POA Book Notes

1
Principles of
Accounts
CSEC
Ms Fergusson

2
ST. MARY’S COLLEGE

CSEC REVISION NOTES

TABLE OF CONTENTS
PAGE
INTRODUCTION TO ACCOUNTING 3
ACCOUNTING CONCEPTS AND CONVENTIONS 4
INTRODUCTION TO THE BALANCE SHEET 5
SIMPLE VERTICAL FORMAT OF A CLASSIFIED BALANCE SHEET 9
ACCOUNTING CYCLE 10
JOURNALS 12
LEDGERS 17
TRIAL BALANCE 22
CORRECTION OF ERRORS 23
ADJUSTING ENTRIES 24
FINAL A/CS OF SOLE TRADERS 28
CONTROL SYSTEMS 30
BANK RECONCILIATION STATEMENT 32
CONTROL A/CS 35
SUSPENSE A/CS & CORRECTION OF ERRORS 38
FINAL A/C FORMATS 43
RATIO ANALYSIS 63

3
INTRODUCTION TO ACCOUNTING
The Purpose of Accounting :

 Definition of accounting
o Accounting is the process of classifying, summarizing, recording, interpreting and communicating

financial information.
 Identifying: Establishing the essential characteristics or features of.

 Classifying and summarizing: sorting out data in a useful order.
o To Classify - to arrange or place items into categories or groups.
o To Summarize – To create a short description that gives the main facts in a condensed form.
 Measuring: placing a value; assigning numbers; determining the size
 Recording: make an official note of in writing, printing, or such.
 Interpreting: explain the meaning of something in clear, understandable terms.
 Communicating / Reporting: Presenting data to stakeholders like internal management and external users.
 The purpose of accounting
o The purpose of accounting is to provide information about financial situation of an organization, so that
informed decisions can be made.
 Difference between accounting and bookkeeping

o Definition of Bookkeeping – Bookkeeping is the recording of the accounting of a business.
 Bookkeeping consists of entering transactions into the journals, making adjustments, maintaining precise and
accurate records, and preparing reports that keep management up to date on the financial condition of their
company.
 Bookkeeping is, therefore, a part of accounting, the part concerned with recording information and
preparing accounts. Accounting involves interpreting the information recorded by the bookkeeper, and
preparing reports in a way that management can use for decision making.
o Accountants are responsible for the design and management of the financial systems that bookkeepers use.
 They prepare monthly financial statements and tax returns at year end.
 Accountants may also prepare budgets for management and loan proposals for bankers;
 They may also perform cost analysis for the company’s products or services.
Users of Accounting :
 The Users of Accounting Information: need to know profitability & liquidity of business, resources and liabilities
Internal Users
o Owners of the Business – need to know profitability & liquidity of business; money in and out; financial resources
o Management: - need to know profitability & liquidity of business - decision-making
o Employees / Trade Unions – Collective bargaining…negotiations for better wages etc.
External Users
o Potential Investors – general public and financial institutions e.g. unit trust – risk and return of investment
o The Bank and other financial institutions – need to know credit rating – risk of non-repayment of loans
o Suppliers – credit sales
The Types of Business Organizations :

 The various forms of business organizations are:
 Sole Trader: 1 owner
 Partnership: 2 – 20 owners / partners
 Limited Liability Companies
o Private Limited Companies: 2 – 50 owners / shareholders
o Public Limited Companies: 7 – unlimited owners / shareholders
 Cooperative Societies (purpose is furthering the economic welfare of its members): open membership
 Non-Profit Organizations
4
Accounting Concepts and Conventions

Accounting Concepts and Conventions are the accounting rules that are followed when recording
transactions in the books.
states that assets are valued and shown in the

The Cost Concept accounts at their cost price (the amount asset is
purchased for).
states that only transactions that can be measured

The Money Measurement Concept
in monetary terms should be recorded in the books.
The rules that state how transactions are to be recorded. 
states that the business is assumed to be in

The Going Concern Concept
operation in the foreseeable future.
states that the items recorded in the business’
books are transactions that affect the business
ACCOUNTING CONCEPTS 
The Business Entity Concept (business transactions).

The owner (s)’ private transactions are kept
separate from business transactions.
states that revenue is realized/recognized/earned
and recorded as revenue when the goods or
The Realization Concept
services are passed to the customers and a liability
(Revenue Recognition Concept)
is incurred.
It is NOT based on when cash has been received.
states that the expenses incurred or used up in an

The Accrual Concept accounting period must be matched to the revenues
(Matching Concept) earned in that period, and therefore, recorded in the
accounting period incurred.
states that there are two aspects of accounting, and
both aspects are always equal to each other.
Assets must always equal Capital plus Liabilities
The Dual Aspect Concept
(Accounting Equation).
“Double entry” is the method of recording the
transactions for the dual aspect concept.
states that only relevant information, which has the

similar items are dealt with in similar ways. 
ability to influence decisions, is reported. Small

accounting methods used to assure that  
These are the rules that standardize the 
Materiality amounts are not considered material and may either

ACCOUNTING CONVENTIONS 
not be reported, or do not have to follow accounting

concepts.
states that, in times of uncertainty, the figure that

understates profit should be reported, rather than
the figure that overstates profit.
Prudence / Conservatism
Expenses should be overstated rather than
understated, and revenue should be understated
rather than overstated.
states that the same method should be used for the

accounting treatment of similar items, and the same
Consistency method should be used from year to year. If the
method is changed, the change should be
disclosed.
 
5
INTRODUCTION TO THE BALANCE SHEET
The Five classes/categories of Accounts :
 ALICE: Assets, Liabilities, Income, Capital, and Expenses.
A – Assets
L – Liabilities
I – income / Revenues
C – Capital / Owner’s Equity
E – Expenses
• Assets
Assets are economic resources owned by a business that are used in its daily operations to
generate profit and benefit the business. Simply, they are a company’s resources i.e. things the
company owns.
• Liabilities
Liabilities are economic resources borrowed by a business from a person or organization. They are
the debts of the business i.e. amounts the business owes.
• Income
Income / revenues are amounts earned during the accounting period from the daily operations of the
business. Simply, they are what the business earns for providing goods and services.
• Capital / Owner’s Equity

Capital is the economic resources that were contributed by the owner(s) of the business to the
business, either to start the business or to continue its operations.
• Expenses
Expenses are the costs incurred by a business in its daily operations in earning income. In other words,
they are the cost of assets used by the business to generate revenues.
A company’s financial position
The financial position of a company is measured by:

1. Assets (what it owns)
2. Liabilities (what it owes to others)
3. Capital / Owner’s Equity
N.B. Every business transaction will have an effect on a company’s financial position.
6
The Balance Sheet and its major components :

 Definition of Balance Sheet
• The Balance sheet is a financial statement that is produced in order to show the financial position of
the enterprise shows
• It is produced in order to show the assets of a business in relation to its liabilities and capital at a
particular point in time.
 The major components of the Balance Sheet

The financial position of a company is measured by:
1. Assets (what it owns)
2. Liabilities (what it owes to others)
3. Capital / Owner’s Equity
Assets, Liabilities and Capital are, therefore, Balance Sheet accounts
• Assets
 Assets are economic resources owned by a business that are used in its daily operations to
generate profit and benefit the business.
 There are two types of assets:
o Fixed Assets: assets used to carry on the business and generate profit.
They are not purchased for resale but intended to be retained permanently for the purpose of
carrying on the business
e.g. Land and Buildings, Fixtures and Fillings, Machinery etc.
o Current Assets: assets consisting of cash and other assets that would be consumed or easily
converted into cash within one year.
• Liabilities
 Liabilities are economic resources borrowed by a business from a person or organization. They
are the debts of the business (the money owed by the business).
 There are two types of liabilities:
o Long Term Liabilities: These are any debts or obligations owed by the business that are
due more than one year from the current date e.g. Mortgages, Bank Loans etc.
o Current Liabilities: These are any debts or obligations owed by the business that are due
within one year from the current date e.g. Creditors (suppliers, short term loans), bank
overdrafts etc.
• Capital / Owner’s Equity

 Capital is the economic resources that were contributed by the owner(s) of the business to the
business, either to start the business or to continue its operations.
 Capital is considered a special kind of liability. It is a loan by the owner to the business and is,
therefore, money owed by the business to the owner.
N.B. For accounting purposes, a business is regarded as being a separate entity from its
owner(s).
(the business entity concept)
7
The Accounting Equation :

The Accounting Equation (also called the balance sheet equation.)
• The Accounting Equation is the basic equation of double entry accounting that reflects the relationship
between a company's assets, liabilities, and equity.
• It shows how assets were financed: either by borrowing money from someone (liability) or by paying your
own money (ownership equity).
• It is expressed as:
Assets = Liabilities + Capital
The double entry system is a method used to record each transaction twice in the books as every transaction affects two items.
Additional Information
The Expanded Accounting Equation :
o The expanded accounting equation includes two components of Closing Capital: Revenue and Expenses
 Revenue – Expenses = the business’ Profit or Loss

 If Revenues > Expenses, there is a Profit
 If Revenues < Expenses, there is a loss
 The owner of the business also has the option to withdraw capital from the business for personal use: Drawings
 The expanded accounting equation is, therefore:

Assets = Liabilities + Capital + Revenues – Expenses – Drawings
o Revenues increase Capital / Owner’s Equity
o Expenses decrease Capital / Owner’s Equity
o Drawings decrease Capital / Owner’s Equity
The Simple Balance Sheet :

o An elaborate form of the Accounting equation is presented in a Balance Sheet, which lists all assets, liabilities, and
equity, as well as totals to ensure that it balances.
The Format of a simple Balance Sheet (Horizontal)
Balance Sheet as at
$ $
Assets X Capital X
Liabilities X
XX XX
Balance Sheet as at
$ $
Fixed Assets X Capital X
Current Assets X Long Term Liabilities X
Current Liabilities X
XX XX
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The Balance Sheet – Arrangement of Assets and Liabilities

The assets and liabilities should be arranged in balance sheet in some specific order. Arrangement of assets and liabilities in
the balance sheet is called 'Marshalling of assets and liabilities'. There are two systems of arrangement of assets and liabilities
in the balance sheet:
(a) Order of Liquidity.
(b) Order of Permanence.
The Balance Sheet – Order of Permanence:
PERMANENCE is the condition, quality or state of being lasting or fixed, primarily judged by durability and useful life.
ORDER OF PERMANENCE is where fixed assets are entered in the balance sheet in descending order of permanence (i.e.
land first, then buildings, then equipment etc).
Balance Sheet as at
$ $
Fixed Assets X Capital X
Current Assets X Long Term Liabilities X
Current Liabilities X
XX XX
The Balance Sheet – Order of Liquidity:
LIQUIDITY refers to the ability to quickly and easily convert assets into cash without incurring a significant loss
ORDER OF LIQUIDITY is when items on a balance sheet are listed in descending order of liquidity. After cash, the other current
assets are listed in order of liquidity or nearness to cash (i.e. Accounts Receivable first, then Inventory…).
Balance Sheet as at
$ $
Current Assets X Current Liabilities X
Fixed Assets X Long Term Liabilities X
Capital X
XX XX
N.B. The most permanent assets are the least liquid.
Assets and Liabilities in Order of Permanence and Liquidity :
FIXED ASSETS CURRENT ASSETS LONG TERM LIAB. CURRENT LIAB.

