Ebook b291 Unit2 E1i1 n9781848735118 l3

B291 Financial accounting
Unit 2
Double-entry bookkeeping
Written by Carien van Mourik
Module Team Dr Devendra Kodwani, B291 Chair & Author Dr Carien van Mourik, Author Professor Jane Frecknall-Hughes, Professional Certicate in Accounting Chair & Author Catherine Gowthorpe, Author Kelly Dobbs, Curriculum Assistant Elizabeth Porter, Regional Manager Sam Cooper, Programme Coordinator Emir Forken, Qualications Manager Dr Lesley Messer, Programme Manager Funmi Mapelujo, Curriculum Manager External Assessor Professor Stuart Turley, Manchester Business School Critical Readers Professor Judy Day, Manchester Business School
Elizabeth Porter
Professor Peter Walton
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The Module Team wishes to acknowledge use of some material from B680 The Certicate in Accounting.
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Contents
Introduction Learning aims and outcomes of Unit 2 Session 1 The accounting cycle, the transaction cycle
and source documents Introduction 1.1 The accounting cycle 1.2 Transactions and recordable events 1.3 Data sources and source documents 1.4 The transaction cycle and the accounting cycle
compared Summary Session 2 Recording transactions in books of prime
entry Introduction 2.1 Books of prime entry 2.2 Recording sales and purchase transactions in
the day books 2.3 Recording sales and purchase returns in the
day books 2.4 Recording cash transactions in the cash book 2.5 Accounting for petty cash 2.6 The journal 2.7 The non-current asset register 2.8 The inventory register Summary Session 3 Double-entry bookkeeping Introduction 3.1 The functions and foundations of double-entry
bookkeeping 3.2 The accounting equation and the nominal
ledger 3.3 The rules of double-entry bookkeeping 3.4 Recording transactions in ledger accounts 3.5 Receivables ledgers, payables ledgers and
control accounts 3.6 Analysing the day books and posting the
totals to the nominal ledger Summary Session 4 Balancing off ledger accounts Introduction 4.1 Introduction to the trial balance 4.2 How to balance and close off ledger accounts 4.3 How to prepare an unadjusted trial balance Summary 5
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Session 5 Accounting systems and the impact of IT on

nancial reporting and control Introduction 5.1 Accounting information systems and sources
of information 5.2 The place of the accounting information
system in a business organisation 5.3 Accounting information systems and business
transactions 5.4 Accounting information systems and the
nance function 5.5 The inputs, outputs and controls of the main
nancial business systems 5.6 Computerised accounting systems 5.7 Manual versus computerised accounting systems Summary Unit summary Self-assessed Questions References
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Introduction
Introduction
Welcome to Unit 2. In Unit 1 you learned what bookkeeping and accounting are, and what accounting information is used for and by whom. In addition, Unit 1 introduced the environmental inuences and constraints on accounting as well as the concepts and principles underlying nancial reporting information. Unit 2 introduces the process of recording transactions, double-entry bookkeeping, and the form and function of manual and computerised accounting information systems. Keeping a record of transactions and summarising transactions through double-entry bookkeeping form the basis of the skills you will learn in this module. There are many activities in Unit 2. All of them are designed to help you understand concepts and master bookkeeping effectively and as quickly as possible. Unfortunately, learning bookkeeping and accounting requires lots of time and practice because there are no short cuts. Note that Session 3 of this unit will be somewhat demanding, but at the end of the session you will have learned the fundamental principles of double-entry bookkeeping. Unit 2 consists of ve sessions. Session 1 introduces the accounting cycle, transactions and recordable events, the difference between a transaction cycle and an accounting cycle, and explains the role of source documents in the accounting system. Session 2 explains how to record transactions in the main books of prime entry. Session 3 explains the logic behind the double-entry bookkeeping system and the basic structure of an accounting system, as well as how to record transactions in nominal ledger accounts. Session 4 illustrates how to summarise the nominal ledger accounts by listing the balances in an unadjusted trial balance and explains the function and limitations of the trial balance. By the end of Session 4 you will be able to perform the rst three steps in the accounting cycle. Session 5 explains the impact of IT on accounting information systems and discusses the differences between manual and computerised accounting systems in relation to the main nancial controls. When working through the unit, please keep in mind that the documents, processes and systems discussed should be regarded as typical examples. However, businesses tend to adopt documentation, processes and systems in accordance with what they need and what works for them. Therefore, the forms and exact content of the documentation, processes or systems discussed in this unit may differ somewhat from one organisation to the next, but should be recognisable. The basic principles of recording the nancial effects of transactions and events using double-entry bookkeeping will remain the same.
Unit 2 Double-entry bookkeeping
I always wanted to be an accountant
Learning aims and outcomes of Unit 2

Upon completion of Unit 2 you are expected to be able to: 1 identify and explain the main types of transactions and events that accountants record in the accounting books 2 identify and explain the role of, and information contained in, source documents 3 record transactions in the appropriate books of prime entry 4 understand and explain the double-entry bookkeeping system, the duality concept, and the accounting equation 5 use books of prime entry, ledger accounts and journals to record transactions 6 balance ledger accounts and extract an unadjusted trial balance 7 understand the basic form and function of accounting records in typical manual and computerised accounting and control systems 8 evaluate the differences between manual and computerised accounting systems and identify their advantages and disadvantages.
Session 1 The accounting cycle, the transaction cycle and source documents
SESSION
1 0The accounting cycle, the transaction cycle and source documents

