spent more money in its bank account than they had in their bank account,
then the balance in the bank column would be on the credit side. Note that it is NOT possible for the cash
column to have a credit balance.

2. Cash discounts are recorded in the business’ accounts:

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Discounts allowed (expense) - discounts allowed to credit customers to encourage them to pay on time

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Discounts received (revenue) - discounts received by the business to encourage the business to pay on time

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2. Trade discounts are NOT recorded in the business’ accounts

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A trade discount is a routine reduction from the regular, established price of an item. A trade discount is

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given at the time of purchase of the item

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3. Contra entries

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Contra entries refer to transactions that affect both the cash and bank accounts

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Eg. A business withdrew money from its bank account to have cash in hand - DR Cash, CR Bank
A business deposited cash into its bank account - DR Bank, CR Cash

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PETTY CASH BOOK

A Petty Cash Book is used to record small/ relatively minor cash payments by a business.
Eg. Payments for stationery, cleaning supplies, travelling etc.

At the start of the month, the petty cashier is given a certain amount, called a float, which he/ she must use to
maintain the petty cash system.
Eg. A petty cashier is given $500 at the start of the month, and she spends $380 on petty cash expenses by
the end of the month. Therefore, the petty cashier is left with $120. In order to restore the petty cashier’s
float for the following month, the business needs to give her the additional amount to “make up” the initial

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$500. Therefore the business will give her an additional $380 to restore her float for the upcoming month.

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Step 1: Enter the balance b/d on the receipts column (that is, how much the petty cashier is starting the float
with)

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Step 2: Enter all the petty cash expenses - remember to include the expenses in BOTH the total column as

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well as its respective expense column in the analyses column
Step 3: Total the “total” column as well as the analyses columns.

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Step 4: Calculate the amount that is “missing” to add up to the initial float amount given to the petty cashier.
This amount is your bad c/d

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Step 5: Total the total column - it should be equal to the initial float. Be sure to also write this total under the
receipt column so that both sides equal to each other

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Step 6: Bring down the amount you carried down on the first day of the following month

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Step 7: Calculate the amount necessary to make back up the float. Eg. If the petty cashier spent $145 for the
month, then she is left with only $55 to spend for the following month, Therefore, she will need an additional

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$145 to make back up her float. This will be given to her on the first day of the following month. Record this
amount in the receipts column with the details Cash Book

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LEDGERS

Sales Ledger - this is where all the accounts of the accounts receivables are found
Purchases Ledger - this is where all the accounts of the accounts payables are found
General Ledger - this is where all other accounts are found

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INCOME STATEMENT/ TRADING AND PROFIT AND LOSS ACCOUNT

1. TRADING SECTION
As with everything else, you NEED to know your format for the Income Statement:
- Sales
- Cost of goods sold
Shalleika’s Ice cream Shop - Gross profit

Income Statement COGS = Opening inventory + Net

For the period ended December 31, 2022 purchases ( purchases + carriage
$ $ $ inwards - purchases returns) - closing
inventory
Sales x
Less: Sales returns (if any) (x)

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Net sales xx

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Less: Cost of Goods Sold
Opening inventory x

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Add: Purchases x
Less: Purchase returns (if any) (x)

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2. PROFIT & LOSS SECTION
Add: Carriage inwards (if any) x - Additional revenues

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Net purchases x - Expenses
- Net profit

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Cost of goods available for sale x
Less: Closing inventory (x)

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Cost of goods sold (x)

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Gross profit xx

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Add: Additional revenues (if any) x
xx

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Less: Expenses (x)
Net profit xx

Note:

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1. Any adjustments to purchases, that is, purchase returns and carriage inwards, are made to the purchases
figure itself, prior to adding the purchases figure to the opening inventory.
2. From “sales” to “gross profit” is referred to as the Trading Account section
3. From “gross profit” to “net profit” is referred to as the Profit and Loss section

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STATEMENT OF FINANCIAL POSITION / BALANCE SHEET
You also NEED to know the format for the Balance Sheet. Read the question properly to determine whether
they want you to list the assets in order of permanence (least likely to turn into cash easily) or in order of
liquidity (most likely to turn into cash easily).