Order of Order of Order of Order of Order of Order of Order of Order of
Permanence Liquidity Permanence Liquidity Permanence Liquidity Permanence Liquidity
Land Motor Land Motor Bank
Buildings Vehicles Buildings Vehicles Mortgage Creditors Bank
Loan due
Machinery Equipment Machinery Equipment Bank Loan in over a Overdraft
Equipment Machinery Equipment Machinery due in over year Bank
Motor Buildings Motor Buildings a year Overdraft Creditors
Vehicles Land Vehicles Land Mortgage
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VERTICAL FORMAT OF A SIMPLE BALANCE SHEET OF A SOLE TRADER

Owner’s Name
Balance Sheet as at _________
$ $ $
FIXED ASSETS:
Land & Buildings X
Plant & Machinery X
Fixtures & Fittings X
Motor Vehicles X
X
CURRENT ASSETS:
Stock X
Debtors X
Bank * X
Cash X
Total Current Assets X
LESS: CURRENT LIABILITIES

Bank Loan (1yr or less) X
Creditors X
Bank overdraft * X
Total Current Liabilities (X)
WORKING CAPITAL X
XX
FINANCED BY:
CAPITAL: X
Opening Capital
Add: Net Profit OR Less: Net Loss X OR (X)
X
Less: Drawings (X)
Closing Capital X
LONG-TERM LIABILITIES
Mortgage X
Bank Loan (more than 1 year) X
Total Long Term Liabilities X
XX
10
Principles of
Accounts
ACCOUNTING CYCLE
Ms Fergusson

11
Accounting Cycle
The accounting cycle is a series of steps for recording each transaction in the accounting
process, which are repeated every accounting period.
NB. Journalizing and posting to ledgers are done through out the period, whereas the rest of the
cycle is done at the end of a period.
Categories and Types of Accounts

Categories of Accounts Types of Accounts
A Assets Personal Accounts – Debtors and Creditors
L Liabilities Real Accounts – Assets & Liabilities
I Income / revenue Nominal Accounts – Revenue and Expenses
C Capital
E Expenses
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Journals (Books of Original Entry)

Transaction Journal
ALL CASH / CHEQUE TRANSACTIONS
Capital: investment by owner Cash Book
Receipt from Loans and repayment of Loans Cash Book
Purchase / Sale of Fixed Assets for cash or cheque Cash Book
Purchase of Stock with cash or cheque (Cash Purchases) Cash Book
Sale of Stock for cash or cheque (Cash Sales) Cash Book
Payment of expenses e.g. rent, salaries, insurance, interest on loan, etc. Cash Book
Payment of creditors (suppliers) the amount owed to them Cash Book
Receipt of income/revenue e.g. interest received, rent received, etc. Cash Book
Receipt of cash/cheque from debtors (customers) the amount owed by them Cash Book
Drawings: money withdrawn from business for personal use Cash Book
Discounts Received and Discounts Allowed Cash Book
CREDIT TRANSACTIONS INVOLVING STOCK AND FIXED ASSETS

Purchase of Stock on credit (Credit Purchases) Purchases Journal
Sale of Stock on credit (Credit Sales) Sales Journal
Sales Returns / Returns Inwards Ret. Inwards Journal
Purchases Returns / Returns Outwards Ret. Outwards Journal
Purchase / Sale of Fixed Assets on credit General Journal
TRANSACTIONS ENTERED IN THE GENERAL JOURNAL
Transactions that are entered in the cash book are also entered in the GJ
Capital: investment by owner General Journal
Purchase / Sale of Fixed Assets for cash or cheque General Journal
Payment of expenses e.g. rent, salaries, insurance, and... General Journal
- Discounts Allowed General Journal
- Carriage Inwards and Outwards General Journal
Receipt of income/revenue e.g. interest received, rent received, and... General Journal
- Discounts Received General Journal
Payment of creditors (suppliers) the amount owed to them General Journal
Drawings: money withdrawn from business for personal use General Journal
Non Cash Transactions are entered in the GJ

Adjusting Entries
- Provision for Depreciation General Journal
- Bad Debts written off General Journal
- Provision for Bad Debts General Journal
- Prepayments and Accruals General Journal
OTHER ENTRIES OF THE BUSINESS

Opening Entries (list of opening balances of assets, liabilities and capital a/cs) General Journal
Correction of Errors General Journal
Closing Entries (list of closing balances of assets, liabilities and capital a/cs) General Journal

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Name of the Business
Sales Journal
Date Details Invoice # Folio Amount $
Year
dt Debtor e.g. John Smith SL # X
dt Debtor e.g. Jane Doe SL X
dt Debtor SL X
End of mth Transfer to Sales account GL XX
Purchases Journal
Year
dt Creditor e.g. Will Browne PL # X
dt Creditor e.g. Alice Williams PL X
dt Creditor PL X
End of mth Transfer to Purchases account GL XX
Returns Inwards Journal

Year
dt Debtor e.g. John Smith SL # X
dt Debtor e.g. Jane Doe SL X
End of mth Transfer to Returns inwards account GL XX
Returns Outwards Journal

Year
dt Creditor e.g. Will Browne PL # X
dt Creditor e.g. Alice Williams PL X
End of mth Transfer to Returns outwards account GL XX
Cash Book
Date Details Folio Discount Cash Bank Date Details Folio Discount Cash Bank
Allowed Received
Year $ $ $ Year $ $ $
dt Balance b/d X X dt Purchases GL X
dt Capital GL X dt Motor Vehicle GL X
dt Sales GL X dt Creditor PL X X
dt Debtor SL X X dt Drawings GL X
dt Interest received GL X *dt Cash GL X
dt Loan GL X *dt Bank GL X
*dt Bank GL X dt Interest on Loan GL X
*dt Cash GL X dt Balance c/d X X
X XX XX X XX XX
dt Balance b/d X X

The Journal
Date Details Folio DR CR
Year $ $
dt Account debited e.g. Motor Vehicle GL X
Account credited e.g. Bank Account GL X
Narrative (description of transaction) e.g. to record the purchase of Motor Vehicle
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TheJournal
The General Journal is the journal used to record opening entries, closing entries, adjusting entries and correction of errors.
Opening Journal (opening balances for assets, liabilities and capital accounts)
At the beginning of an accounting period, there is one journal entry which shows all the opening balance of assets,
liabilities and capital called an opening journal entry.
Because all assets have debit balance, so these are debited in opening journal entry and all liabilities have credit
balance, so these are credited in opening journal entry. Capital is credited.
It is based on accounting equation
The balances can be taken from the balance sheet of previous year.
To creating the opening journal entry make a list of all Assets on debit side, all Liabilities and Capital on credit side.
The Journal
Year $ $
dt Land and Buildings GL X
Plant and machinery GL X
Motor Vehicles GL X
Stock (Inventory) GL X
Debtors GL X
Bank GL X
Cash GL X
Mortgage GL X
Bank Loan GL X
Creditors GL X
Accrued Expenses GL X
Provision for Depreciation: Motor Vehicles GL X
To record assets, liabilities and capital of business at beginning of period
XX XX
Correction of errors, Adjusting entries, etc.
The Journal
Year $ $
dt Account debited e.g. Motor Vehicle GL X
Account credited e.g. Bank Account GL X
Narrative (description of transaction) e.g. to record the purchase of Motor Vehicle
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Petty Cash Book 
Motor Travel Sundry Ledger Ledger
Receipts Folio Date Details Total Postage Cleaning
Expenses Expenses Expenses Folio Accounts
$ 2011 $  $  $  $  $  $    $ 
X CB Jan 3 Cash
Jan 7  Postage X  X
Jan 10  Motor Exp. X  X
Jan 14  R. King X  PL X
Jan 19  Travel Exp. X  X
Jan 25  Sundry exp. X  X
Jan 26  Cleaning X  X
X X X X X X X
Jan 31 Balance c/d X
X CB X
X Feb 1 Balance b/d
X Feb 1 Cash
 
$ 2011 $  $  $  $  $  $    $ 
X CB Jan 3 Cash
Jan 7  Postage X  X
Jan 10  Motor Exp. X  X
Jan 14  R. King X  PL X
Jan 19  Travel Exp. X  X
Jan 25  Sundry exp. X  X
Jan 26  Cleaning X  X
X X X X X X X
X CB Jan 31 Cash
Jan 31 Balance c/d X
XX XX
X Feb 1 Balance b/d
 
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$ 2011 $  $  $  $  $  $    $ 
300 CB Jan 3 Cash
Jan 7  Postage 5  5
Jan 10  Motor Exp. 20  20
Jan 14  R. King 30  PL 30
Jan 19  Travel Exp. 15  15
Jan 25  Sundry exp. 12  12
Jan 26  Cleaning 14  14
96 20 15 5 14 12 30
Jan 31 Balance c/d 204
300 300
204 Feb 1 Balance b/d
96 CB Feb 1 Cash
 
$ 2011 $  $  $  $  $  $    $ 
300 CB Jan 3 Cash
Jan 7  Postage 5  5
Jan 10  Motor Exp. 20  20
Jan 14  R. King 30  PL 30
Jan 19  Travel Exp. 15  15
Jan 25  Sundry exp. 12  12
Jan 26  Cleaning 14  14
96 20 15 5 14 12 30
96 Jan 31 Cash
Jan 31 Balance c/d 300
396 CB 396
300 Feb 1 Balance b/d
 
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Ledgers (Double entry – T accounts)

A T-ACCOUNT is an individual record of business transactions that result in increases and decreases in
the specific asset, liability, or capital item.
An account consists of three parts:

- The Title/Name of the account
- The left side (known as debit / Dr)
- The right side (known as credit / Cr)
Name of account e.g. Capital

Date Details Folio Dr$ Date Details Folio Cr$
• Increases and decreases in assets, liabilities and capital are posted in the form of debits and credits.
Debit and credit, therefore, indicate on which side of a T account numbers will be recorded.
• For some types of accounts debit means an increase in the account balance, while for others debit
means a decrease in the account balance, as seen below:
Category of Account Entry to Increase Entry to Decrease

Assets Debit Credit
Liabilities Credit Debit
Income / revenue Credit Debit
Capital Credit Debit
Expenses Debit Credit
LEDGERS are books of final entry containing the T-accounts of the business in which transactions are
posted in the form of debit and credits.
Ledgers T-Accounts
Sales Ledger Debtor a/cs (personal accounts) e.g. John Smith
Purchases Ledger Creditor a/cs (personal accounts) e.g. Alice Williams
General Ledger Real a/cs: assets, liabilities and capital e.g. Motor Vehicles, Stock, Loans etc.
Nominal a/cs: income and expense a/cs e.g. Rent, Discount Allowed, Interest received
Account Ledger
Debtor a/cs (personal accounts) e.g. John Smith Sales Ledger
Creditor a/cs (personal accounts) e.g. Alice Williams Purchases Ledger
Sales , Purchases, Returns Inwards, Returns Outwards a/cs General Ledger
Fixed Asset a/cs (real accounts) e.g. Buildings, Motor Vehicles etc. General Ledger
Cash and Bank separate a/cs General Ledger
Liability a/cs e.g. Mortgage General Ledger
Capital a/c and Drawings a/c General Ledger
Revenue a/cs and Expense a/cs (nominal accounts) e.g. rent , salaries, etc General Ledger

