Calculation of Net

Profit.
Category Effect Net Profit Results

Expenses Increase Decrease Add(+)

Decrease Increase Less(-)

Purcheses Increase Decrease Add(+)

Decrease Increase Less(-)

Sales Increase Increase Less(-)

Decrease Decrease Add(+)

Sales Tax
- This is the VAT (Value Added Tax) on goods and services.
- There are 2 types:
(i) Output Tax (Sales)- DR- Trade Receivables( Debtors)
-CR- Sales Tax
(ii) Input Tax (Purchases)- DR- Sales Tax
-CR- Trade Payables (Creditors)
PISO-(Purchases input, Sales Output)

Gross price= Net Price + Sales Tax

N/B- When posting amounts on the purchses and sales account we use the Net price(VAT Exclusive)

-When posting the amounts in trade receivables and trade payables we use the Gross price.

DR (Purchases) CR (Sales)

x/x/x Bal c/d (payable) xxx x/x/x Bal c/d (refundable) xxx
 SALES > PURCHASES = PAYABLE
PURCHASES > SALES = REFUNDABLE

When there is a debit balance on the sales tax account it signifies that there is an amount of sales tax
due from the tax authorities. (Asset)

When there is a credit balance on the sales tax account it signifies that there is an amount of sales tax
owing to the tax authorities. (Liability)

Sales tax on a credit sale should be recorded by the supplier when the invoice is issued and the
customer has received the invoice.

A credit note is first recorded in a sales return day book in a manual book keeping system.

It is not advisable to send a statement to an account written off as an irrecoverable debt by doing so you
would advise the receivable (Debtor) there is no need to pay.

When posting in the purchase day book we debit the General Ledger Purchase account and credit the
Suppliers account in the payable ledger.

When recording goods return outwards we credit return outwards and debit payables (Creditors)
account.

The logical order in purchasing an item would be is :

1) Purchase requisition (Quotation)

2) Purchase Order.
3) Delivery Note.
4) Goods Received Notes.
5) Invoice.
6) Cheque Requisition.

Income Statement
Formats
a) Trading, Profit and Loss Account
Details DR CR

Sales/ Revenue/ Turnover xx

Less Return Inward/ Revenue Inwards (x)
Net Sales/ Net Revenue xx
Less Cost Of Sales
Opening Stock xx
Add Purchases xx
Add Carriage Inwards xx
Less Return Outwards (xx)
Less Drawings of goods for personal use (xx)
Cost Of goods available for sale xx
Less Closing Stock (xx) (xx)
Add Gross Profit xx
Add Incomes
Discount Received x
Total Incomes xx
Less Expenses
General Expenses
Carriage Outwards xx
Salaries and Wages xx
Insuarnace xx
Rent xx
Offi ce Expenses xx
Lighting and Heating xx
Motor Expenses xx (xx)
Net Profit xx

b) Balance Sheet.

Drawer/Payor- The person who issues the cheque/account holder

Drawee-The Bank

Payee- This is the person receiving the cheque.

When a cheque is crossed containing ‘Account Payee’ this means the amount must be paid into the bank
account of the payee.

A cheque is needed to be properly authorized by an evidence of an underlying transaction (carbon copy)

and an approved requisition.
Details $ $
Non-current Assets
Fixtures and Fittings x
Furniture x
Equipment x
Motor Vehicle x xx

Current Assets
Stock x
Cash at Bank x
Cash at Hand x
Debtors x
Stationary x
Office Equipment x xx
Total Assets xx
Financed by:
Opening Stock x
Add: Additional Capital x
Add: Net Profit x
Less: Drawings (x) xx

Current Liabilities
Account Payables( Creditors) x
Bank Overdraft x
Prepaid incomes x
Accured expenses x xx

Long Term Liabilities

Bank Loans x
Debentures x xx
Total Liabilities and Capital xx

Total Assets must be equal to total liabilities

Formulas

1) Net Sales= Sale – Return Inwards

 2) Cost of goods available for sale= Opening stock+ Purchases +Carriage Inwards – Return
Outwards – Goods for personal use
3) Cost Of Sales= Cost of goods available for sale – Closing stock
4) Gross Profit= Net Sales – Cost Of Sales
5) Total Income= Gross Profit + All incomes
6) Net Profit= Total Incomes – All Expenses

c) Bank reconciliation

Date Details Amount Date Details Amount

x/x/xx Bal b/d xxx Bank Charges xxx

Traders Credit xxx Standing Order xxx
Dividends xxx Intrest xxx
Credit Transfer xxx Commission xxx
Dishonoured xxx
Error xxx
Insuarance xxx
Bal c/d xxx
xxx xxx
Bal b/d xxx

