MGT 5102: Accounting for Decision Making

Week 10

Department of Business Finance

Faculty of Management
University of Peradeniya
 Steps in the Recording Process
• Analyze each transaction for its effect on the account.
• Enter the transaction information in a JOURNAL (Book of original
entry).
• Transfer the journal information to the appropriate accounts in
the LEDGER
• Bookkeeping and Accounting

• Books of account may be divided into books of

Journals – Prime entry books

Ledger – second entry

 Double Entry System
• Bookkeeping is the process of keeping books of account.
• The bookkeeping records analyze, classify and summarize
transactions to provide the basic data for accounting
reports.
• In the books, the total debit postings equals the total credits.
• The arithmetical accuracy of the books is verified by making a
"trial" or test by listing the balances of the accounts in the form
of a trial balance, to check that total debits and credits agree.
• The whole process of BOOKKEEPING and Accounting which
involves:
Journalizing transactions in the prime entry books
Posting to accounts in the ledger
Balancing ledger accounts
Extracting a trial balance
and .. the ACCOUNTING work of preparing Financial
Statements (Income statement, Financial Position etc. with
Accounting Standards)
 Double Entry System
• There is a dual aspect in every business transaction or event.
• E.g.:
o Purchasing goods – inflow of inventory, outflow of cash
o Selling goods – inflow of cash, outflow of stocks
o Electricity expenses – inflow of electricity, outflow of cash

• Double entry system means,

“a system of recording business transactions where each
transaction has a dual impact and recorded at least in two
accounts as debit and credit.”

• Thus, every transaction must contain at least one account

debited and at least one account credited (total of entries on
debit side must be equal to the total of credit side).
• This method was first introduced by an Italian priest Fr. Luca
Pacioli in 1494.
 Double Entry System
• Modern accounting system is based on double entry system
which is based on the fundamental accounting equation.
Assets = Capital + Liabilities

Assets + Expenses = Capital + Income + Liabilities

• The double entry accounting system ensures the accounting

equation always remains in balance.
• Debits must be equal to Credits.
• There are five elements in accounting;
1. Assets
2. Expenses
3. Equity
4. Income
5. Liabilities
 Double Entry System
• Accounting Principle

Accounting Elements Increase Decrease General Balance

Assets Debit Credit Debit
Expenses Debit Credit Debit
Capital Credit Debit Credit
Income Credit Debit Credit
Liabilities Credit Debit Credit

Assets + Expenses = Capital + Income + Liabilities

Debit Credit
 Double Entry System
• A basic debit is increased by debits and decreased by credits.
Conversely a basic credit is increased by credits and decreased
by debits.
• Each business transaction has a debit aspect and a credit
aspect of the same amount. Thus, in a set of books the total
debits always equal the total credits.
• "Dr" means debit and "Cr" means credit.
• In bookkeeping the word "credit" has two meanings:
✓ Credit means NOT for cash
✓ Credit means right side of the account, the opposite of
debit.
• Transactions may be either for cash or credit
✓ Cash transactions are either cash receipts or cash payments,
which increase or decrease the cash balance.
✓ Credit transactions increase either receivables or payables,
but NOT cash... until they are paid with a cash transaction!
 Double Entry System
• The standard format for the recording of every financial
transaction is known as an “Account”.
• It takes the form of the English alphabet letter “T”.
• The place where accounts are positioned is known as “Ledger”.
• This can be maintained in a book or in an electronic device.
Debit (Dr) …………………..Account Credit (Cr)

Dr …………………………..Account Cr
Date Details Folio Ref Amount Date Details Folio Ref Amount
 Double Entry System
• Debiting:
Making an entry with an amount on the left side of an account (Debit side)

• Crediting:
Making an entry with an amount on the right side of an account
(Credit side)

• Debit balance =2,000 (Total of the debit amount 5,000> Total of the
credit amount 3,000)
• Credit balance =5,000 (Total of the credit amount 8,000> Total of
the debit amount 3,000)
• Debit must equal to credit for each transaction.
• The equality of debits and credits provides the basis for the double- entry
system. (TB)
• (a) Debit, as the left-hand side
(b) Credit, as the right-hand side
(c) Basic debits as, assets, costs and expenses, purchase
(d) Basic credits, as liabilities, owners' equity and sales

• This facilitates very rapid assimilation of the bookkeeping

technique, while the computer does all the hard work!
 Double Entry System
Types of ledger accounts
• Related to statement of financial position:
✓ Assets :… … … … … … … … … … … … … … … … … . .
✓ Equity :… … … … … … … … … … … … … … … … … . .
✓ Liabilities: … … … … … … … … … … … … … … … … … . .