DOUBLE ENTRY requires that for each transaction, the amount entered into the accounting records is
entered in at least two different accounts, with one account being debited and the other credited. All debit
amounts equal all credit amounts provided the double-entry accounting was properly followed.
18
Ledgers (Double entry – T accounts)
Sales Ledger
Debtor a/c e.g John Smith

Year Year
dt Sales SJ X dt Returns Inwards RIJ X
dt Cash/Bank CB X
dt Discounts Allowed CB X
Debtor a/c e.g Jane Doe

Year Year
dt Cash/Bank CB X
Debtor a/c
Year Year
dt Cash/Bank CB X
Purchases Ledger
Creditor a/c e.g Will Brown

Year Year
dt Returns Outwards ROJ X dt Purchases PJ
dt Cash/Bank CB X
dt Discounts Received CB X
Creditor a/c e.g Alice Williams

Year Year
dt Cash/Bank CB X
Creditor a/c
Year Year
dt Cash/Bank CB X
19
General Ledger
Sales a/c
Year
dt Cash / Bank CB X
dt Total credit Sales for
the month SJ X
Purchases a/c
Year
dt Cash/Bank CB X
dt Total credit Purchases
for the month PJ X
Returns Inwards a/c

Year
dt Total Return Inwards
for the month RIJ X
Returns Outwards a/c

Year
dt Total Return Outwards
for the month ROJ X
Motor Vehicles a/c

Year
dt Bank CB X
Capital a/c
Year
dt Bank CB X
Bank Loan a/c

Year
dt Bank CB X
Rent a/c
Year
dt Cash / Bank CB X
Commissions received a/c

Year
dt Cash / Bank CB X
20
Balancing off Personal and Real accounts

An account balance is the difference between the debit and credit amounts.
Bank account
2010 2010
March 1 Balance b/d 12 500 March 14 Purchases CB 1 300
March 13 Sales CB 2 000 March 20 Equipment GJ 1 000
March 25 Loan GJ 1 000 March 27 Drawings GJ 200
March 28 Rent GJ 2 000
Simple steps:
1. Skip a line, draw total lines across from each other on the debit and credit sides, as seen below:
Bank account
2010 2010
2. Total the side with the larger amount and enter the amount in both total boxes, as seen below:
Bank account
2010 2010
15 500 15 500
3. On the side with the smaller amount, enter the date (last day of the month), Balance c/d and the
difference between the debit and credit amounts (account balance), as seen below:
4. On the opposite side after the totals, enter the date (first of the following month), Balance b/d and the
account balance.
Bank account
2010 2010
March 31 Balance c/d 10 000
15 500 15 500
April 1 Balance b/d 10 000
5. Account balances are entered in the Balance Sheet to show the financial position of the business.
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Closing off Nominal accounts

Nominal accounts are temporary accounts, which are closed off at the end of a period.
The steps are the same as Real and Personal accounts, except that Nominal a/c balances are NOT
carried forward to following period but are transferred to the Trading a/c or the Profit & Loss a/c as
follows:
Nominal account Transfer to:

Sales Trading a/c
Purchases Trading a/c
Returns Inwards / Outwards Trading a/c
Expenses Profit & Loss a/c
Revenue Profit & Loss a/c
Name of Business
The Journal
2010 $ $
March 31 Sales X
Trading a/c X
March 31 Trading a/c X

Purchases a/c X
March 31 Profit and Loss a/c X

Expense a/c e.g. Rent X
March 31 Revenue a/c e.g. Commissions Received X

Profit and Loss a/c X
Sales a/c
2010 2010
March 13 Bank CB 2 000
March 31 Total Credit Sales for
March 31 Transfer to Trading a/c GJ 24 000 the month of March SJ 22 000
24 000 24 000
Purchases a/c
2010 2010
March 14 Bank CB 1 300
March 31 Total Credit Purchases
for the month of March PJ 22 000 March 31 Transfer to Trading a/c GJ 24 000
24 000 24 000
Expense a/c e.g. Rent a/c

2010 2010
March 14 Bank CB 300
March 25 Cash CB 600 March 31 Transfer to P&L a/c GJ 900
900 900
Revenue a/c e.g. Commissions Received

2010 2010
March 31 Transfer to P&L a/c GJ 1 000 March 13 Bank CB 1 000
1 000 1 000
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Trial Balance
The Trial Balance is a list of all the debit and credit account balances for a period.
Type of Account Balance in Trial Balance

Personal and Real accounts Balance c/d
Nominal accounts Transfer to Trading or P&L a/c
The account balances for a period are entered in the Trial Balance as follows:
Category of Account Account Balances

Assets Debit
Liabilities Credit
Income / revenue Credit
Capital Credit
Expenses Debit
Trial Balance as at ___________________

Dr Cr
$ $
Asset accounts X
Liability accounts X
Income accounts X
Capital account X
Expense accounts X
XX XX
Trial Balance as at ___________________

Dr Cr
$ $
Cash X
Bank * X
Stock (Opening Stock) X
Bank Loan X
Debtors X
Creditors X
Sales X
Purchases X
Returns Inwards X
Returns Outwards X
Rent X
Carriage Inwards X
Carriage Outwards X
Commissions received X
Wages and Salaries X
Interest Received X
Discounts Allowed X
Discounts Received X
Interest on Loan X
Motor Vehicles X
Equipment X
Bank Overdraft * X
Capital X
Drawings X
XX XX
All debit amounts equal all credit amounts provided the double-entry accounting was properly followed.
23
Correction of Errors
Types of errors
There are two main classifications:
Errors NOT affecting / revealed by the Trial Balance

1. Errors of Commission (correct amount, wrong personal account)
2. Errors of Principle (correct amount, wrong type / category of account)
3. Errors of Original entry (incorrect amount entered in the journal / book of original entry)
4. Errors of Omission (no entry made in the books for transaction)
5. Compensating Errors (incorrect amount entered in double entry to ledger accounts cancelling out error)
6. Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each a/c
Errors affecting / revealed by the Trial Balance

• Errors of transposition in half of the double entry (resulting in overstatement or understatement of amts).
• Errors caused by entries on the wrong side of one half of the double entry.
• Errors caused by the omission of one half of the double entry.
• Errors of calculation (miscalculation of the account balances)
• Errors made in the Trial Balance.
Suspense Account (Errors affecting / revealed by the Trial Balance)

A temporary account called a suspense account has to be opened in the general ledger with the difference to make
the Trial Balance totals agree with each other. It is opened with a balance, on the side of the a/c that the Trial
Balance is less, as seen below:
General Ledger
Suspense account
Date Details Dr$ Date Details Cr$
Difference in trial balance X Difference in trial balance X
(DR side of TB less) (CR side of TB less)
 A credit balance in the Suspense account is a Current Liability in the Balance Sheet.
 A debit balance in the suspense account is a Current Asset in the Balance Sheet.
N.B. When errors are discovered, they must be corrected through journal entries (separately), which are then posted to
the ledger accounts affected by the error, including the suspense account.
The Statement of Corrected Net Profit

Name of business
st
Statement of corrected Net Profit for the year ended 31 March 2007
$ $
Net Profit per accounts X
Add: Expenses amount overstated X
Income / Revenue amount understated / omitted X
X
Less: Income / Revenue amount overstated X
Expenses amount understated / omitted X
(X)
Corrected Net Profit for the year XX
24
Adjusting Entries
Adjusting entries are entries made at the end of an accounting period to allocate revenue and expenses to
the period in which they belong, as required by the Matching / Accruals Concept.
Expenses to be transferred to the Profit and Loss account is the expenses incurred in the period, whether
they have been paid or not.
Revenue to be transferred to the Profit and Loss account is the revenue earned in the period, whether it has
been received or not.
TYPES OF ADJUSTING ENTRIES:

1. Accruals – Accrued Expenses and Accrued Revenue
2. Prepayments – Prepaid Expenses and Prepaid Revenue
3. Provision for Depreciation
4. Bad Debts and Provision for Bad Debts
Accruals and Prepayments

1. Accruals and Prepayments adjust revenue and expense amounts in the Trial Balance as follows:
Profit and Loss Amount Trial balance Notes to accounts

EXPENSES
Expense Transferred to P&L a/c = Expense paid + Accrued Expense
Expense Transferred to P&L a/c = Expense paid - Prepaid Expense

REVENUE
Revenue Transferred to P&L a/c = Revenue received + Accrued Expense
Revenue Transferred to P&L a/c = Revenue received - Prepaid Expense
ADD ACCRUALS
LESS PREPAYMENTS
2. Accruals and Prepayments are included in the Balance Sheet as follows:
CURRENT ASSETS CURRENT LIABILITIES
Prepaid Expenses Accrued Expenses
Accrued Revenue Prepaid Revenue
Bad Debts
Profit and Loss a/c Expense (amount written off)
Provision for Bad Debts
Profit and Loss a/c Increase in Provision for Bad Debts (Expense)
Decrease in Provision for Bad Debts (Revenue)
Balance Sheet Total Provision for Bad Debts (Current Assets: Debtors less Provision)
Depreciation
Profit and Loss a/c Annual Depreciation (Expense)

Balance Sheet Accumulated Depreciation (Fixed Assets less Depreciation)
25
A djusting Entries: Journal entries
ACCRUALS AND PREPAYMENTS
Expenses (Rent, Salaries, Insurance, etc.)
The Journal
Year $ $
dt Expense a/c GL X
Cash / Bank a/c CB X
To record payment of expense during the year
End of yr Expense a/c GL X

Accrued Expense a/c GL X
To record expense incurred but still owing at the end of period
End of yr Prepaid Expense a/c GL X
Expense a/c GL X
To record expense not incurred but paid in advance
End of yr Profit & Loss a/c X

Expense a/c GL X
To close off Expense a/c and transfer to Profit & Loss a/c
Revenue (Interest received, commissions received, rent received, etc.)
The Journal
Year $ $
dt Cash / Bank a/c CB X
Revenue a/c GL X
To record revenue received during the year
End of yr Accrued Revenue a/c GL X

Revenue a/c GL X
To record revenue earned but still owing at the end of period
End of yr Revenue a/c GL X
Prepaid Revenue a/c GL X
To record revenue not earned but received in advance
End of yr Revenue a/c GL X

Profit & Loss a/c X
To close off Revenue a/c and transfer to Profit & Loss a/c
NB. Accrued Expenses / Revenue and Prepaid Expenses / Revenue accounts are not opened for CSEC.
The Accruals and Prepayments are recorded as c/d and b/d figures that are recorded in the
Balance sheet as Current assets or Current liabilities.
26
A djusting Entries: Journal entries
Bad Debts and Provision for Bad Debts
The Journal
Year $ $
dt Bad Debts a/c GL X
Debtors a/c SL X
To write off Bad debts and reduce Debtor amount

Bad Debts a/c GL X
To close off Bad Debts a/c and transfer to Profit & Loss a/c

Provision for Bad Debts a/c GL X
To create a Provision for Bad debts a/c and transfer to P& L a/c
as an expense.