Details

Balance as per the updated cashbook xxx

Add unpresented cheques xxx
xxx
xxx
Less uncredited cheques (xxx)
(xxx) xxx
xxx

1) Direct Credit(+) DR
2) Credit Transfer(+) DR
3) Direct Debit(-) CR
4) Standing Order(-) CR
5) Dishonored Cheque(-) CR
6) Bank Charges(-) CR
7) Bank Intrest(-) CR
NB: Unpresented cheques- paid the supplier Uncredited cheques- received a cheque
 Bank
Statements.
1) Debit Note- It is a note written by the seller to the buyer requesting payment or to correct an
undercharge.
2) Credit note- It is issued to cancel all or part of a sales invoice.
3) Good received note- It is a note sent by the buyer to the seller to record that the goods have
been received.
4) Purchases Order- This is a document sent by the buyer to the seller requesting to purchases a
list of items.
5) Remittance Advice- It is used to identify the goods have been received and accompanied by
cheque to settle an outstanding amount.
6) Invoice- It is used to demand for payment
7) Purchase Invoice- It is used to claim back the sales tax, to identify the goods bought and to
record how much is owed to the supplier.
8) Receipt- It is used to acknowledge that the supplier has received the method of payment
9) Internal cheque requisition- It is used to authorize an outstanding invoice so that a business can
settle.
10) Sales Order- It is a document sent by the buyer to the supplier to request for goods.
11) Carriage Outwards- These are goods returned by the buyer to the seller since they have been
damaged.
12) Return Inwards- These are goods returned by the customers to the business since they have
been damaged.
13) Return Outwards- These are goods returned by the business to the supplier since they have
been damaged.
14) Pro-forma invoice-This is a description of the goods, the total payable amount and other details
about the transaction and also it is provided by a supplier where payment with order is
required.
15) Statement- This a document showing the amount of money received and spent.
16) Till Receipts- This is a document used by retailers where payment is done through cash, cheques
and vouchers.
17) Payable (Creditors) Ledger- A record of the accounts of each credit supplier.
18) Nominal Ledger- The book which contains a ledger account for each type of asset, liability,
expense and income.
19) Book of Prime Entry- A record in which transactions are originally recorded before being
transferred to a ledger account.
20) Direct Debit- This is a document that gives supplier permission to obtain money from the bank
themselves.( Variable amounts such as water bills)
21) Standing Order- An order given by the drawer to the bank to pay specific amounts to a specific
person at a specific period of time.( Fixed amount such as rent)
 22) Banker’s draft- It is used to make payments when buying property or paying huge amount of
cash such as School fees, it is guaranteed that it will not be dishonored like a cheque.
23) Electronic Fund Transfer At Point Of Sale (EFTOPS) - Funds that are transferred automatically
from a customer’s bank account to the organization’s bank when goods are purchased.
24) Banking Clearing System- This is a mechanism for obtaining payments for cheques/this is the
transferring of chequesIlik from one bank to another ie depositing an Equity cheque to ABSA
Bank.
25) Bank Mandate- This are the names and specimen signatures of individuals authorized to sign
cheques supplied to a bank.
26) Cheque remittance-
27) Bank Automated Clearing System (BACS)- This is an electronic bank to bank transfer and is
commonly used to as a form of payments in payrolls.
28) Journal- It is a record of all the transactions included in the ledger accounts which have not been
captured in the other books of entry.
29) Charge Card- It is a card issued by the bank to a customer similar to a credit card but for this
scenario one is required to pay the credit balance in the end of the month and there are no
credit limits.
30) Credit card- This is a card issued by the bank to the customer to may payments on credit and
paid part or fully the credit balance at the end of the month and it has a credit limit.
31)

Books Of Prime Entry Transaction Record Summarized by:

It records credit sales, credit sales invoices and credit note
1) Sales Day Book sent
2) Sales Return Day Book Records sales return and credit note sent. Receivable Ledger
Records credit purchases, credit purchases invoice and
3) Purchase Day Book credit notes received
4) Purchase Return Day Book Records purchase return and credit notes received Payable Ledger
5) Cash Book Records cash paid and cash receipts.
6) Petty Cash Book Records small amounts of cash paid and received
7) Journal It is used to make adjustments

Books of Prime Entry Source Documents

Purchases Day Book Invoice
Sales Day Book Invoice
Return Outwards Day Book Credit /Debit Note
Return Inwards Day Book Credit /Debit Note
General Journal Invoice
Cash Book Receipt
Petty Cash Book Petty Cash Voucher
Petty Cash Book.
1.) Petty cash vouchers.
This is a supporting document for every petty cash payment that is made it contains the following
details:

a) Purpose of the payment

b) Amount paid.
c) Name and signature of the person receiving the cash.
d) Signature of the person who has authorized the payment.
e) Date of payment.
f) Voucher number.
g) Receipt.
Receipt Date Details Total Cleaning Postage Stationery Travelling
20xx
600 June 1 Cash Book
June 2 Postage 12 12
June 3 Cleaning 13 13
June 4 Stationery 56 56
June 5 Travelling 36 36
June 6 Postage 62 62
June 7 Cleaning 48 48
June 8 Stationery 95 95
322 61 74 151 36
Bal b/d 278
600

After using the petty cash on the required expenses the money is returned and the petty cash voucher is
altered to read the amount of money spent on the expenses.

Petty cash tin is always kept in a safe.

Petty cash payments are ensured to be made for authentic expenditure by stapling appropriate receipts
to the vouchers.

 NB: Imprest Petty cash= Notes and coins in the cash book + vouchers of payment + IOUs –
incomes

Errors and their corrections.

Types of errors.
1) Errors disclosed by the trial balance.
There are 2 types:

1) Arithmetic error- This is a mistake of adding up wrongly.

2) Error of single entry- This is where a transaction has a debit without a credit or a credit without
a debit.

2)Errors that are not disclosed by the trial

balance.

a) Error of Commission- This involves the writing of the wrong name eg G Dawn instead of G Dan.
b) Error of Omission- This is where a transaction is not recorded at all, it’s missing.
c) Error of Principle- This is where a transaction is recorded in the wrong class of account.
d) Error of Transposition- This involves recording the wrong sequence of figures.
e) Complete Reversal- This is where a transaction is recorded on the wrong side.
f) Original Entry- This is where a transaction is recorded wrongly in the first time.
g) Compensating error- This is where a transaction cancels out one another.

Summary Keyword

Ommision Omitted
Commision Name/ Same class
Compensating Cancel
Principle Wrong Class
Complete reversal of entries Wrong Side
Original entry First Time
Transposition Wrong Sequence (digits)