• Related to statement of financial performance:

✓ Expenses … … … … … … … … … … … … … … … … … . .
✓ Income: … … … … … … … … … … … … … … … … … . .

Types of ledgers:
1. General ledger
2. Creditors’ ledger
3. Debtors’ ledger
 Activity 01
Usual /basic
Accounts Increase Decrease
balance
Capital Account
Furniture Account
Bank Loan Account
Machinery Account
Account Payable
Cash Account
Account Receivable
Office Expenses Account
Building Account
Electricity Account
Services Revenues Account
Salaries Account
Rent Account
Drawing Account
Sales Revenues Account
Equipment Account
 Double Entry System
You should be able to:
1. Write effect on accounting equation.
2. Write double entries (Journal entries).
3. Record in ledger accounts.
4. Prepare a Trial Balance.
5. Prepare Financial Statements.
 Double Entry System
1. April 01, 2023 the owner introduced Rs. 800 000 to start the business.
 Double Entry System
2. April 03, 2023 purchased furniture for Rs. 100 000.
 Double Entry System
3. April 09, 2023 purchased goods for cash Rs. 240 000.
 Double Entry System
4. April 10, 2023 cash sales Rs. 400 000.
 Double Entry System
5. April 15, 2023 paid electricity bill Rs. 24 000.
 Double Entry System
6. April 17, 2023 purchased goods on credit Rs. 120 000.
 Double Entry System
7. April 19, 2023 credit sales Rs. 160 000.
 Double Entry System
8. April 22, 2023 paid Rs. 80 000 to payables.
 Double Entry System
9. April 23, 2023 received Rs. 140 000 from receivables.
 Double Entry System
10. April 25, 2023 received rent income Rs. 288 000.
 Double Entry System
11. April 27, 2023 obtained a bank loan of Rs. 400 000.
 Double Entry System
12. April 30, 2023 the owner withdrew Rs. 20 000 for personal
expenses.
 Activity 02
Identify the accounts to be debited and credited:

1. A sole proprietor invests Rs. 20,000 in a business

2. Purchases a motor vehicle by cash for Rs. 5,000
3. Rent of Rs. 500 paid by cash
4. Purchases of office furniture on credit Rs. 3,000
5. Salaries of Rs. 1,500 paid by cash
6. Services rendered for cash Rs. 8,000
7. Services rendered on credit Rs. 6,000
8. Payments of account payable Rs. 2,500
9. Cash received from Account Receivable Rs. 3,500
10.Withdrawal of cash by owner Rs. 2,000
 Prime Entry Books
• Recording in Prime Entry Books – Journalizing transactions using
Source documents
Prime Entry Books Source Documents
Sales Journal Sales Invoices
(Debtors/Receivables)
Purchase Journal (Creditors/ Purchases Invoices
Payables)
Sales Return/Returns Inwards Credit Notes
Journal
Purchase Return / Return Debit Notes
Outwards Journal
Cash Receipts Journal Cash Receipts/Deposit slips
Cash Payments Journal Payment Voucher/Counterfoil
Petty cash Payments Journal Petty Cash Voucher
General Journal Journal Voucher
Introduction