Introduction
Upon completion of Session 1 you are expected to be able to:
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distinguish between the accounting cycle and the transaction cycle classify transactions identify the information in the different source documents that needs to be recorded in the appropriate books of prime entry.
In Session 1 you will learn about the accounting cycle and the transaction cycles of cash and credit transactions. This will enable you to decide in which book of prime entry to record a transaction. Each type of transaction is recorded in a separate book of prime entry. Session 1 will also introduce the documents that businesses use at various stages of each transaction. This will help you to identify the information from the source documents that needs to be recorded in the books of prime entry. Recording transactions in the appropriate books of prime entry will be the topic of Session 2.
1.1 The accounting cycle

1.1.1 What is an accounting cycle?
The accounting cycle is the process which commences when a transaction is rst recorded and ends at the time that the nancial statements are prepared. The steps in the accounting cycle are shown in Figure 1. Figure 1 also shows where in this module you will learn about each of the steps in the accounting cycle. These steps are discussed in more detail below. Step 1: Recording the transaction in the books of prime entry and keeping the source documents as evidence. The books of prime entry include the sales and purchase day books, the cash book and the journal. You will learn how to record transactions in the appropriate books of prime entry in Session 2 of this unit. Step 2: Recording the dual aspect of transactions in the general ledger, also called the nominal ledger, using the technique of double-entry bookkeeping. The general ledger holds all the ledger accounts that are used to prepare the nancial statements and which constitute the double-entry system. In a computerised accounting system the recorded transactions are automatically linked to the double-entry bookkeeping system. However, in a manual accounting system all the individual transactions are recorded in the day books in Step 1, and the individual sales and purchase transactions are then also posted to the personal accounts
Step 1: Recording individual transactions evidenced by source data in the books of prime entry and posting them to the memorandum books (Unit 2: Session 2)
Step 2: Recording the dual aspect of transactions and recordable events in the nominal ledger by posting the totals in the day books to the nominal ledger accounts (Unit 2: Session 3 and Unit 3: Sessions 18)
Step 3: Preparing an unadjusted trial balance by collecting balances from all the nominal ledger accounts (Unit 2: Session 4)
Step 4: Extending the trial balance by making the necessary end of period adjustments in order to match revenues and expenditures for the period (Unit 4: Sessions 15)
Step 5: Preparing the financial statements in accordance with the appropriate measurement and disclosure rules and regulations (Unit 4: Session 6 and Unit 5: Sessions 1, 3 and 4)
Step 6: Closing the temporary nominal ledger accounts: the revenue and expense accounts, the income and expense nominal ledger account and the drawings account (Unit 4: Session 6)
Step 7: Reversing the prepayment and accruals entries, and preparing a post-closing trial balance (Unit 4: Session 6)
Figure 1 The accounting cycle owchart
in memorandum ledgers (also called subsidiary ledgers) by means of journal entries. The totals in the books of prime entry are periodically posted to the appropriate nominal ledger accounts which constitute the double-entry bookkeeping system. This is the topic of Session 3 of this unit. Step 3: Preparing an unadjusted trial balance by collecting the balances of all the nominal ledger accounts. This is the topic of Session 4 of this unit. In a computerised accounting system this is done automatically. Step 4: Extending the trial balance to include the end of period adjustments which are required to prepare nancial statements on an accruals basis instead of a cash basis. Examples include adjustments for inventory and cost of sales, prepayments and accruals, and the depreciation of non-current assets. Other end of period adjustments include those for irrecoverable receivables, the allowance for receivables, and the correction of errors. Unit 4 covers the end of period adjustments using the knowledge of how to account for all the related transactions and events provided
Step 5:
Step 6:
Step 7:
by Unit 3. The extended trial balance serves as a worksheet that aids in the preparation of nancial statements. Preparing the nancial statements. Unit 4, Session 6 deals with the nancial statements of sole traders and Unit 5 for partnership accounts and company nancial statements. Closing the temporary nominal ledger accounts, which consist of the revenue and expense and drawings accounts, so that only the balance sheet nominal ledger accounts remain open (this is covered in Unit 4). Preparing a post-closing trial balance to make sure that the accounting system is ready for the next accounting cycle (this is covered in Unit 4).
By the end of Session 4 of this unit you will have become familiar with the rst three steps in the accounting cycle, and by the end of Unit 4 you should be able to perform all the steps necessary to produce nancial statements for a sole trader, close the temporary accounts and prepare a post-closing trial balance. Although the steps in the accounting cycle are the same for partnerships and companies, the actual nancial statements are different. You will learn more about this in Unit 5.
1.1.2
How long is an accounting cycle?
A transaction can be completed in as little as a few seconds (e.g., retail sales for cash) or as much as several years (e.g., large building and infrastructure projects). In other words, transaction cycles are extremely variable in length. As you learned in Unit 1, accounting information must be useful as an input to decisions regarding the allocation of scarce resources. For an organisation to know if it is meeting its objectives, and to be able to report to its stakeholders, it needs periodically to summarise and analyse the information it is collecting about its transactions. An accounting cycle comprises the process of recording transactions and posting them to the nominal ledger where, together with other similar transactions, they become information that is periodically summarised, adjusted and presented in a form that serves a particular purpose. For management purposes, accounting cycles are often monthly, quarterly and annual, but management reports can be produced whenever the need arises. Management reports are typically concerned with costs and budgets or actual and projected sales and revenues. In addition, enterprises close their accounting books at least once a year for nancial accounting purposes, often but not necessarily at the end of the scal year. The scal year is determined by the tax authorities within a country. They are interested in calculating how much tax revenue they can collect from a business every year. Different countries have different scal years. For example, the scal year can run from 1 January to 31 December or from 1 April to 31 March. In many countries, for example, the UK, the USA, Japan and the Netherlands, most companies choose to make their nancial year follow the scal year, although they are allowed to choose a nancial year that is different. However, there may be countries, where the nancial year has to be the same as the scal year. The
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nancial year is the annual accounting reference period for external (nancial) reporting purposes. For many businesses their nancial accounting cycle is annual. However, companies listed on a European stock exchange are obliged to provide their current and potential shareholders with annual reports as well as interim nancial reports for shorter periods typically six months. Companies listed in the US must prepare interim nancial reports every three months. In such cases these constitute shorter accounting cycles within the annual nancial reporting cycle.
1.2 Transactions and recordable events