Provision for Bad Debts a/c GL X
To transfer an increase in Provision for Bad debts to P& L a/c
as an expense.
End of yr Provision for Bad Debts a/c X

Profit and Loss a/c GL X
To transfer a decrease in Provision for Bad debts to P& L a/c
as revenue.
NB. Bad Debts is treated as an expense account. It is, therefore, debited when a debt is written off.
At the end of the period, the amount of Bad Debts is transferred to the P & L account like all expenses.
Bad Debts is NOT recorded in the Balance Sheet.
Provision for Bad Debts is a contra asset account as it reduces Debtors in the Balance Sheet.
It, therefore, has a credit balance.
Changes in the provision are recorded in the P & L a/c. Increases in provision for Bad Debts are treated
as expenses in the P&L a/c while decreases are revenue in the P&L a/c.
Total Provision for Bad Debts is entered in the Balance Sheet and reduces Debtors in Current Assets.
Depreciation
The Journal
Year $ $
Provision for Depreciation a/c GL X
To transfer annual depreciation to P& L a/c as an expense.
NB. Provision for Depreciation is a contra asset account as it reduces the value of Fixed Assets in the
Balance Sheet. It, therefore, has a credit balance.
Annual Depreciation is transferred to the P&L a/c at the end of a period as an expense.
Total / Accumulated Depreciation is entered in the Balance Sheet and reduces the relevant Fixed Asset
to record the Net Book Value of the Asset.
CONTRA ASSET accounts have BOTH a P&L figure AND a Bal c/d figure (Balance Sheet) at the end of a period.
27
A djusting Entries: Ledger entries
Accruals and Prepayments
Expense a/c e.g. Rent a/c
Year Year
Opening Prepaid Expense b/d X Opening Accrued Expense b/d X
dt Cash / Bank CB X End of yr Transfer to P & L a/c GJ X
Closing Accrued Expense c/d X Closing Prepaid Expense c/d X
XX XX
Opening Prepaid Expense b/d X Opening Accrued Expense b/d X
Revenue a/c e.g. Commissions Received a/c

Year Year
Opening Accrued Revenue b/d X Opening Prepaid Revenue b/d X
End of yr Transfer to P & L a/c GJ X dt Cash / Bank CB X
Closing Prepaid Revenue c/d X Closing Accrued Revenue c/d X
XX XX
Opening Prepaid Revenue b/d X Opening Accrued Revenue b/d X
Bad Debts
Bad Debts a/c
Year Year
Dt Debtor X End of yr Transfer to P & L a/c X
(expense)
XX XX
Provision for Bad Debts

Provision for Bad Debts a/c
Year Year
End of yr Balance c/d X End of yr P & L a/c (expense) X
Beginning Balance b/d X
XX XX
End of yr P & L a/c (revenue) X Beginning Balance b/d X
End of yr Balance c/d X
XX XX
Depreciation
Provision for Depreciation
Year Year
End of yr Balance c/d X End of yr P & L a/c X
XX XX
End of yr Balance c/d X Beginning Balance b/d X
28
Final A ccounts: Income Statement

Owner’s Name
Trading & Profit & Loss A/c for the _______ ended _________
$ $ $
Sales X
Less: Sales Returns (X)
Net Sales X
LESS: COST OF GOODS SOLD:
Opening Stock X
Purchases X
Less: Purchases Returns (X)
X
Add: Carriage In X
Net Purchases X
Cost of Goods Available for sale X
Less: Closing Stock (X)
Cost of Goods Sold (X)
GROSS PROFIT (or GROSS LOSS) X or (X)
**Add: Rent Received X

Interest received X
Discount received X
Decrease in Provision for bad debts X
X
**Less: Expenses
Wages/salaries X
Utilities X
Increase in provision for bad debts X
Depreciation X
Bad debts expense X
Carriage Outwards X
Discount allowed X
Total expenses (X)
NET PROFIT (or NET LOSS) X or (X)
**These are a few examples, however the list can be exhaustive in reality
NB. This is an Income Statement for a sole trader.
For other types of businesses with more than one owner, an Appropriation a/c is prepared to share out
the net profit amongst the owners and calculate profit retained in business.
For Manufacturing Businesses, a Manufacturing a/c is prepared before the Trading & Profit & Loss a/c
For Non profit organizations, an Income and Expenditure a/c is prepared instead of a Trading and Profit
and Loss a/c.
29
Final A ccounts: Balance Sheet
Owner’s Name
FIXED ASSETS: COST $ ACC DEP. $ NBV $

Land & Buildings X (X) X
Plant & Machinery X (X) X
Fixtures & Fittings X (X) X
Motor Vehicles X (X) X
X (X) X
CURRENT ASSETS:
Stock X
Debtors X
Less: provision for bad debts (X)
Net debtors X
Prepaid expenses X
Revenues owing X
Bank X
Cash X

Creditors X
Accrued expenses X
Advanced revenues X
Bank overdraft X
WORKING CAPITAL X
XX
FINANCED BY:
Opening Capital X
X
Less: Drawings (X)
Closing Capital X
Mortgage X
Bank Loan X
X
XX
NB. This is a Classified Balance Sheet for a sole trader.
For other types of businesses there may be other items like proposed dividends, current a/c
(partnership) etc.
30
Principles of
Accounts
CONTROL SYSTEMS
Ms Fergusson

31
St. Mary’s College
Principles of Accounts
Control Systems
Control Systems are the procedures designed and established to check, record, regulate, supervise,
and safeguard assets, and ensure that the figures in the financial statements can be relied upon to be
accurate, by reducing the incidence of unintentional errors and intentional irregularities.
The need for Control Systems in Accounting.

- Control systems are needed to protect the organization’s assets and ensure the preparation of
reliable and timely financial statements.
THE THREE COMMON CONTROL SYSTEMS ARE:

1. Bank Reconciliation Statements
2. Control Accounts
3. Suspense Accounts
 
Bank Reconciliation Statement

A Bank Reconciliation Statement is a statement prepared to reconcile the difference between the
balances in the bank column of the cash book and the bank statement on any given date.
 
Control Accounts
Control Accounts are general ledger accounts whose balances reflects the total of balances of related
subsidiary ledger accounts. Debtors /Accounts Receivable and Creditors / Accounts Payable are the
most commonly used control accounts, and their balances serve as a crosscheck (control) of the
accuracy of the associated subsidiary records (personal accounts).
Suspense Accounts
A suspense account is an account in the general ledger in which amounts are temporarily recorded
until the correct entry could be determined.
When the proper account / amount is determined, the amount will be moved from the suspense acc.
Suspense accounts are used when accounting for errors to ‘balance” the trial balances until the
bookkeeper finds the errors and finishes recording the transactions.
 
 
 
 
32
St. Mary’s College Lesson Notes
Bank Reconciliation Statement :
SET INDUCTION: The Cash Book and the Bank Statement
BANK ACCOUNT
BUSINESS Cash Book BANK Bank Statement
The business records all the bank account’s The bank records all the bank account’s cheque
cheque and cash transactions in the Cash Book. and cash transactions in a Bank Statement, which
is sent to the business periodically.
The Cash Book:

• The Cash Book is the business’ record of the business’ bank account.
• It consists of information regarding the bank account’s cash and cheque receipts and payments and the
balance at the end of the period, as prepared by the business.
The Bank Statement

• The Bank Statement is the bank’s record of the business’ bank account.
• It is a summary that consists of information regarding the bank account’s cash and cheque receipts and
payments and the balance at the end of the period, as prepared by the bank.
• A Bank Statement is produced by the bank monthly, quarterly or annually and sent to the business.
Main accounting difference between the Cash Book and the Bank Statement:
Receipts / Deposits Payments / Withdrawals

CASH BOOK – business’ record DR CR
BANK STATEMENT – bank’s record CR DR
St. Mary’s College Lesson Notes 33
Differences / Discrepancies
between the Cash Book balance and the Bank Statement balance at the end of a specific period.
• There are usually timing differences between when the transaction information is recorded / entered in
the banks systems and when it is recorded in the business’ cash book.
• Therefore, there is sometimes a difference / discrepancy between the cash book (bank column) account
balance and the bank statement account balance at the end of the specific period.
Reasons for the differences between the Cash Book balance and the Bank Statement balance:
 Entries recorded in the Bank Statement but not in the Cash Book
• Direct Deposits
- Dividends received
- Credit transfers – receipts from debtors made into the bank account directly through the bank.
• Standing Orders and Direct Payments

- These are payments made by the bank from the bank account on behalf of the business
- E.g. Insurance payments
• Bank Charges (service charges on the bank account taken directly from the account by the bank)
• Interest Received (interest on the bank account deposited directly into the account by the bank)
• Dishonoured / Returned cheques

- bounced cheques that were deposited and have been returned to the bank as dishonored.
- The business was not notified as yet because it takes a few days (timing difference)
 Entries recorded in the Cash Book but not in the Bank Statement
These occur because of a time lag between the recording of the receipt or payment in the cash book and the
recording in the bank:
• Unpresented / Outstanding Cheques

- These are cheques issued by the business as payment to persons / businesses that have not been
presented to the bank for payment yet.
NB The payee has 6 months to present / “cash” a cheque.
- The business has it recorded in the cash book as a payment made but the bank has not because
they have not “cashed” the cheque as yet.
• Unrecorded deposits
- These are mainly cheque deposits to be made in the bank account that have been recorded in the
cash book but not by the bank as they have not received the deposits as yet.
- The business records the cheques as having been received / deposited on one day, while the bank
records the deposit on another day when the cheques are brought in from the business.
 Errors in the Cash Book and in the Bank Statement
The most common types of errors are the overstatements and the understatements of receipts and payments
due to errors in the amounts and receipts being entered as payments and vice versa.
Bank Reconciliation :
It is necessary to reconcile the cash book balance and the bank statement balance at the end of each period to ensure that
both are correct.
Bank reconciliation is the process of comparing and matching figures from the cash book against those shown
on a bank statement:
• to locate the reasons for the discrepancies,
• adjust cash book with those items which must be included and
• clarify and support any remaining difference between adjusted cash book balance and bank statement balance.
The Steps of Bank Reconciliation:

1. Compare the Bank Statement and the Bank column of the Cash Book. Check for:
- Entries made in the Bank Statement but not the Cash Book.
- Entries made in the Cash Book but not the Bank Statement.
- Incorrect amounts.
- Entries made on the incorrect side of the Cash Book.
2. Prepare a Revised Cash Book to update the CB with entries made in the Bank Statement but not the CB.
- Start with the Cash Book balance at the end of the period / month in question.
- Enter all the items that appear in the Bank Statement but not the Cash Book e.g. Bank Charges, Int. Rec…
- Correct any errors made in the Cash Book.
- Balance / Close off the Revised cash Book.
Revised Cash Book (Bank Column)

Bank Charges X
Balance b/d X
Standing Order e.g. Insurance X
Interest received X
Dishonoured chqs (debtor personal a/c) X
Credit Transfer (debtor personal a/c) X
Other Payments not entered in CB X
Other Receipts not entered in CB X
Receipts overstated X
Receipts understated X
Payments understated X
Payments overstated X
Balance c/d X
XX XX
Balance b/d X
3. Prepare a Bank Reconciliation Statement, which deals with items recorded in the Cash Book but not in
the Bank Statement. There are two methods:
- Method 1: Start with the Revised Cash Book closing bal. Add Unpresented chqs and Less Unrecorded deposits.