Financial Recording of Transactions

Statements Transactions

Closing Source
Journals
entries
documents
Accounting Cycle

Adjusted Trial
Books of
Ledger prime entry
Balance

Adjust Trial
entries Balance
Transactions

Transactions

Transactions on a cash basis Transactions on a credit basis

Petty cash Other cash

transactions transactions

Receipts Payments

Sales Sales return Purchase

Purchase Other
return
 Transactions
Types of transactions Source documents Prime entry books
Transactions related to cash Receipts Cash receipts journal
receipts Deposit slip
Transactions related to cash / Payment voucher Cash payments journal
cheque payments Counter foil
Petty cash transactions Receipts Petty cash payments journal
Petty cash voucher
Purchase of goods on credit Purchase invoice Purchases journal
Return of goods purchased on Debit note Purchase returns journal
credit
Sales of goods on credit Sales invoice Sales journal
Return of goods sold on credit Credit note Sales returns journal
Other transactions Journal voucher General journal
Source Documents
These are the documents that are prepared by including all the details of a
business transaction and authorized by a person in charge.
Information available in source documents:
✓Name and the address of the business
✓Serial number
✓The date in which transaction had taken place
✓The details of the other parties that is connected to the transaction
✓Description of the transaction
✓Monetary value of the transaction
✓Signature (the officers who prepared, checked and authorized)
Importance:
✓An initial document for a transaction
✓Written evidence of a transaction
✓It includes all the details of the transaction
✓Assist to reveal short comings, errors and frauds in accounting process
✓A basis to record transactions in prime entry books
Books of Prime Entry
Prime entry books are the books in which the transactions of a business are
recorded first (before record them in the ledger accounts).
It also known as day books, journals and subsidiary books.
Transactions are classified based on its nature and maintained several prime
entry books to record those transactions.

Prime entry books types of transactions

Cash receipts journal Transactions related to cash receipts
Cash payments journal Transactions related to cash payments
Petty cash payments journal Petty cash transactions
Purchases journal Purchase of trade goods on credit
Purchase returns journal Return of trade goods purchased on credit
Sales journal Sales of trade goods on credit
Sales returns journal Return of trade goods sold on credit
General journal Other transactions that are not recorded in the
above prime entry books.
 Cash Journals
These are the prime entry books which used to record cash transactions.
Transactions done through cash and cash equivalents are known as cash
transactions.
Transaction Books of prime entry
1. Cash receipts Cash receipts journal
Cash Journals
2. Cash payments Cash payments journal
3. Petty cash payments Petty cash payments journal

Analysis column:
Different columns are maintained to record similar type of cash transactions
which assists to post ledger accounts easily.
Discounts: Reduction of value, from the value of a transaction when it takes place.

Discount

Trade discount Cash discount

Discount received Discount allowed

Cash Receipts Journal
The prime entry book in which cash receipts are recorded is known as cash
receipts journal.

Example:
✓Owner introduced cash as capital
✓Cash sales
✓Cash received from trade receivables
✓Cash received from different income sources (E.g.; rent income, investment
income, interest income, commission income)
✓Cash received from bank loan

Source documents:
✓Receipts
✓Deposit slips
✓Bank statement and etc.
 Cash Receipts Journal

Cash Receipts Journal / Receipts Journal

Receipts analysis
Discount
Receipt Value
Date Description Allowed Cash Debtors Other Other
No. (Rs.)
(Rs.) sales receipts Income receipts
Cash sales XXX XXX
Debtors XX XXX XXX
Income XXX XXX
Other receipts XXX XXX
XX XXXX XXX XXX XXX XXX

Income Other receipts

• Interest income • Capital introduced
• Commission income • Bank loan received
• Dividend income
• Rent income
Cash Receipts Journal
Cash account / Cash control account
Date Description Value Date Description Value
Balance B/F XXX
Sales XXX
Debtors control XXX
Other income XXX
Other receipts XXX

Sales a/c
Date Description Value Date Description Value
Cash control XXX

Debtors control a/c

Date Description Value Date Description Value
Cash control XXX
Discount allowed XX
Cash Receipts Journal
Relevant other income a/c
Date Description Value Date Description Value
Cash control XXX

Relevant o receipts a/c

Date Description Value Date Description Value
Cash control XXX

Discount allowed a/c

Date Description Value Date Description Value
Debtors control XX
Cash Payments Journal
The prime entry book in which cash payments are recorded is known as cash
payments journal.