1.2.1 Identifying transactions and recordable events
In every day life, a transaction takes place when one party exchanges or promises to exchange a good or service with another party for money. Any transaction that is not in exchange for money is called a barter transaction. An example of a barter transaction is when your neighbour mows your lawn in exchange for a haircut from you. Barter transactions are potentially difcult to account for because it may not be easy to put a monetary value on either side of the exchange. As mentioned in Unit 1, the monetary measurement concept dictates that bookkeeping and accounting deal with transactions and events that can be measured reasonably objectively in monetary terms. In any business, the most frequent transactions are sales of goods and/or services. This is how businesses increase their revenue. Businesses can sell their goods and services for cash or on credit. In order to be able to sell, a business needs to purchase goods for resale, or in case of a manufacturing business, it needs to purchase raw materials which it will turn into products for sale. These transactions are called purchases. Of course, businesses also buy goods or services for their own use. Some of these will be used within one accounting reference period, such as stationery, electricity, telephone or legal services. Such expenditures are called revenue expenditures. Others are meant to last for multiple periods, such as buildings, computers, desks, chairs, etc. Such expenditures are called capital expenditures. Bookkeepers and accountants not only record transactions, but they also record the nancial effects of other events. Examples of recordable events include the loss of inventory due to water damage, a loss of sales revenue because of a debtors bankruptcy, or end of period adjustments to the accounts in order to produce nancial statements that reect the matching principle. In essence, bookkeepers and accountants record all transactions and events that directly affect the nancial situation of the business as reected in the elements of nancial statements, which are: assets, liabilities, revenue and expenses. These elements were introduced in Unit 1.
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Activity 1.1
There are many types of transactions and events. Can you give some examples of transactions and events that accountants record in accounting books?
Feedback
You may have suggested any of the following. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Sales of goods for cash. Purchasing a stock of goods for resale, or raw materials, and paying by cheque. Sales of goods on credit. Purchasing a stock of goods for resale, or raw materials, on credit. Purchasing ofce supplies on credit. Paying cash into the bank. Receiving money for goods sold on credit by cheque or bank transfer. Paying a creditor by cheque for goods or services received. Returning damaged or unwanted goods to a seller. Receiving damaged or unwanted goods returned by a customer. Receiving discounts from suppliers or extending discounts to customers. Borrowing money from a bank in order to buy ofce equipment to use for several years in the business. Using the borrowed money to buy ofce equipment to use for several years in the business and paying by bank transfer. Depreciating the cost of the ofce equipment after one year by the amount used up during the year. Incurring expenses such as telephone, electricity, insurance, business rates, etc. Paying salaries to employees. Paying or reclaiming Value Added Tax (VAT). VAT relates to the obligation that VAT registered businesses have to the tax authorities (HMRC in the UK). Unit 3 will elaborate on VAT (which is effectively a sales tax) and explain how accountants record VAT.
1.2.2 The cash basis of accounting and the accruals basis of accounting
The distinction between cash transactions and credit transactions is fundamental to bookkeeping and accounting. In the case of a cash transaction, goods or services are exchanged for cash. In the case of a credit transaction, the seller extends credit to the buyer and the buyer pays the seller at a later date, as specied in a contract or agreement. If a business only buys and sells goods and services for cash, the business records the transactions at the time of payment or receipt of cash. At the end of the accounting period, there would not be any need for end of period adjustments apart from the correction of errors because any increase (or decrease) in cash would be prot (or loss) for the period. For such a business, the cash basis of accounting would be sufcient to calculate periodic prots that truly and fairly represent the economic reality of the business. Under the cash basis of accounting any recorded increase in cash counts as revenue and any recorded decrease in cash counts as expense for the determination of prot in a given accounting period. There would not be any timing differences between the receipt of money and the recognition of revenue for the purpose of periodic income
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determination or between the payment of money and the recognition of an expense for the period determination of prot or loss. Most businesses, however, buy and sell on credit, and borrow money from banks or other lenders to invest in assets that last longer than one accounting period. Some businesses engage in projects that last multiple years, such as long-term construction projects for buildings, bridges, roads, etc. All businesses need periodically to prepare nancial statements and determine their prot or loss for a specied accounting period. Sole traders and partners in partnerships want to know how well or badly they are doing, and how much money there is to invest in the business or how much money can be withdrawn without endangering the future existence of the business. In the case of companies, prot or loss indicates how much money, if any, can be distributed to the shareholders in the form of dividends. However, the cash basis of accounting for most businesses results in prot or loss numbers that are very volatile and provide a poor reection of the nancial performance and nancial position of the business. Over time, bookkeepers and accountants developed the accruals basis of accounting to deal with this problem. Under the accruals basis of accounting, revenues and expenses are recognised for the periodic determination of income when they are accrued that is, earned (for revenues) and incurred (for expenses) rather than when cash is paid or received. As a result, in general, cash received during an accounting period does not equal revenues earned during that period. Similarly, cash paid during an accounting period does not usually equal expenses incurred during that period. In practice, this means that at the end of an accounting period adjustments need to be made to the nominal ledger accounts. The idea is that accrual accounting makes the revenue and expense accounts in the income statement better reect the economic performance during the accounting period, and the asset and liability accounts in the balance sheet better reect the nancial position of the business at the end of the accounting period. Examples of such end of period adjustments include prepayments and accruals and the depreciation of non-current assets. Activity 1.2
Consider a case where a business pays 1,200 for 12 months of insurance on 1 October 2010. The business prepares nancial statements as at 31 December 2010. How much would the insurance expense for the year be under the cash basis of accounting? How much would the insurance expense for the year be under the accruals basis of accounting?
Feedback
Under the cash basis of accounting the insurance expense for the year would be 1,200. On the other hand, under the accruals basis of accounting the insurance expense for the year would be 3/12 months 6 1,200 = 300. The 900 difference is then recorded as an asset called prepaid insurance. You will learn how to do this in Unit 3.
Beyond cash-based accounting, the question of how best to allocate revenues and expenses over accounting periods so as to determine prot or loss, and the carrying amount of assets and liabilities, is
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also known as the allocation problem in accounting. How do accountants determine whether revenues have been earned and expenses have been incurred? There are two ways of practising accrual accounting. The rst is to determine prots for the period by matching the expenses to the revenues that have been realised in an accounting period. The second is to determine prots for the period through the valuation of assets and liabilities. According to the latter method, revenues and expenses are recognised as the by-products of valuation. In other words, the values of assets and liabilities are measured or estimated at two points in time as best as possible, and the increase (or decrease) in the difference between the two totals is called prot (or loss) for the period. In practice, nancial accounting standards usually follow the matching approach, although you will see an example of the valuation approach in Unit 3.
1.2.3 Capital expenditures and revenue expenditures