Shalleika’s Ice cream Shop

Statement of Financial Position
As at December 31, 2022
$ $ $
FIXED ASSETS
Land and building x

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Fixtures and fittings x
Motor vehicle x

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xx
CURRENT ASSETS
Inventory x

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Accounts receivables x
Prepaid expenses* x

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Accrued revenues* x

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Bank x
Cash x x

CURRENT LIABILITIES
Accounts payables x

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Prepaid revenues* x

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Accrued expenses* x
Bank loan (short term) x (x)

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Working capital x
xx

Mortgage
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LONG TERM LIABILITIES

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(x)
xx

CAPITAL

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Opening capital
Add: Net profit / Less: net loss
Less: Drawings
Closing capital
x
x
(x)
xx

Note:
1. The example above was prepared in the order of permanence ! Please adjust if the question asks you to
prepare in order of liquidity
2. Working capital is the capital of a business used in its day to day trading operations, calculated as current
assets minus current liabilities
3. Remember your accounting equation, that is, CAPITAL = ASSETS - LIABILITIES
4. Where you see asterisks above, we will come back to that under adjustments

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RATIOS

You need to know your formulae ! The picture below is taken directly from the syllabus.
You also need to know how to analyse the ratios (compare to each other from year to year, or compare to
similar businesses in the industry), and make recommendations on how to improve.

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ADJUSTMENTS

CURRENT ASSETS - PEAR

PE - Prepaid expenses eg. Prepaid insurance, prepaid salaries etc.
AR - Accrued revenues eg. Discounts received owing, interest owing etc.

CURRENT LIABILITIES - PRAE

PR - Prepaid revenues - Discounts received in advance, interest received in advance etc.
AE - Accrued expenses - Insurance owing, salary owing etc.

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Example 1:

prepaid for the following year.

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For the year ended 31st December 2022, a business pays $10,500 in rent. However, $500 of this amount was

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Income Statement - The Income Statement records the amount that was SUPPOSED to be paid FOR THE

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YEAR. Therefore the amount stated in the income statement would be $10,000 ($10,500 - $500).

prepaid expenses as a current asset (PEAR)

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Balance Sheet - The Balance Sheet records the amount that was prepaid. Therefore, $500 will be recorded as

Example 2:

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For the year ended 31st December 2022, a business paid $30,000 in wages. However, the business was still
owing $10,000 in wages.

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Income Statement - The Income Statement records the amount that was SUPPOSED to be paid FOR THE
YEAR, whether or not it was actually paid. Therefore the amount stated in the income statement would be

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$40,000 ($30,000 + $10,000).

Balance Sheet - The Balance Sheet records the amount that was still owing. Therefore, $1,000 will be
recorded as accrued expenses as a current liability (PRAE)

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DEPRECIATION

There are 2 ways to calculate depreciation:

1. Straight line method = (Cost of asset - scrap/ residual value) / years of useful life OR Rate of
depreciation x cost of asset
This method assumes that the asset depreciates by the same amount every year

Example:
A business purchases a truck worth $800,000. The said truck has a salvage value of $1,000, and is expected

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to last 5 years. Calculate the depreciation expense and net book value at the end of 3 years.

Depreciation = (800,000 - 1,000) / 5 = $159,800

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Therefore the truck will depreciate by $159,800 every year for the next 5 years.
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Year

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Cost of asset

800,000

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Depreciation

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Net Book Value

640,200

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2 640,200 159,800 480,400

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3 480,400 159,800 320,600

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2. Reducing balance method = Rate of depreciation x Net book value of asset

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Net book value (NBV) = Cost of asset - Accumulated depreciation
This method acknowledges that the asset may depreciate by a different amount every year

Example:

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A business purchases a truck worth $800,000. The rate of depreciation is 10% using the reducing balance

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method. Calculate the depreciation expense and NBV at the end of three years.