Example:
✓Owner’ cash drawings
✓Cash purchases
✓Cash payments to trade payables
✓Cash payments made for different expenses (E.g.; rent and rates, Electricity,
Advertising, Salaries and wages)
✓Repayment of bank loan

Source documents:
✓Payment vouchers
✓Counter foil
✓Bank statement and etc.
 Cash Payments Journal

Cash Payments Journal / Payments Journal

Payments analysis
Discount
P.V. Value
Date Description Received Cash Payments to Other Other
No. (Rs.)
(Rs.) purchases creditors expenses payments
Cash purchases XXX XXX
Creditors XX XXX XXX
Expenses XXX XXX
Other payments XXX XXX
XX XXXX XXX XXX XXX XXX

Expenses Other payments

• Interest expense • Drawings
• Electricity expense • Repayment of bank loan
• Rent and rates • Purchase of non current assets
• Salaries and wages
Cash Payments Journal
Cash account / Cash control account
Date Description Value Date Description Value
Balance B/F XXX Purchases XXX
Creditors control XXX
Other expenses XXX
Other payments XXX

Purchase a/c
Date Description Value Date Description Value
Cash control XXX

Creditors control a/c

Date Description Value Date Description Value
Cash control XXX
Discount Received XX
Cash Payments Journal

Relevant other expense a/c

Date Description Value Date Description Value
Cash control XXX

Relevant other payments a/c

Date Description Value Date Description Value
Cash control XXX

Discount received a/c

Date Description Value Date Description Value
Debtors control XX
Petty Cash Payments Journal
The prime entry book in which petty cash payments (small value payments) are
recorded is known as petty cash payments journal.
It functions dual role as a prime entry book (petty cash payments journal) and as
a ledger account(Petty cash control account)

Example:
✓Entertainment expenses
✓Postage expenses
✓Stationary expenses
✓Travelling expenses

Source documents:
✓Receipt
✓Petty cash payment vouchers
Petty Cash Payments Journal

Cash

Chief Cashier Petty Cashier

 Petty Cash Payments Journal
Total cost of petty cash expenses for a given period is decided in advance and the
chief cashier will give that sum to a petty cashier.

Petty cash imprest:

Specific amount of money given by chief cashier to petty cashier to make petty
cash payments.

Petty cash reimbursement:

Cash given by chief cashier to pay petty cashier, which is equivalent to the
amount of payments made at that time to maintain petty cash imprest.

Imprest System:
Petty cash imprest and the reimbursement of the expenses of the petty cash.
 Petty Cash Payments Journal
Petty Cash Payments Journal
Analysis Columns
Other
Led. V. Amount Page
Date Description Stationar Entertain Travellin ledger
Receipts Folio No. (Rs.) Postage Miscella
accounts
No.
y ment g
(Rs.) neous
XXX Cash
Stationary XXX XXX
Entertainment XXX XXX
Travelling XXX XXX
Postage XXX XXX
Miscellaneous XXX XXX
Wages XXX XXX
Total payment XXXX XXX XXX XXX XXX XXX XXX
Balance C/D XXX
XXXX XXXX
XXX Balance B/F

Cash account / Cash control account

Date Description Value Date Description Value
Balance B/F XXX Petty cash XXX
 Petty Cash Payments Journal
Stationary a/c
Date Description Value Date Description Value
Petty cash XXX

Entertainment a/c
Date Description Value Date Description Value
Petty cash XXX

Travelling/c
Date Description Value Date Description Value
Petty cash XX
 Petty Cash Payments Journal
Postage expenses a/c
Date Description Value Date Description Value
Petty cash XXX

Miscellaneous expenses a/c

Date Description Value Date Description Value
Petty cash XXX

other relevant a/c

Date Description Value Date Description Value
Petty cash XX
Petty Cash Payments Journal
Double entries:
1. Receiving the petty cash imprest
Petty cash a/c Dr
Cash control a/c Cr

2. Total of analysis columns

Respective a/c Dr
Petty cash a/c Cr

3. Reimbursement of the analysis columns

Petty cash a/c Dr
Cash control a/c Cr
Purchases Journal
The prime entry book in which goods purchased on a credit basis (with the
purpose of resale)are recorded is known as Purchases Journal.
Source documents:
✓Purchase invoice
Purchases Journal

Description of the Goods Total

Invoice
Date Supplier Amount
No. Description Quantity Unit Cost Amount (Rs.)