In addition to the use of credit, a second reason for the allocation problem in accounting is the use of assets that are not purchased for the purpose of resale but in order to serve the business for longer periods. The cash basis of accounting for large amounts of cash spent on non-current assets may lead to losses instead of prots in the period when the non-current assets were bought. Therefore, another way of differentiating between transactions is to consider the purpose of the goods or services involved in the transactions. As mentioned above, some goods are purchased in order to be resold. Session 2 of this unit will explain that these transactions are called purchases. The goods bought are in another category called current assets. However, for example, ofce equipment, motor vehicles and buildings are normally purchased to serve the business for several years. Such investments in non-current assets typically involve large sums of money and are often nanced by debt. Money spent on non-current assets is also called capital expenditure. Similarly, businesses also purchase goods and services for consumption by the business and the employees in order to carry out their work. The money spent on such goods and services is called revenue expenditure. Examples include electricity for the ofce, stationery, and coffee or tea for employees. Unit 1 introduced the distinction between current and non-current assets. Unit 3 will explain in detail the difference between accounting for capital and revenue expenditures.
1.2.4 Transaction cycles for cash transactions and credit transactions

A transaction cycle starts with the order of a product or service, and ends with the exchange of the good or service for payment. In the case of a cash transaction, the whole transaction cycle could take as little as a minute. An example of a cash transaction would be buying a good or service from a retailer and paying straight away in cash. The exchange of the good and the payment take place at the same time. Usually the buyer gets a till receipt as evidence of payment.
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A cash transaction is recorded as a receipt in the cash book of the seller and as a payment in the cash book of the buyer. Cash transactions do not give rise to liabilities for either the seller or the buyer. In the case of a credit transaction, the transaction cycle takes as long as the seller is willing to extend credit to the buyer. This could be two weeks or 30 days, but it could also be six months or more. An example of a credit transaction is when Business 1 orders goods from Business 2 on, say, 1 July. Business 2 despatches the goods on 7 July and at the same time sends out its sales invoice for the goods, asking for payment within two weeks. Business 1, the purchaser of the goods, receives the invoice and the goods on 8 July and instructs the bank to pay the amount due on 21 July. In this case, the whole transaction cycle takes three weeks to complete. For a credit transaction, the transaction cycle lasts from the moment a buyer places an order to the moment the seller receives payment for the goods or services delivered. The accounting cycle, however, starts for the seller when the goods have been delivered and the sales invoice sent and for the buyer when the goods and the purchase invoice have been received. The very same invoice represents the sales invoice to the seller and the purchase invoice to the buyer. It is common practice for many businesses to buy and/or sell on credit. Therefore, transaction cycles could take weeks or months to be completed. In the case of large-scale construction projects they could even take years. Retail businesses often buy their stock on credit and sell their goods for cash. Credit enables businesses to increase their sales and purchases faster than they would be able to do on a cash basis. On the other hand, the advantage of cash sales and purchases is that a business does not run the risk that its customers will not pay their invoices or that it will not be able to pay its trade creditors. Activity 1.3
What determines whether or not a transaction is a cash or credit transaction?
Feedback
The distinction between credit and cash transactions rests on whether or not the seller allows the buyer a period for payment. In the case of credit transactions, the seller will then need to record an account receivable in the books. In other words, the books need to indicate the goods that have been sold, the date and amount of the sale, and when payment should be received. The buyer needs to record an account payable which indicates the goods that have been bought, the date and amount of the purchase, and when payment is due.
Activity 1.4
Suppose that a buyer purchases a television for 500. The buyer has
the following payment options.
Option 1 Option 2 Option 3 Pay in cash immediately.
Pay by debit card.
Pay by cheque.
Option 4 Pay by credit card.