Year Cost of asset Depreciation Net Book Value

1 800,000 80,000 720,000

2 720,000 72,000 648,000

3 648,000 64,800 583,200

Year 1 depreciation = 10% x 800,000 = $80,000

Year 2 depreciation = 10% x 720,000 = $72,000
Year 3 depreciation = 10% x 648,000 = $64,800

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BAD DEBTS AND PROVISION FOR BAD AND DOUBTFUL DEBTS

When a business believes that a certain accounts receivable would not pay what they owe them, they will
write off the accounts receivable account as a bad debt. Bad debt is an expense, and will be recorded in the
income statement ! To write off the account, you:

DR Bad Debts account

CR Accounts Receivable account

Example:

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Julissa purchased $500 worth of goods on credit from H.S.M. Ltd on April 10, 2022. On April 12, 2022

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Julissa paid H.S.M. Ltd. $200. On April 30, 2022, H.S.M. Ltd decided to write off the remainder as a bad
debt.

To do this, we will:
DR Bad Debts $300

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CR Julissa $300

PROVISION FOR BAD AND DOUBTFUL DEBTS

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When a business believes that a certain percentage of its accounts receivables will not repay them, they will

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create a provision for bad and doubtful debts. Provision for bad and doubtful debts is an expense (increase /

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decrease) and also offsets the amount for accounts receivables in the Balance Sheet (full amount). For
opening entries/ increases in provision for bad debts, we:

DR Income Statement

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CR Provision for bad and doubtful debts

Example:

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(The opposite for decreases in the provision for bad and doubtful debts)

H.S.M. Ltd wishes to create a provision for bad and doubtful debts account of 10% of its accounts
receivables. Its accounts receivables are as follows
2019- $80,000
2020 - $83,000
2021- $81,000

Step 1: Calculate the provision for bad and doubtful debts

2019 - 10 % x $80,000 = $8,000
2020 - 10% x $83,000 = $8,300
2021 = 10% x $81,000 = $8,100

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Step 2: Calculate how much it increased / decreased by
2019 - 10 % x $80,000 = $8,000
2020 - 10% x $83,000 = $8,300 (increase by $300 from 2019 to 2020)
2021 = 10% x $81,000 = $8,100 (decrease by $200 from 2020 to 2021)

Step 3: What are the double entries

2019 - DR Income Statement, CR Prov for bad debts (opening entry) $8,000
2020 - DR Income Statement, CR Prov for bad debts (increase) - $300
2021 - DR Prov for bad debts, CR Income Statement (decrease) - $200

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The account will therefore look like:

Date Details $
Provision for Bad Debts

Date

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Details u $

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2019 Bal c/d 8,000 2019 Income 8,000
Statement

2020 Bal c/d 8,300

en 2020 Bal b/d

Income
8,000

300

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Statement

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8,300 8,300

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2021 Income 200 2021 Bal b/d 8,300
Statement

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Bal c/d 8,100

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8,300 8,300

2022 Bal b/d 8,100

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CONTROL SYSTEMS

Control systems are techniques developed to ensure accuracy in accounting information.

ERRORS THAT DO NOT AFFECT THE TRIAL BALANCE

1. Error of commission - correct type of account, wrong personal account

Eg. A supplier paid Nisha by cheque in the amount of $1,000. However, the accounting clerk accidentally
entered the amount in Tisha’s account instead of Nisha’s account

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2. Error of principle - wrong type of account

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Eg. A business purchased furniture for use in the business in the amount of $50,000. The accounting clerk
debited the purchases account in error.

3. Error of omission - forgot to make the entry completely

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Eg. The business paid salaries in the amount of $5,000 via cheque. The accounting clerk forgot to enter this

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into the business’ accounts.

4. Error of original entry - wrong amount entered

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Eg. The business purchased goods in the amount of $550. However, the accounting clerk debited the

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purchases account and credited the cash account in the amount of $505.

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5. Error of complete reversal - debiting the account that should be credited, and crediting the account that
should be debited (remember to double this amount)
Eg. The owner of a business withdrew cash from the business in the amount of $100 for his private use. The

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accounting clerk debited the cash account and credited the drawings account

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6. Error of compensation - where 2 or more errors cancel each other out
Eg. The entries made for the payment of wages in cash of $760 were DR Wages. $670 and CR Cash $760
The clerk credited the sales account with $5,300 but it was supposed to be $5,390

EXAMPLE 1:
A business purchased furniture for use in the business in the amount of $50,000. The accounting clerk
debited the purchases account in error.