Discount

Trade discount Cash discount

Discount received Discount allowed

 Purchases Journal

Double entry:
Purchase a/c Dr
Creditors Control a/c Cr

Purchase a/c
Date Description Value Date Description Value
Creditors XXX

Creditors control a/c

Date Description Value Date Description Value
Purchase XXX
Sales Journal
The prime entry book in which goods sold on a credit basis are recorded is known
as Sales Journal.

Source documents:
✓Sales invoice
Sales Journal

Description of the Goods Total

Invoice
Date Customer Amount
No. Description Quantity Unit Cost Amount (Rs.)

Discount

Trade discount Cash discount

Discount received Discount allowed

 Sales Journal

Double entry:
Debtors Control a/c Dr
Sales a/c Cr

Debtors control a/c

Date Description Value Date Description Value
Sales XXX

Sales a/c
Date Description Value Date Description Value
Debtors control XXX
Returns of goods
Goods purchased / sold on a credit basis may return to the supplier/customer
due to the following reasons:
1. The expiry date has passed
2. Goods received / sent being different to the order
3. Goods received / sent being damaged
4. Delay in receiving / sending goods

Returns of goods

Purchase returns / Returns Sales returns / Returns

outwards inwards
Returns Outwards Journal
The prime entry book for recording goods returns ( that purchased on a credit
basis) is known as Returns Outwards Journal(purchase Returns Journal).

Source documents:
✓Debit note
Returns Outwards Journal

Description of the Goods Total

Invoice
Date Supplier Amount
No. Description Quantity Unit Cost Amount (Rs.)

Discount

Trade discount Cash discount

Discount received Discount allowed

Returns Outwards Journal

Double entry:
Creditors Control Dr
Purchase return a/c Cr

Creditors control a/c

Date Description Value Date Description Value
Purchase returns XXX

Purchase returns a/c

Date Description Value Date Description Value
Creditors control XXX
Returns Inwards Journal
The prime entry book for recording goods returns ( that sold on a credit basis) is
known as Returns Inwards Journal (Sales Returns Journal).
Source documents:
✓Credit note
Returns Inwards Journal

Description of the Goods Total

Invoice
Date Customer Amount
No. Description Quantity Unit Cost Amount (Rs.)

Discount

Trade discount Cash discount

Discount received Discount allowed

Returns Inwards Journal

Double entry:
Sales return a/c Dr
Debtors Control a/c Cr

Sales returns a/c

Date Description Value Date Description Value
Debtors control XXX

Debtors control a/c

Date Description Value Date Description Value
Sales return XXX
General Journal
Any transaction that does not come to the cash journals or any other journals has
to be recorded in the General Journal.
Entries that are recorded in General Journal
1. Opening entries
2. Adjusting entries
3. Rectification of errors
4. Acquisition and disposal of fixed assets on a credit basis
5. Exchange of fixed assets
6. Transfer entries
7. Closing entries

Source documents:
✓Journal voucher
General Journal

General Journal
Ledger
Date J.V No. Description Debit Credit
Folio
…………. a/c XXX
……………… a/c XXX
(Narration)

……………….. a/c
Date Description Value Date Description Value
…………….. XXX

……………….. a/c
Date Description Value Date Description Value
……………… XXX
 General Journal - Opening Entry

The journal entry is recorded at the beginning of an accounting period for opening
the books of accounts. It supports bringing forth the balances in the ledger accounts
and is called the opening entry. The opening entry for the ledger account is based
on the opening balance sheet.

The various assets, liabilities, and capital that appear in the balance sheet of the
previous accounting period are then brought forward in the books of a present
accounting period known as an opening entry.
 General Journal - Adjusting Entry

https://www.wallstreetmojo.com/adjusting-entries-examples/#h-adjusting-entries-
example-3
 General Journal – Rectification of Errors

https://www.wallstreetmojo.com/accounting-errors/
 General Journal – Closing Entries

https://www.accountingtools.com/articles/closing-entries-closing-procedure