Do all these options result in the transaction being a cash
transaction? What difference is there between the perspective of
the buyer and that of the seller in any of the above cases?
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Feedback
The rst two options result in a cash transaction. The third option is considered a cash transaction although there is a possibility that the cheque will not be honoured. Paying by credit card results in the transaction becoming a three-way credit transaction. Option 1 Option 2 Cash transaction for both the seller and the buyer. From both the perspective of the seller and the buyer, it is a cash transaction (although in the UK it usually takes a few days before the money leaves the buyers bank account and enters the sellers bank account). Payment by cheque means that the money goes from the buyers account to the sellers account. There may be a three day delay due to the national clearing system. As there is always the possibility that a cheque will not be honoured, the seller could record a note receivable until the money is received and the buyer could record a note payable until the money leaves the bank account, but this is not usual. In the case of payment by credit card, the situation is more complicated for the following two reasons: (1) there are three parties involved instead of two (2) the credit card company may require a fee of, say, three per cent from the company selling the television. For all three parties involved, this is a credit transaction. From the perspective of the seller, the credit card company owes the seller 500 less three per cent (i.e., 485), which the seller records as receivable from the credit card company. The buyer owes the credit card company 500 and records this as a payable. The credit card company records a receivable from the buyer for 500 and a payable to the seller of 485.
Option 3
Option 4
Activity 1.5
Most businesses purchase and/or sell goods on credit as well as for cash. Why do you think that credit is so important in business? What is the disadvantage of credit transactions?
Feedback
Extending and receiving credit enables businesses to increase the number of their purchases and sales transactions faster than would be possible on a cash basis only. Credit allows business to grow faster. The disadvantage is that there is always the risk that some customers will be unable to pay the amount owed.
1.2.5 Other ways of distinguishing between transactions

Another way of distinguishing between transactions is by international (import and export) and intra-national transactions. International transactions can be more complicated because the transactions are not necessarily conducted in the home currency of an enterprise. For example, if there is a transaction between a seller in the UK and a buyer in France, the transaction price can be set in British Pound Sterling or Euros. Pounds will be the home currency for the seller and Euros will be the home currency for the buyer, so in this case either the seller or the buyer needs to account for the transaction by converting the foreign currency into their home currency. This module deals exclusively with transactions in the home currency of a business. In addition, the terms of trade (such as payment and shipping) are often
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longer and may involve bank or export guarantees and additional insurance. For example, payment may involve credit periods as long as 18 months. Shipping containers from, say, Rotterdam to Tokyo may take four to six weeks. Accounting for such transactions is also a little more complicated and beyond the scope of this module. The list in the answer to Activity 1.1 gives an idea of the transactions that you will learn to record in the books of prime entry and the double-entry system. Recording transactions in the books of prime entry is the rst step in the accounting cycle. In Session 2 of this unit you will learn how to record transactions in the appropriate books of prime entry, but rst you will learn more about the accounting cycle and the source documents that serve both as the source of the data to be recorded and the evidence that the records are correct.
1.3 Data sources and source documents

1.3.1 The purpose of business documentation
Business transactions can take weeks or months to complete. Therefore, it is important to document the whole process so each party to the transaction knows exactly what is happening at any moment in time. Enterprises, depending on their size, may be involved in hundreds or thousands of different transactions at the same time and the documentation helps businesses to keep track of all these transactions. Thus, businesses record all of their transactions on source documents, and these documents contain the information that accountants record in the account books or the computerised accounting system. The source documents or copies thereof are usually kept with the books of prime entry to serve as evidence for the transactions.
1.3.2
Source documents in credit transactions
In a cash transaction the source document for the buyer could be an invoice marked paid or a receipt, and for the seller would be a copy of the same. For credit transactions the transaction cycle is longer, and the whole process could involve the following source documents. See Figure 2.
Source Document Price quotation Purchase order Sales confirmation Delivery note + goods SELLER Invoice Debtors statement Debit note Credit note Payment by cheque or BACS Remittance advice Receipt CUSTOMER Direction Source Document
Figure 2 Source documents in credit transactions
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Price quotation: Written offer by a business to a customer. In reality, a quotation often takes place over the phone and may be conrmed via e-mail. See Figure 3. A quotation could include:
the name and address of the business quoting

the price the name and address of the customer the date of the quotation the date until which the quotation is valid the details of the goods the details of the price the terms of delivery and/or shipment the terms of payment.
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Purchase order: The customer agrees with the price, payment and delivery terms in the quotation and orders the goods or service. See Figure 4. A purchase order could include:
the name and address of the business placing