Step 1: Cancel the error - to cancel the error, do the opposite of what was incorrectly done. What the
accounting clerk did was:
DR Purchases account $50,000 (incorrect)
CR Cash $50,000 (correct)
Therefore to cancel the error, we CR Purchases account $50,000

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Step 2: Do the correct entry ! We were supposed to
DR Furniture account $50,000

Therefore the correct journal entries would be:

DR Furniture
CR Purchases

EXAMPLE 2:
The owner of a business withdrew cash from the business in the amount of $100 for his private use. The
accounting clerk debited the cash account and credited the drawings account

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Step 1: Cancel the error - to cancel the error, do the opposite of what was incorrectly done. What the
accounting clerk did was:

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DR Cash $100 (incorrect)
CR Drawings $100 (incorrect)

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Therefore to cancel the error, we have to DR Drawings $100, CR Cash $100

Step 2: Do the correct entry ! We were supposed to

DR Drawings $100

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CR Cash $100

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Therefore the correct journal entries would be:
DR Drawings $200

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CR Cash $200

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Scroll back up to the note above to see the note on Suspense Account, that is, where errors were made that do

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affect the totals in the Trial Balance.
Hint: Where the error only affects one account, then the other account being affected will be the Suspense

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Account

Example:
A sale of goods worth $500 to M. Millar was only recorded in the sales account.

What the accounting clerk did was:

CR Sales $500 (correct)

Therefore the correct journal entries would be:

DR M. Millar $500
CR Suspense $500

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CONTROL ACCOUNTS

Sometimes a business may have a lot of individual accounts receivables and accounts payables. Therefore, in
order to make life easier, and to check the accuracy of the accounts, the control account was developed.

The Control Account operates in the SAME way as a regular Accounts Receivable account and a regular
Accounts Payables account. The only difference is that the Control Account records the TOTALS.

The Sales Ledger Control Account/ Accounts Receivables Control Account/ Debtors Control Account
records the totals of all transactions affecting Accounts Receivables:

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The Purchases Ledger Control Account/ Accounts Payables Control Account/ Creditors Control

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Account records the totals of all transactions affecting Accounts Payables:

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UPDATED CASH BOOK AND BANK RECONCILIATION STATEMENT

The purpose of the Updated Cash Book and Bank Reconciliation Statement is to ensure that the business’
bank records as recorded in the Cash Book is in line with the bank’s records as it relates to the Bank
Statement.

The Updated Cash Book functions just like a regular Cash Book (DR for increases in bank/ cash (receipts),
CR for decreases in bank / cash (payments)). Remember, the whole purpose of updating your cash book is to
ensure that the bank’s records match your records.

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Remember to read the question to determine whether you are starting the Bank Reconciliation Statement

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using the balance as per updated cash book vs the balance as per bank statement.

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If starting using the balance as per updated cash book, think about what the business would have already
done, and reverse this so that the bank reconciliation statement would be in line with the cash book.

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If starting using the balance as per bank statement, think about what the bank would have done, and reverse

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this so that the bank reconciliation statement would be in line with the cash book.

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KEY TERMS:

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1. Standing order - an arrangement with the bank to have a certain amount deducted from your account at
relevant intervals (business will not see it until they see their bank statement so will go in the UCB)

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2. Direct deposit - amounts directly deposited into business’ bank account (business will not see it until
they see their bank statement so will go in the UCB)

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3. Bank charges - banks deduct a certain amount from your account for operating your account (business

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will not see it until they see their bank statement so will go in the UCB)
4. Not sufficient funds cheque/ dishonoured cheque - where a cheque has been received by a customer

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but is returned by the bank for insufficient funds (the business would have immediately debited their
cash book upon receipt of the cheque so now that it is bounced, they will have to credit their UCB)
5. Unpresented cheques - where a business issues a cheque to a supplier but the supplier has not yet
presented it to the bank for payment (bank will not see it until it is presented for payment so this will go
in BRS)
6. Undeposited cheque - where a cheque has been received by the business but has not yet been deposited
(bank will not see it until it is cashed in so this will go in BRS)
7. Bank lodgement - amounts deposited into the bank that has not yet been cleared (bank will not see it
until it is cleared so this will go in BRS)

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