$
Revised Cash Book Balance X
Add: Unpresented cheques X
X
Less: Unrecorded deposits (X)
Bank Statement Balance XX
- Method 2: Start with the Bank Statement balance. Add Unrecorded deposits and Less Unpresented cheques.
$
Bank Statement Balance X
Add: Unrecorded deposits X
X
Less: Unpresented cheques (X)
Revised Cash Book Balance XX
- For both methods, correct errors by adding or subtracting amounts.

35
Control Accounts
A control account is a summary account in the general ledger that shows the totals of transaction amounts
entered in a subsidiary ledger such as sales or purchases ledger during the month.
Its balance reflects the aggregate balance of the related subsidiary ledger accounts and is, therefore, used to
control the subsidiary ledgers and verify that entries have been made. They provide totals of debtors and
creditors quickly when a trial balance is being prepared.
Control accounts are an important system of control on the reliability of ledger accounts. They indicate that
errors may have occurred in the ledgers they control.
Ledger Accounts Control Account

Sales Ledger Control Account
Sales Ledger debtors’ personal accounts
(totals of items in the sales ledger)
Purchases Ledger Control Account
Purchases Ledger creditors’ personal accounts
(totals of items in the purchases ledger)
The purpose of Control Accounts

The reasons for having control accounts are as follows:
1. To check on the accuracy
They provide a check on the accuracy of entries made in the personal accounts in the sales ledger and
purchase ledger.
It is very easy to make a mistake in posting entries, because there might be hundreds of entries to make.
- Figures might get transposed while some entries might be omitted altogether, so that an invoice or a
payment transaction does not appear in a personal account as it should.
It is possible to identify the fact that errors have been made by comparing:
• The total balance on the debtors account with the total of individual balances on the personal
accounts in the sales ledger.
• The total balance on the creditors account with the total of individual balances on the personal
accounts in the purchase ledger.
2. To locate errors
By using the control account, a comparison with the individual balances in the sales or purchase ledger
can be made for every week or day of the month, and the error found much more quickly than if
accounts did not exist.
3. To provide debtors and creditors balances more quickly for producing a Trial balance or B Sheet.
A single balance on a control account is obviously simpler and quicker than many individual balances in
the sales or purchase ledger.
This means also that the number of accounts in the double entry bookkeeping system can be kept down
to a manageable size.
36
CONTROL ACCOUNTS
Ledger Accounts Control Account

Sales Ledger Control Account
Sales Ledger debtors’ personal accounts
(totals of items in the sales ledger)
Purchases Ledger Control Account
Purchases Ledger creditors’ personal accounts
(totals of items in the purchases ledger)
The Sales Ledger Control Account

The sales ledger control account is also known as the Debtors Control Account and the Total Debtors
Account. It comprises the totals of all accounts of a similar nature related to debtors.
All items that appear in a debtor’s account are also recorded in the debtors control account.
The total of each type of transaction related to debtors is entered on the relevant side of the control account.
Items / types of transactions related to debtors include:
• Total opening balances of all debtors for the period
• Total credit sales for the period
• Total sales returns for the period
• Total cash received and cheques received from debtors for the period.
• Total Discounts Allowed for the period
• Total Bad Debts written off for the period
• Dishonoured / Returned cheques from debtors for the period
• Total closing balances of all debtors for the period
The Purchases Ledger Control Account

The purchases ledger control account is also known as the Creditors Control Account and the Total Creditors
Account. It comprises the totals of all accounts of a similar nature related to creditors.
All items that appear in a creditor’s account are also recorded in the Creditors Control Account.
The total of each type of transaction related to creditors is entered on the relevant side of the control account.
Items / Types of transactions related to creditors include:
• Total Opening balances of all creditors for the period
• Total Credit Purchases for the period
• Total Purchases Returns for the period
• Cash payments and cheque payments to creditors for the period
• Total Discounts received for the period
• Total closing balances of all creditors for the period
Contra entries (appear in both Control Accounts)

A contra entry is an item that offsets, cancels or partially reduces another item.
There maybe situations where a firm is both a supplier and a customer (creditor and debtor). Two separate
accounts are kept to record the relevant transactions.
Instead of making a payment by cheque for the full amount owed to him as a creditor, his accounts can be
settled by “setting off” the amount owed to him by the company and the amount owed by him to the company.
A contra entry which is recorded in the personal accounts in the Sales and Purchases Ledger needs to be
reflected in both Control accounts to ensure that they balance with the sum of the balances in the ledger
accounts. The amount that is set off in the accounts would be the smaller amount.
37
CONTROL ACCOUNTS - FORMAT
Items Source Notes

Opening and Closing Balances:
Sales Ledger Control Account Sales Ledger A credit balance may be caused by
overpayment or return of goods already paid
for by debtor. Credit balances must NOT be
deducted from debit balances, but shown
separately on the credit side of the control
account.
Purchases Ledger Control Account Purchases Ledger A debit balance may be caused by
overpayment or return of goods already paid
for to creditor. Debit balances must NOT be
deducted from credit balances, but shown
separately on the debit side of the control
account.
Credit Sales Sales Journal
Credit Purchases Purchases Journal
Discounts Allowed / Discounts Received Cash Book
Sales Returns Sales Returns Journal
Purchases returns Purchases Returns Journal
Cash / Cheque received and paid Cash Book
Bad Debts written off General Journal
Refunds from suppliers / to customers Cash Book
Dishonoured cheques Cash Book
Contra Entries General Journal A Contra Entry in a control account is when
the smaller amount is offset against the
larger amount.
The Sales Ledger Control Account

Date Details Dr$ Date Cr$
Balance b/d X Balance b/d (if any) X

(total debtors’ debit bals from previous period) (total debtors’ credit bals from previous period)
Credit Sales X Sales Returns X

Refunds to debtors/customers X Cash/Cheques received from debtors X
Dishonoured cheques X Discount allowed X
Interest on overdue accounts Bad Debts written off X
Contra Entries / set offs X
Balance c/d (if any) X Balance c/d X
Balance b/d Balance b/d (if any)
The Purchases Ledger Control Account

Date Details Dr$ Date Cr$
Balance b/d (if any) X Balance b/d X

(total creditors’ debit bals from previous period) (total creditors’ credit bals from previous period)
Purchases Returns X Credit purchases X

Cash/Cheques paid to creditors/suppliers X Refunds from suppliers/creditors X
Discount received X X
Contra Entries / set offs X Balance c/d (if any)
Balance c/d X X
Balance b/d (if any) Balance b/d

38
Suspense accounts and Correction of Errors

TYPES OF ERRORS
There are two main classifications of errors:

1. Errors that affect the Trial Balance (errors revealed by the Trial Balance)
2. Errors that DO NOT affect the Trial balance (errors not revealed by the Trial Balance)
Errors that affect the Trial balance

Certain errors cause the Trial Balance totals to be unequal i.e. not balance. These include:
• Errors of transposition in half of the double entry (resulting in overstatement or understatement of amounts).
• Errors caused by entries on the wrong side of one half of the double entry.
• Errors caused by the omission of one half of the double entry.
• Errors of calculation (miscalculation of the account balances)
• Errors made in the Trial Balance.
Examples:
A cash payment of $450 is entered in the Cash Book as $540.
This is an error of transposition resulting in an overstatement of $90 on the CR side of the CB and, therefore, the TB.
(A transposition error happens when you reverse two digits in a number or leave a zero off the end of a number)
Cash sales of $1000 were entered correctly in the CB but incorrectly in the Sales account as a Debit.
This would result in the Trial balance Debit balance being more by $2000!!!!!
Errors that do not affect the Trial Balance

• Errors of Commission (correct amount, wrong personal account)
• Errors of Principle (correct amount, wrong type / category of account)
• Errors of Original entry (incorrect amount entered in the journal / book of original entry)
• Errors of Omission (no entry made in the books for transaction)
• Compensating Errors (incorrect amount entered in double entry to ledger accounts cancelling out error)
• Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each a/c
Examples:
Errors of Commission (correct amount, wrong personal account)
e.g. Goods sold to M. Smith on credit is entered in N. Smith’s account in error.
Errors of Principle (correct amount, wrong type / category of account)

e.g. Motor expenses ( expense) were entered in the Motor vehicles’ account (asset) in error.
Errors of Original Entry (incorrect amount entered in the journal / book of original entry)
e.g. Goods purchased from T. Tall for $475 was entered in the Purchases Journal as $457 in error.
As a result, the incorrect amount of $457 was posted to the ledger accounts: T. Tall and Purchases.
Errors of Omission (no entry made in the books for transaction)

e.g. Rent received of $1200 was never entered in the cash book, and therefore the accounts.
Compensating Errors (incorrect amounts entered in each ledger account (double entry), cancelling out error)
e.g. Goods sold to J. Bond for $200 was entered correctly in the Sales Journal, but posted to the ledger accounts as
$300 (DR: J. Bond CR: Sales).
Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each account)
e.g. $800 Rent paid in cash was entered incorrectly as DR: Cash CR: Rent
N.B. When errors are discovered, they must be corrected through journal entries, which are then posted to the
ledger accounts affected by the error.
39
Errors that do NOT affect the Trial Balance

 There are certain errors that are not revealed by the Trial Balance, as the debit and credit totals are not
affected by the error so they are equal. These errors are:
• Errors of Commission (correct amount, wrong personal account)

• Errors of Principle (correct amount, wrong type / category of account)
• Errors of Original entry (incorrect amount entered in the journal / book of original entry)
• Errors of Omission (no entry made in the books for transaction)
• Compensating Errors (incorrect amount entered in double entry to ledger accounts cancelling out error)
• Errors of Complete reversal of entries (correct amts entered in the wrong sides (DR/CR) of each a/c
 When these errors are discovered, correcting the errors require double entry journal entries which will
be posted to the accounts affected by errors.
 