the order the name and address of the supplier the date of the purchase order the purchase order number the VAT registration number of the business placing the order, if applicable the details of the goods ordered the quantity of the goods ordered the details of the price the delivery address, if different from the billing address the terms of delivery and/or shipment the terms of payment.
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Sales conrmation: Delivery note:
The seller conrms the order, price, payment and delivery terms and planned date of delivery and attaches a sales order number to the transaction. The seller despatches the goods accompanied by a delivery note and the customer signs the delivery note in order to conrm receipt or to conrm that the service has been performed. The delivery note will mention the sales order number and will bear a delivery note number.
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T Printer he
Fast and reliable Print Street, Print City, PC7 7PP Phone (01666) 222233 Fax (01666) 222234 v.roy@emailaddress TO Mary Malony The Open University Walton Hall Milton Keynes, MK7 6AA (01908) 123456 Customer ID [ABC12345] SALES PERSON Vikas Roy SHIPPING METHOD UPS Parcel SHIPPING TERMS Delivery included DELIVERY DATE 14 days after receipt of order PAYMENT TERMS Up to 14 days after delivery
QUOTE
INVOICE # [100] Date: 25 JANUARY, 2010 EXPIRATION DATE 8 February, 2010
JOB
DUE DATE
OBU Coast
QTY 10,000 1,000
ITEM # OBU COAST B291 D0
DESCRIPTION OBU COAST 010 BOOKLET B291 D0 Reader
UNIT PRICE 1.50 2.50
DISCOUNT 10%
LINE TOTAL 13,500 2,500
TOTAL DISCOUNT
1,500 Subtotal 16,000 2,800 18,800
SALES TAX (VAT) TOTAL