Correction of Errors NOT affecting the Trial Balance 
Errors of Commission (correct amount, wrong personal account)
Correcting the error requires journal entries to be posted to:
• The account incorrectly posted to - DR if the account was credited / CR if the account was debited
• The correct account – post to the correct account
Errors of Principle (correct amount, wrong type / category of account)

Correcting the error requires journal entries to be posted to:
• The account incorrectly posted to - DR if the account was credited / CR if the account was debited
• The correct account – post to the correct account
Errors of Original Entry (incorrect amount entered in the journal / book of original entry)
1. Identify whether the correct incorrect amount entered was overstated or understated.
2. Calculate the amount by which the entry was understated or overstated i.e. the difference.
3. Prepare the journal entry to correct the error:
If the amount was understated:
DR: the account debited
CR: the account credited
With the difference calculated to increase the amount to the correct amount
If the amount was overstated:
DR: the account credited
CR: the account debited
With the difference calculated to decrease the amount to the correct amount
Errors of Omission (no entry made in the books for transaction)

Correcting the error requires journal entries to be posted to the relevant accounts in the double entry.
Compensating Errors (incorrect amounts entered in each ledger account (double entry), cancelling out error)
Correcting these errors require the same steps as correcting Errors of Original entry.
Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each account)
The journal entry to correct the error:
DR: the account credited
CR: the account debited
With twice the amount of the error (to cancel the error / remove from incorrect side and post to correct side)
 
NB. There must be a double entry to correct the errors. 
40
Errors that affect the Trial Balance

 When the Trial Balance totals are not equal, the errors affecting the Trial Balance may not
immediately be found and corrected.
 A temporary account called a suspense account has to be opened in the general ledger with the
difference to make the Trial Balance totals agree with each other.
 A suspense account should only be opened when all attempts to find the error(s) have been
unsuccessful and the final accounts are needed urgently.
Suspense Account
A Suspense account is a temporary ‘holding’ account in the General ledger that is opened to place the
difference in the trial balance to make it balance when the causes of the difference cannot immediately be
found and corrected.
How to open a Suspense Account

A suspense a/c is opened with a balance, on the side of the a/c that the Trial Balance is less.  
The Suspense Account will, therefore, have a credit balance when the credit total in the Trial Balance is less
and a debit balance when the debit total is less.
General Ledger
Suspense account
Difference in trial balance X
(DR side of TB less)
Suspense account
Difference in trial balance X
(CR side of TB less)
Example:
S. James
st
Trial Balance as at 31 December 2009
DR CR
$ $
Totals (sum of all balances) 100 000 99 960
Suspense a/c 40
100 000 100 000
Suspense account
31 Dec Difference in Trial Balance 40
The Suspense Account and the Balance Sheet

 A credit balance in the Suspense account is a Current Liability in the Balance Sheet. 
 A debit balance in the suspense account is a Current Asset in the Balance Sheet. 
41
Correction of Errors and the Suspense Account

 When the errors are discovered after a Suspense a/c has been opened, the errors have to be
corrected by moving the amount from the suspense account to the proper account.
Correcting the errors require double entry journal entries which will be posted to:
1. The Suspense account
2. The other account(s) affected by the error
N.B. To correct the error, there MUST be an entry in the suspense account to cancel the amount entered.
Examples:
A Creditor for $95 was posted as $68 in the personal a/c.
The credit side would have been less by $27 so the Suspense account would have been credited.
Therefore, the journal entry to correct the error is: DR: Suspense a/c $27 CR: Creditor’s personal a/c $27
Discounts Received $70 had been posted to the Purchases ledger but NOT to the Discounts Received.
The credit side would have been less by $90 so the Suspense account would have been credited.
The journal entry to correct the error is: DR: Suspense a/c $70 CR: Discounts Received a/c $70
Rent expense of $200 was recorded twice on the same side of the cash account, but entered correctly in
the Rent expense a/c
The credit side would have been more (debit side less) by $200 so the Suspense account would have been
debited. The journal entry to correct the error is: DR: Cash a/c $200 CR: Suspense a/c $200
A cheque for $225 received from Jays Co had been posted to the debit side of their account.
As the entry was made on the wrong side of the account, the credit side would have been less (debit side more)
by $248, so the Suspense account would have been credited with $450.
The journal entry to correct the error is: DR: Suspense a/c $450 CR: Jays Co a/c $450
 Some errors do not affect the double entry and would, therefore, be corrected with a single entry in
the Suspense account. These errors include:
- account balance entered incorrectly in the Trial Balance e.g. $248 entered as $284
- account balance placed on the wrong side in the Trial balance (double the amount)
Examples:
The total of the Sales a/c of $1500 had been omitted from the Trial Balance.
The credit side of the TB would have been less by $1500 so the Suspense account would have been credited.
Therefore, the journal entry to correct the error: DR: Suspense a/c $1500
The total of the purchases a/c of $1400 had been entered in the Trial Balance as $1200.
The debit side of the TB would have been less by $200 so the Suspense account would have been debited.
The journal entry to correct the error: CR: Suspense a/c $200
Discount received of $67 was entered as $76 in the Trial Balance.

The credit side of the TB would have been more (debit side less) by $9 so the Suspense account would have
been debited. The journal entry to correct the error: CR: Suspense a/c $200
The total of the Bank Loan a/c of $1500 was entered on the debit side of the Trial Balance.
As the entry was made on the wrong side of the account, the credit side would have been less by $3000 so the
Suspense account would have been credited. The journal entry to correct the error: DR: Suspense a/c $1500
N.B. THE BALANCE IN THE SUSPENSE ACCOUNT MAY BE CAUSED BY MORE THAN ONE ERROR 
 
• Enter each journal entry to correct the error separately.
• Post each entry to the Suspense account and close off.
42
The Statement of Corrected Net Profit

 Errors affect the calculation of the Net Profit if the errors affect any of the components of the
Trading and Profit and Loss account.
• Income and Net Profit have a direct relationship:

- When an error results in Income being overstated, Net profit is also overstated.
- When an error results in Income being understated, net profit is also understated.
• Expenses and Net Profit have an inverse relationship:

- When an error results in Expenses being overstated, net profit is understated.
- When an error results in Expenses being understated, net profit is overstated.
 To correct Net Profit, amounts resulting in Net profit being understated have to be added, and
amounts resulting in Net Profit being overstated have to be lessened. This is done using a
“Statement of Corrected Net Profit”.
 
Name of business
st
Statement of corrected Net Profit for the year ended 31 March 2007
$ $
Net Profit per accounts X

Add: Expenses amount overstated X
Income / Revenue amount understated / omitted X
X
Less: Income / Revenue amount overstated X
Expenses amount understated / omitted X
(X)
Corrected Net Profit for the year XX
 
 
 
Example: 
th
• On January 17 2010, an error was found where an invoice of $100 had been credited to the
supplier’s a/c but had not been debited to the purchases account.
If Purchases was understated, then Net Profit was overstated and has to be corrected as follows:
st
Statement of Corrected Net profit for the year ended 31 December 2009
$ $
Net Profit per accounts 2 120
Less: Purchases undercast (100)
Corrected Net Profit for the year 2020
 
43
Principles of
Accounts
FINAL ACCOUNTS
Ms Fergusson

44
VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A SOLE TRADER
Owner’s Name
Trading & Profit & Loss A/c for the _______ ended _________
$ $ $
Sales X
Net Sales X

Opening Stock X
Purchases X
Add: Carriage Inwards X
X
Net Purchases X
GROSS PROFIT (or GROSS LOSS) X or (X)
**Add: REVENUE
Interest received X
Rent Received X
Discount received X
X
Total Revenue X
**Less: EXPENSES
Wages/salaries X
Utilities X
Depreciation X
Bad debts expense X
Carriage Outwards X
Discount allowed X
Total expenses (X)
NET PROFIT (or NET LOSS) X or (X)
**These are a few examples, however the list can be exhaustive in reality
45
VERTICAL FORMAT OF THE BALANCE SHEET OF A SOLE TRADER

Owner’s Name
Fixtures & Fittings X (X) X
X (X) X
CURRENT ASSETS:
Stock X
Debtors X
Net debtors X
Prepaid expenses X
Revenues owing X
Bank * X
Cash X

Creditors X
Accrued expenses X
Advanced revenues X
Bank overdraft * X
WORKING CAPITAL X
XX
FINANCED BY:
Opening Capital X
X
Less: Drawings (X)
Closing Capital X
Mortgage X
Bank Loan X
XX
46
VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A PARTNERSHIP
Partnership
Trading & Profit & Loss Appropriation A/c for the _______ ended ________
$ $ $
Sales X
Net Sales X
Opening Stock X
Purchases X
Add: Carriage In X
X
Net Purchases X
GROSS PROFIT (or GROSS LOSS) X / (X)
Add: Revenue
Rent Received; Discount Rec. etc X
Decrease in Provision for bad debts X X
Less: Expenses
Carriage Outwards; Discount allowed etc. X
Wages/salaries etc X
Increase in Provision for Bad Debts X
Depreciation X
(X)
NET PROFIT (or NET LOSS) X / (X)
Add: Interest on drawings
Partner 1 X
Partner 2 X
X
Less: Interest on Capital
Partner 1 X
Partner 2 X
X
Salary: Partner 1 X
(X)
XX
Share in Profits:
Partner 1 X
Partner 2 X
XX
* The last section (starting from Net Profit) is called the Approriation A/C
47
TIME APPORTIONMENT OF INTEREST ON CAPITAL AND INTEREST ON DRAWINGS
Interest on Capital is based on number of months the capital was in use.

Capital in use: Date of capital investment to Year end
e.g. Capital $5000 on June 1 to Dec 31 (year end) = 7 months
Interest on capital (10%):
Partner 1: ($5000 x 10%) x 7/12mths
Interest on Drawings is based on number of months the drawings was in use.

Drawings in use: Date of drawings to Year end
e.g. Drawings $300 on April 1 to Dec 31 (year end) = 9 months
Interest on drawings (5%):
Partner 1: ($300 x 5%) x 9/12mths
PROFIT SHARING
Profits or Losses may be shared according to a stated Profit Sharing ration or in
proportion to Partners’ Capital (Partnership Deed). If it is not stated how to share profits,
share equally according to the Partnership Act.
THE PARTNERSHIP CAPITAL AND CURRENT ACCOUNTS

(Columnar Format)
Partnership Co.
Capital Account
Date Details Partner 1 Partner 2 Date Details Partner 1 Partner 2
2010 $ $ 2010 S $
Jan 1 Balance b/d X X
Dec 31 Balance c/d X X Feb 1 Bank X
XX XX XX XX
2011
Current Account
Date Details Partner 1 Partner 2 Date Details Partner 1 Partner 2
2010 $ $ 2010 S $
Dec 31 Drawings X X Jan 1 Balance b/d X X
Dec 31 P&L Appropriation: Dec 31 P&L Appropriation:
Interest on drawings X X Interest on Capital X X
Salary X -
Share of profits X X
Dec 31 Balance c/d X X
XX XX XX XX
2011
48
VERTICAL FORMAT OF THE BALANCE SHEET OF A PARTNERSHIP

Partnership

X (X) X
CURRENT ASSETS:
Stock X
Debtors X
Net debtors X
Prepaid expenses X
Accrued revenue X
Bank X
Cash X

Creditors X
Accrued expenses X
Advanced revenues X
Bank overdraft X
WORKING CAPITAL X
XX
FINANCED BY:
CAPITAL ACCOUNTS
Partner 1 X
Partner 2 X
X
CURRENT ACCOUNTS
Partner 1 X
Partner 2 X
X
Mortgage X
XX
49
FORMAT OF THE BALANCE SHEET OF A PARTNERSHIP: FULL DETAILS
Partnership

X (X) X
CURRENT ASSETS:
Stock X
Debtors X
Net debtors X
Prepaid expenses X
Accrued revenue X
Bank X
Cash X

Creditors X
Accrued expenses X
Advanced revenues X
Bank overdraft X
WORKING CAPITAL X
XX
FINANCED BY:
CAPITAL ACCOUNTS Partner 1 Partner 2

Opening Capital X X
Capital introduced X X
X X X
CURRENT ACCOUNTS
Opening balance X X
Add: Interest on Capital X X
Salary X -
Share in Profits X X
Less: Drawings (X) (X)
Interest on drawings (X) (X)
X X X
Mortgage X
XX
50
FORMATION OF A PARTNERSHIP (MERGER OF TWO SOLE TRADERS)
When forming a partnership by merging two sole traders, an opening journal is prepared
as follows:
• State partnership name
• Draw Journal with DR and CR columns, as seen below
• List the assets and liabilities of the new partnership.
- Combine / Add each asset and liability of the sole traders forming the
partnership
- * Bank and Bank overdrafts are combined into one net figure which is
EITHER a Bank figure (Current asset) or Bank Overdraft (Current liability)
- *The Capital of EACH partner (former sole traders) must be stated separately.
The Capital of each partner is calculated using C = A-L, using the individual
sole trader figures.
• Narrative for formation of partnership
• DR and CR Totals must balance (Accounting equation)
Partnership
The Journal
Date Details DR CR
$ $
Buildings X
Fixtures and Fittings X
Motor Vehicles X
Stock X
Debtors X
Bank * X*
Cash X
Mortgage X
Bank Loan X
Creditors X
Bank Overdraft * X*
*Capital: Partner 1 X
Partner 2 X
To record assets and liabilities at formation of partnership
XX XX
51
FORMATS FOR FINAL ACCOUNTS OF NON PROFIT ORGANIZATONS
Non Profit Organizations include:
• Associations
• Clubs
• Societies
• Unions
• Charities
• Universities
• Churches
Non-profit making organizations belong to their members. Members pay subcriptions.
The Cash book is called the Receipts and Payments Account and the Trading and Profit and Loss
Account is called the Income and Expenditure Account.
Differences in accounting terms / procedures
PROFIT MAKING FIRMS NON PROFIT ORGANIZATIONS

Cash Book Receipts and Payments a/c
Trading a/c for buying and selling of goods for profit Trading a/c for fundraising activities only
e.g. Bar Trading a/c
Profit & Loss a/c Income and Expenditure a/c
Net Profit Surplus of income over expenditure (Surplus)
Net Loss Excess of expenditure over income (Deficit)
Capital a/c Accumulated Fund
Balance Sheet Balance Sheet
_________________________________________________________________________________________
FORMAT FOR RECEIPTS AND PAYMENTS A/C
Non Profit Organization

Receipts and Payments Account for the period ended ________________________
Receipts $ Payments $
Balance b/f X Bar Purchases X
Bar Sales X General Expenses X
Subscriptions X Other Payments e.g.
Donations Received X Insurance X
Other Receipts e.g. Purchase of refreshments X
Rent Received X Purchases of Prizes X
Gate Receipts X Purchase of new equipment X
Raffles and other competitions X Rent of hall for Annual Dinner X
Interest Received on bank a/c X Maintenance X
Sale of old equipment Balance c/f X
XX XX
Balance b/f X
52
THE SUBSCRIPTION ACCOUNT OF NON PROFIT ORGANIZATONS
Non Profit Organizations receive subscriptions from its members.

The Subscription Account is a revenue account (credit balance).
The Subscription account must account for any Accruals and Prepayments, like all revenue accounts,
as follows:

Subscription a/c
Year Year
Dt @ start Accrual b/d X Dt @ start Prepayment b/d X
Year end Income & Expenditure** X Year end Bank (Receipts) X
Prepayment c/d X Accrual c/d X
XX XX
**The amount for “Income & Expenditure” is entered in the Income & Expenditure account for
Subscriptions in the Income section.
___________________________________________________________________________________
LIFE MEMBERSHIP
Many clubs and societies have life membership schemes where members can pay a relatively large
amount at the beginning and then never pay any more membership fees.
The payment of a life membership fee should be spread over the estimated / expected membership period.
An annual amount from the total payment would be entered in the Income & Expenditure a/c, and the
remainder would be entered in the Balance Sheet as a long-term liability.
Example:
A member paid $20 000 life membership at age 20 and expected to be a member until 40 years old.
Therefore, the annual amount to be entered in the Income & Expenditure a/c for subscriptions should be
$20 000 / 20 years which is $1 000.
In the first year, the remaining $19 000 would be entered in the Balance Sheet as a long-term liability.
In the second year, the remaining $18 000 would be entered in the Balance Sheet as a long-term liability.
…
53
FORMATS FOR FINAL ACCOUNTS OF NON PROFIT ORGANIZATONS
The Trading a/c is prepared to calculate whether the non profit organization made a profit or a loss on its
fundraising activities e.g. bar, disco, dances, etc.
The Income & Expenditure shows whether the accumulated fund (capital) has increased or decreased
over the period.

Bar Trading a/c for the period ended ____________________________
$ $
Bar Sales X
Less: Cost of Goods Sold
Opening Stock X
Add: Purchases X
X
(X)
Gross Profit X
Less: Barman’s Salary (X)
Profit / Loss transferred to Income & Expenditure a/c* XX
Income & Expenditure a/c for the period ended ____________________________

$ $
Income
Profit from bar* X
Subscriptions** X
Donations received X
Rent received X
Interest Received X
Receipts from Raffles etc. X
Any other income for period… X
X
Expenditure
Loss from bar* X
Wages X
General Expenses X
Donations X
Depreciation of Equipment X
Depreciation of Furniture & Fittings X
Any other payments in period X
(X)
Surplus of income over expenditure ** XX
**If Expenditure exceeds Income, the difference is Excess of expenditure over income
N.B. The amounts entered in the Income & Expenditure a/c include Accruals and exclude Prepayments.
Therefore, Accruals are added to amounts and Prepayments are subtracted from amounts.
54
FORMAT FOR THE BALANCE SHEET OF NON PROFIT ORGANIZATONS

Balance Sheet as at ________________

Club Premises X - X
Furniture & Fittings X (X) X
Sports Equipment X (X) X
X (X) X
CURRENT ASSETS:
Bar Stock X
Prepaid Expenses X
Accrued Revenues e.g. Accrued Subscriptions * X
Bank X
Cash X
Creditors X
Accrued expenses X
Advanced revenues e.g. Advanced Subscriptions * X
WORKING CAPITAL X
XX
FINANCED BY:
ACCUMULATED FUND
Accumulated Fund @ start of period (Opening Balance) X

Add: Surplus of income over expenditure OR X OR
Less: Excess of expenditure over income (X)
Accumulated Fund @ end of period (Closing Balance) X
Mortgage X
Life Membership Fee** X
XX
55
FORMATS FOR FINAL ACCOUNTS OF COOPERATIVE SOCIETIES
Income and Expenditure Account for the year ended ___________________________________
$ $ $
Income
Membership dues X
Interest and Dividends X
Other X
X
Expenditure
Telephone X
Stationary & Office Supplies X
Traveling X
Repairs and Maintenance X
Motor Vehicle expense X
Bank Charges X
Interest on members deposits X
Interest on Loans X
Application: Subscriptions and dues X
Annual General Meeting (AGM) expenses X
Auditors’ fees/remuneration X
Provision for Depreciation X
(X)
Surplus/Deficit for the year X
Add: Undistributed surplus at the beginning of year b/f X
X
Less: Appropriations
Transfer to reserves:
Statutory reserve X
Special reserve X
X
Honoraria X
Proposed dividend X
(X)
Undistributed surplus c/f to next year XX
Note:
• Statutory Reserves – by law / statute a minimum percentage of net income should be transferred
to this reserve.
• Special Reserve – a reserve for any specific named purpose e.g. Investment reserve; Building
reserve
• Honoraria – voluntary payments to members of the committee of management as appreciation for
services performed.
• Proposed Dividends – dividends fixed at the AGM.
56
FORMATS FOR FINAL ACCOUNTS OF COOPERATIVE SOCIETIES
Name of Business
Balance Sheet as at _________________________________________
$ $ $
Employment of Capital Cost Accumulated Net Book
Fixed Assets Depreciation Value
Premises X -- X
Equipment X (X) X
X X X
Current Assets
Stock X
Receivables: Membership dues X
Prepayments X
Bank X
Cash X
X
Less: Current Liabilities
Honoraria Owing X
Proposed Dividends * X
(X)
Working Capital X
Net Assets XX
Capital Employed
Share Capital X
Reserves:
Statutory reserve X
Special reserve X
Undistributed surplus income X
X
XX
Note:
A Cooperative Society’s primary source of capital is from its members.

57
VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A COMPANY
Limited Liability Company

Trading & Profit & Loss Appropriation A/c for the _______ ended ________
$ $ $
Sales X
Net Sales X
Opening Stock X
Purchases X
X
Add: Carriage In X
Net Purchases X
GROSS PROFIT (or GROSS LOSS) X / (X)
Add: Revenue
Rent Received; Discount Rec. etc X
Total revenue X
Less: Expenses
Carriage Outwards X
Utilities ; Wages/salaries etc X
Discount allowed X
Bad debts expense X
Depreciation X
*Directors’ Remuneration X
*Debenture Interest X
Total expenses (X)
NET PROFIT (or NET LOSS) X / (X)
Add Retained Earnings b/f X
X
Less: Appropriations
Transfer to General reserves X
Proposed dividends:
Preference share dividends X
Ordinary Share Dividends X
(X)
Retained Earnings for the year X
* The last section (starting from Net Profit) is called the Approriation A/C
58
VERTICAL FORMAT OF THE BALANCE SHEET OF A COMPANY
Limited Liability Company
X (X) X
CURRENT ASSETS:
Stock X
Debtors X
Net debtors X
Prepaid expenses X
Accrued revenue X
Bank X
Cash X
Creditors X
*Debenture Interest Payable X
Accrued expenses X
Advanced revenues X
*Proposed Dividends:
Ordinary X
Preference X
Bank overdraft X
WORKING CAPITAL X
XX
FINANCED BY:
Authorized Share Capital
Ordinary Shares @ $ par value X
% Preference Shares @ $ par value X
X
Issued Share capital
Ordinary Shares @ $ par value X
% Preference Shares @ $ par value X
X
Reserves
General Reserves X
Retained Earnings X
X
X
Mortgage X
* % Debentures X
X
XX
59
FORMAT OF THE MANUFACTURING ACCOUNT
Manufacturing Business
Manufacturing Account for the _______ ended ________
$ $ $
Opening Stock of Raw Materials X
Add: Purchases of Raw Materials X
Carriage Inwards (Raw Materials) X
X
Less: Closing Stock of Raw Materials (X)
Cost of Raw Materials consumed (Direct Materials) X
Direct Labour X
Direct expenses X
PRIME COST X
Add: Factory Overhead Expenses
Indirect labour / Pay (Factory workers) X
General Factory expenses / Indirect expenses X
Fuel and Power X
Factory rent; Factory Insurance… X
Depreciation of Plant and machinery X
Lubricants X
X
PRODUCTION COST X
Add: Opening Work-in-Progress X
X
Less: Closing Work-in-Progress (X)
PRODUCTION COST OF GOODS COMPLETED C/D* X
Trading and Profit and Loss Account for the ________ended ________
$ $ $
Sales X
Less: Sales Returns (Finished Goods) X
NET SALES X
Less: Cost of Goods Sold
Opening Stock of Finished Goods X
Add: Purchases of Finished Goods (if any) X
Less: Purchases Returns of Finished Goods (if any) X .
Net Purchases X
*Add: Production cost of goods completed b/d* X
X
Less: Closing Stock of Finished goods (X)
(X)
GROSS PROFIT X
Less: Administrative Expenses