Quotation prepared by: Vikas Roy This is a quotation on the goods named, subject to the conditions noted below: This quotation is valid for 14 days. A minimum charge of 35 will apply to all authors corrections. To accept this quotation, sign here and return:
THANK YOU FOR YOUR BUSINESS!
Figure 3 Example of a price quotation
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Purchase Order
DATE: 5 FEBRUARY, 2010 PO # [100] Vendor Vikas Roy The Printer Print Street Print City, PC7 7PP Phone (01666) 222233 ID XYZ123 SHIPPING TERMS Delivery included Ship To Mary Malony The Open University Walton Hall Milton Keynes, MK7 6AA (01908) 123456 Customer ID [ABC12345] DELIVERY DATE
SHIPPING METHOD UPS Parcel
QTY 10,000 1,000
ITEM # OBU Coast B291
DESCRIPTION 010 Booklet B291 D0 Reader
JOB OBU Coast B291 DO
LINE TOTAL 13,500 2,500
Subtotal Sales Tax Total 1. 2. 3. 4. Please send two copies of your invoice. Enter this order in accordance with the prices, terms, delivery method, and specifications listed above. Please notify us immediately if you are unable to ship as specified. Send all correspondence to: address in Wellingborough.
16,000 2,800 18,800
Authorised by Mary Maloney
Date 5/2/2010
The Open University, Walton Hall, Milton Keynes, MK7 6AA, Registration No. RC000391. Tel: (01908) 123456 E-mail: MM@emailaddress
Figure 4 Example of a purchase order
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Invoice:
Usually at the time of despatch the seller sends the sales invoice to the customer, often by post so that it arrives shortly after the customer has received the goods or services. It is a document that requests the customer to pay the amount owed. See Figure 5. A sales invoice typically includes:
l l l l l l
the name and address of the supplier the name and address of the customer the invoice date the invoice number the VAT registration number (if applicable) the delivery note number (if already delivered) the customers account number the details of the goods the details of the price (excluding and including trade discounts and VAT if applicable) the terms of delivery and/or shipment the terms of payment
l l l
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payment instructions or the suppliers bank account details. Terms of payment and delivery: If the agreement is that the customer pays on delivery of the goods, the invoice will state cash on
delivery (COD).
If the agreement is that the supplier pays for
delivery of the goods, the invoice will state carriage
paid.
If the price quoted does not include delivery of the
goods, the customer must organise and pay for the
collection and delivery of the goods. The suppliers
invoice will then state ex works.
An invoice could also mention the period of
payment. Often this may be two weeks or a month.
Invoices could also mention a discount if the
customer pays the supplier early, for example,
within two weeks. This is called a cash discount or
settlement discount. Discounts will be explained
further in Session 2 of this unit.
Debtors statement: Also called the statement of account or simply statement, a document sent by the seller/supplier to a customer listing all the invoices, credit notes sent to and payments received from the customer over a specied period, for example, one month. See Figure 6.
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T Printer he
Fast and reliable Print Street, Print City, PC7 7PP Phone (01666) 222233 Fax (01666) 222234 v.roy@emailaddress TO Mary Malony The Open University Walton Hall Milton Keynes, MK7 6AA (01908) 123456 Customer ID [ABC12345] SALES PERSON Vikas Roy SHIPPING METHOD UPS Parcel SHIPPING TERMS Delivery included SHIP TO
INVOICE
INVOICE # [100] Date: 8 FEBRUARY, 2010
The Open University Materials depot Wellingborough Contact person: Sarah Jackson
JOB
DELIVERY DATE 8 February, 2010
PAYMENT TERMS Up to 14 days after delivery
DUE DATE 22 February, 2010
OBU Coast
QTY 10,000 1,000
ITEM # OBU COAST B291 D0
DESCRIPTION OBU COAST 010 BOOKLET B291 D0 Reader
DISCOUNT 10%
LINE TOTAL 13,500 2,500
TOTAL DISCOUNT
1,500 Subtotal 16,000 2,800 18,800
SALES TAX (VAT) TOTAL
Pay to: Open Bank, Account number: 987 54 32 10 or make all cheques payable to The Printer THANK YOU FOR YOUR BUSINESS!
Figure 5 Example of an invoice
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T Printer he
Fast and reliable Print Street, Print City, PC7 7PP Phone (01666) 222233 Fax (01666) 222234 v.roy@emailaddress BILL TO Mary Malony The Open University Walton Hall Milton Keynes, MK7 6AA (01908) 123456 Customer ID [ABC12345] COMMENTS
STATEMENT
STATEMENT # [0100] Date: 10 FEBRUARY, 2010
DATE 15/1/2010 8/2/2010
DESCRIPTION Invoice no. 65 re: envelopes A4 size Invoice no. 100 re: OBU Coast 010 Booklet and B291 Reader
BALANCE 4,000 18,800
AMOUNT 4,000 18,800
CURRENT 18,800
1-30 DAYS PAST DUE 4,000
31-60 DAYS PAST DUE
61-90 DAYS PAST DUE
OVER 90 DAYS PAST DUE
AMOUNT DUE 22,800
Remittance Statement # Date Amount Due Amount Enclosed 0100 10 February, 2010 22,800
Pay to: Open Bank, Account number: 987 54 32 10 or make all cheques payable to The Printer THANK YOU FOR YOUR BUSINESS!
Figure 6
Example of a debtors statement
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CREDIT NOTE
Bubbles plc 100 Bubble Street Bubble City, BC10 12N (01079) 570001 Billy.Bubble@emailaddress TO Sigmund Alpha Alpha Ltd Moon Crescent Winter City, WC1 7HJ (01910) 020030 Customer ID A205 JOB BS357 No tears DATE: 10 MARCH, 2010 CREDIT NO. CN001
QTY 500
ITEM # BS357
DESCRIPTION Shampoo (No tears)
UNIT PRICE 1
LINE TOTAL 500
SUBTOTAL SALES TAX TOTAL
500 0 500
Figure 7 Example of a credit note
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Debit note:
Credit note:
A document sent by the customer relating to goods returned or an overpayment made. A debit note can be interpreted as a request for a credit note. On the face of the document there will always be a debit note number. A document sent by the seller/supplier to the customer relating to goods returned or overpayments made by the customer. It is usually a cancellation of part of an invoice. A credit note will have a credit note number. See Figure 7. A document that instructs a bank to take money from the account of the drawer and give it to the payee. These days, however, many payments are made by credit transfer. In most European countries cheques have all but disappeared since the early 1990s and have been replaced by bank transfers and electronic payments. In December 2009, the UK Payment Council voted to phase out cheques by 2018. A document that the customer sends to the supplier indicating which invoices are being paid and which credit notes are being offset. A written or printed conrmation of payment.
Cheque:
Remittance advice: Receipt:
Source documents such as the ones above provide the basis and evidence for the information recorded in the books of prime entry. Bank statements can be used as source documents for direct debits, standing orders, bank transfers, and bank interest and charges. Activity 1.6
Spend ve minutes carefully studying the above examples of source documents. Make sure you can nd all the relevant information that needs to be recorded in the accounting records.
1.3.3
Credit transactions and the accounting cycle
The above discussion of source documents in the transaction cycle raises the following question: At what stage of the transaction cycle do accountants generally record credit transactions in the account books? For example, when does an accountant record a sales transaction in the appropriate book of prime entry? In Unit 1 you learned about the general recognition criteria for the elements of nancial statements such as assets, liabilities, revenues and expenses. Unit 1 also introduced you to the realisation concept with regard to revenues. This means that revenues can only be recorded when their realisation is reasonably certain. A cash sale is certain when goods and cash are exchanged. Accountants consider the realisation of a credit sales transaction reasonably certain at three points: 1 when payment is received 2 at the time of delivery 3 at the time that the invoice is sent to the customer.
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In practice, credit sales transactions are often recorded in the appropriate book of prime entry, in this case the sales day book, of the seller when the business sends out the sales invoice to the customer. Conversely, credit purchases are recorded in the purchase day book of the purchaser at the time that the goods and the purchase invoice have been received. The seller will, of course, keep a digital or hard copy of the invoice as evidence. Until an invoice is sent out, copies of the price quotation, purchase order, sales conrmation and shipping documents are kept in a le by the person or department in charge of the transaction (usually in the sales department). When a sales invoice is sent out to the customer, a copy of the invoice will be passed on to the accounts department (or the bookkeeper or accountant) so that the invoice can be matched to the payment received in due course. It is also possible that it is the accounts department which issues the sales invoice.
1.4 The transaction cycle and the accounting cycle compared