Administrative Staff pay X
Rent; Insurance; Depreciation etc X
X
Less: Selling and Distribution
Sales Staff pay X
Commission on sales; Carriage Outwards, etc X
X
Financial Charges
Bank Charges X
Discounts Allowed X
X (X)
NET PROFIT X
60
MANUFACTURING ACCOUNT (INCLUDING COST OF PACKAGING)
The Cost of Production may include the cost of the packaging of the finished goods e.g. boxes, bottles,
cases etc. This Cost has to be included in the Manufacturing Account in addition to the cost of Raw Materials.
This can be done after Cost of Raw Materials Consumed is calculated, or in columnar format as seen below:
$ $ $
Raw Packaging
Materials e.g Boxes Total
Opening Stock X X
Add: Purchases X X
Carriage Inwards X X
X X
Less: Closing Stock of Raw Materials (X) (X)
Cost of Direct Materials & Boxes consumed X X XX
Direct Labour X
Direct expenses X
PRIME COST X
Fuel and Power X
Lubricants X
X
PRODUCTION COST X
X
* Factory Overhead Expenses are for ALL INDIRECT EXPENSES (Factory Expenses), even
though it appears to be under the “Boxes” Column.
61
The following format is the long way of including the Cost of Packaging in the Manufacturing Account. The
Packaging cost is calculated after the “Cost of Raw Materials consumed” as follows:

$ $ $
Opening Stock of Raw Materials X
Add: Purchases of Raw Materials X
Carriage Inwards (Raw Materials) X
X
Less: Closing Stock of Raw Materials (X)
Cost of Raw Materials consumed (Direct Materials) X
Opening Stock of Packaging e.g. Boxes X

Add: Purchases of Boxes X
Carriage Inwards (Boxes) X
X
Less: Closing Stock of Boxes (X)
X
Cost of Direct Materials and Boxes consumed XX
Direct Labour X
Direct expenses X
PRIME COST X
Fuel and Power X
Lubricants X
X
PRODUCTION COST X
X
62
FORMAT OF THE BALANCE SHEET OF A MANUFACTURING BUSINESS
The Current Asset Section is the only section that differs in the Balance Sheet for a
Manufacturing Account as Stock is now divided into THREE types:
1. Raw Materials
2. Work-in-Progress
3. Finished Goods
Manufacturing business
Balance Sheet as at ________________

X (X) X
CURRENT ASSETS:
Stock*
Raw materials X
Work in progress X
Finished Goods X
X
Debtors X
Net debtors X
Prepaid expenses X
Revenues owing X
Bank * X
Cash X
Creditors X
Accrued expenses X
Advanced revenues X
Bank overdraft * X
WORKING CAPITAL X
XX
FINANCED BY:
Opening Capital X
X
Less: Drawings (X)
Closing Capital X
Mortgage X
Bank Loan X
XX
63
Principles of
Accounts
RATIO ANALYSIS
Ms Fergusson

64
St. Mary’s College Lesson Notes
Accounting Ratios:
A ratio that expresses the relationship between one accounting result and another, intended to provide a useful comparisons.
Liquidity Ratios: assesses the business’ ability to cover its short-term debt as they become due.
Also known as “Working Capital Ratio”

Current Ratio = Current Assets . Ratio expressed as the number of times
Current Liabilities current assets can cover the current liabilities
in the accounting period.
Example: Current Assets = $12 500 = 2.5:1 2.5 Current assets cover 1 Current liability
Current Liabilities $5 000
Also known as “Acid Test Ratio”

Quick Ratio = Current Assets - Stock . Ratio expressed as the number of times
Current Liabilities quick assets can cover the current liabilities
in the accounting period.
Example: Current Assets - Stock = $12 500 - $2 500 = 2:1 2 Quick Assets cover 1 C. Liability
Current Liabilities $5 000
Debtors / Acc. Receivable x 12mths Expressed as the average no. of

Debtor: Sales Ratio =
Annual Sales months debtors take to pay
business amounts owed.
Example: Debtors = $3 600 x 12mths = 1.35 months Debtors take 1.35 months on average to
Sales $32 000 pay business amounts owed.
Expressed as the average no. of

Creditor: Purchases Ratio = Creditors / Acc. Payable x 12mths months the business takes to
Annual Purchases pay creditors / suppliers
amounts owed.
Example: Creditors = $2400 x 12mths = 1.04 months The business takes 1.04 months on
Purchases $27 700 average to pay creditors amounts owed.
Debtor . Measures the relationship between how much credit is

Debtor: Creditor Ratio = granted by the business to customers and how much credit
Creditor is received from suppliers.
Example: Debtors = $3 600 = 1.5:1 …for every $1.50 owed by a debtor, the business owes $1 to a
Creditors $2 400 creditor.
Profitability Ratios: assesses the business’ overall efficiency and performance during a specific period.
Expressed as a %
Gross Profit as a Percentage of Sales = Gross Profit x 100
Amount of Sales that result in
Net Sales Gross Profit
Example: Gross Profit x 100 = $12 900 x 100 = 40.3% The business made a Gross profit of $0.40
Net Sales $32 000 for every $1 of Sales.
Expressed as a %
Net Profit as a Percentage of Sales = Net Profit x 100
Amt of Sales that business keeps as
Net Sales profits after cost of sales & expenses
Example: Net Profit x 100 = $7 200 x 100 = 22.5% The business made a profit of $0.22 for every $1
Net Sales $32 000 of Sales after deducting all costs & expenses.
Net Profit as a Percentage of Capital Employed =

(Return on Capital Employed) Net Profit x 100 Expressed as a
Capital Employed %
This ratio measures the amount of returns a business receives from resources made available to them
from funds supplied by owners. Sometimes, funds supplied by creditors (long term liabilities) are
included in capital employed as well.
There are different Formulas for Capital Employed. Most popular for CSEC:
Capital Employed = Opening Capital + Closing Capital
2
Example: Net Profit x 100 = $7 200 x 100 = 33.3% The business earned $0.33 for every $1
Capital Employed $21 600 of Capital Employed.
Rate of Turnover or Stock turnover = Cost of Goods Sold . Expressed as the no. of times per
Average Stock annum stock is sold or turned over.
Rate of Turnover or Stock turnover = Average Stock x 12mths / 365dys Expressed as the average
Cost of Goods Sold no. of months or days the
stock is sold or turned over.
Average Stock = Opening Stock + Closing Stock

2
Example1: $19 100 = 8.3 times Example2: $2 300 x 12mths = 1.45 months
$2 300 $19 100
66
Accounting Ratios and Incomplete Records:
MARK UP AND MARGIN (PROFIT EXPRESSED AS A % OF PRICE)

MARK UP: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD
MARGIN: Profit expressed as a fraction / percentage of SELLING PRICE / SALES REVENUE
FORMULAS:
Mark up (%) = Gross Profit X 100

Cost Price /
Cost of Goods Sold
NB: Sales = Cost of Goods Sold + Mark up Profit
MARGIN: Profit expressed as a fraction / percentage of SELLING PRICE / SALES REVENUE
Margin (%) = Gross Profit X 100

Selling Price /
Sales
NB: Cost of Goods Sold = Sales – Margin Profit
USING MARK UP AND MARGIN IN INCOMPLETE RECORDS
NB: If Mark up % is given and Cost of Goods Sold, Gross Profit and Sales can be calculated as follows:
Gross Profit ($) = Mark up (%) x Cost of Goods Sold ($)
Sales ($) = Cost of Goods Sold ($) + Gross Profit (mark up)
Example: Cost of Goods Sold = $5000 Mark up = 20%

Solution: Gross Profit = 20% x $5000 = $1000
Therefore, Sales = $5000 + $1000 = $6000
MARGIN: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS SOLD
NB: If Margin % is given and Sales Revenue, Gross Profit and Cost of Goods Sold can be calculated as follows:
Gross Profit ($) = Margin (%) x Sales ($)
Cost of Goods Sold ($) = Sales ($) - Gross Profit (margin)
Example: Sales = $6400 Margin = 25%

Solution: Gross Profit = 25% x $6400 = $1600
Therefore, Cost of Goods Sold = $6400 + $1600 = $4800
RELATIONSHIP BETWEEN MARK-UP AND MARGIN (how to use one to find the other if necessary)
MARGIN = Mark-up numerator . MARK UP = Margin numerator .

(fraction) Mark-up numerator + Mark-up denominator (fraction) Margin numerator - Margin denominator

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1

ST. MARY’S COLLEGE

TABLE OF CONTENTS

The Purpose of Accounting :

o Accounting is the process of classifying, summarizing, recording, interpreting and communicating

 Identifying: Establishing the essential characteristics or features of.

 Difference between accounting and bookkeeping

The Types of Business Organizations :

Accounting Concepts and Conventions

states that assets are valued and shown in the

states that only transactions that can be measured

states that the business is assumed to be in

The Business Entity Concept (business transactions).

states that the expenses incurred or used up in an

states that only relevant information, which has the

ability to influence decisions, is reported. Small

Materiality amounts are not considered material and may either

not be reported, or do not have to follow accounting

states that, in times of uncertainty, the figure that

states that the same method should be used for the

The Five classes/categories of Accounts :

 ALICE: Assets, Liabilities, Income, Capital, and Expenses.

• Capital / Owner’s Equity

A company’s financial position

The financial position of a company is measured by:

The Balance Sheet and its major components :

 The major components of the Balance Sheet

Assets, Liabilities and Capital are, therefore, Balance Sheet accounts

• Capital / Owner’s Equity

The Accounting Equation :

 Revenue – Expenses = the business’ Profit or Loss

 The expanded accounting equation is, therefore:

The Simple Balance Sheet :

The Format of a simple Balance Sheet (Horizontal)

The Balance Sheet – Arrangement of Assets and Liabilities

The Balance Sheet – Order of Permanence:

The Balance Sheet – Order of Liquidity:

N.B. The most permanent assets are the least liquid.

Assets and Liabilities in Order of Permanence and Liquidity :

FIXED ASSETS CURRENT ASSETS LONG TERM LIAB. CURRENT LIAB.

VERTICAL FORMAT OF A SIMPLE BALANCE SHEET OF A SOLE TRADER

LESS: CURRENT LIABILITIES

Categories and Types of Accounts

L Liabilities Real Accounts – Assets & Liabilities

I Income / revenue Nominal Accounts – Revenue and Expenses

Journals (Books of Original Entry)

CREDIT TRANSACTIONS INVOLVING STOCK AND FIXED ASSETS

TRANSACTIONS ENTERED IN THE GENERAL JOURNAL

Non Cash Transactions are entered in the GJ

OTHER ENTRIES OF THE BUSINESS

Returns Inwards Journal

Returns Outwards Journal

It is based on accounting equation

Correction of errors, Adjusting entries, etc.

Ledgers (Double entry – T accounts)

An account consists of three parts:

Name of account e.g. Capital

Category of Account Entry to Increase Entry to Decrease

Purchases Ledger Creditor a/cs (personal accounts) e.g. Alice Williams

Ledgers (Double entry – T accounts)

Name of the Business

Debtor a/c e.g John Smith

Debtor a/c e.g Jane Doe