You should now have a good idea of what the transaction cycle and the accounting cycle are and how they relate to each other. Within an accounting cycle, many transactions are recorded and accounted for. Within a transaction cycle, the point at which the transaction is recorded in the accounting system is when the transaction is realised, either at the point of delivery of the good or service, or at the time of payment. Source documents serve as evidence. Below is a visual expression of how the transaction cycle and the accounting cycle relate to each other.
Credit transaction cycle 1 Price quotation 2 Sales/purchase conrmation 3 Delivery Delivery note and invoice Step 1: Recording receivable or payable in the books of prime entry Step 1a: Posting individual transactions to the personal accounts in the memorandum (or subsidiary) ledgers 4 Payment or receipt of payment Cheque, bank statement Step 1: Recording payment or receipt of payment in the cash book Step 2: Posting total receivables and payables, and total cash receipts and payments, to the double-entry system in the nominal ledger accounts Step 3: Preparing an unadjusted trial balance Step 4: Performing end of period adjustments Step 5: Preparing the nancial statements Source documents Accounting cycle
Individual transactions
Aggregated transactions
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Summary
In this session you have learned that the transaction cycle is not the same as the accounting cycle and you should now be able to distinguish different types of transactions. The accounting cycle starts with recording transactions and events in the appropriate books of prime entry and keeps the source documents as evidence for every step in the transaction process. In Session 2 you will learn about the rst step of the accounting cycle. Session 2 will explain what the main books of prime entry are and how to record transactions in the appropriate day books.
Session 2 Recording transactions in books of prime entry
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SESSION
2 0Recording transactions in books of prime entry

Introduction
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identify the main books of prime entry, explain their function and describe their format record sales in the sales day book and purchases in the purchase day book record sales and purchase returns in the appropriate day books record payments and receipts in the cash book record petty cash in the petty cash book understand the imprest system understand the purposes of the journal.
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In Session 2 you will learn about the main books of prime entry, their function and format and the type of information that is recorded in each of these books. This is Step 1 in the accounting cycle in Figure 1 that you encountered in Session 1.
2.1 Books of prime entry

Books of prime entry are also called subsidiary books of account. Their purpose is to keep records of source documents relating to transactions. The main books of prime entry are: 1 2 3 4 5 6 7 8 9 sales day book
purchase day book
sales returns day book
purchase returns day book
cash book
petty cash book
journal
non-current asset register
inventory register.
Very small cash-based businesses would probably only use a cash book. The rst seven items in the list above are covered in Session 2, although the journal will be discussed in greater detail in Session 3 of this unit. The non-current asset register and the inventory register will be discussed in Unit 3. In a computerised accounting system the transactions recorded in the books of prime entry are automatically linked to the general ledger. The general ledger accounts make up the double-entry bookkeeping system. Books of prime entry are not part of the double-entry system, and in a manual accounting system posting the totals in the day books to the nominal ledger accounts will have to be done manually. In this session you will learn how to record individual transactions manually in the books of prime entry. Later, in Session 3, you will
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learn how to record the summarised transactions in the nominal ledger accounts and record individual transactions in subsidiary ledgers when required. Note that some people prefer to use the term general ledger instead of nominal ledger. The two terms are interchangeable. As mentioned above, the books of prime entry are not part of the double-entry bookkeeping system. They are simply lists of transactions of the same type that make it easier to summarise and total these transactions and record these totals in the nominal ledger accounts. Under a manual bookkeeping system in a business with a large volume of transactions, the books of prime entry will be totalled daily as the name day book suggests. In enterprises with relatively few transactions they could be totalled weekly or monthly. These totals will then be posted to the appropriate nominal ledger accounts. In computerised accounting systems, totals are posted to the nominal ledger accounts automatically.
2.2 Recording sales and purchase transactions in the day books

2.2.1 The sales day book
The sales day book is a list of the invoices that an enterprise has sent out during a given period. In other words, it is a list of all the credit sales transactions for that period, which is often a day, but could be longer in the case of a business with relatively few transactions. An extract from a sales day book could look like this:
Sales day book Date 28 May 28 May 28 May Invoice 0203 0204 0205 Customer Alpha Ltd Beta Ltd Gamma Ltd Description Shampoo Toothpaste Shampoo Invoice amount 2,500 1,200 1,500 5,200
Some businesses analyse their sales by product group. In that case, an extract from the sales day book could look like the one below. Keep in mind that the analysis columns can easily be tailored to the specic needs of the individual business. For example, in a business that is registered for VAT there would also be a column for VAT, as will be illustrated in Unit 3.
Analysed sales day book Date 28 May 28 May 28 May Invoice 0203 0204 0205 Customer Alpha Ltd Beta Ltd Gamma Ltd Invoice amount Shampoo Toothpaste 2,500 1,200 1,500 5,200 1,500 4,000 1,200 2,500 1,200
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2.2.2
The purchase day book
Similarly, the purchase day book is the book of prime entry for credit purchases and is, therefore, a list of all the purchase invoices to be processed for a given period. However, because not all invoices received relate to the purchase of goods for resale, or (in the case of a manufacturing business) raw materials for producing goods, a business is likely to make a distinction between purchases and other expenses. Invoices that relate to capital investments in assets that the business intends to use for several years are usually not recorded in the purchase day book. Instead, these are recorded in the journal, which will be discussed below and in Session 3 of this unit. An extract from the purchase day book could be laid out as follows:
Purchase day book Date Supplier Description Woolly jumpers Cardigans Telephone Invoice amount 28 July Delta plc 28 July Epsilon plc 28 July Zeta plc 7,000 8,000 500 15,500
An extract from an analysed purchase day book could look like this:
Analysed purchase day book Date Supplier Description Invoice amount 28 July 28 July 28 July Delta plc Epsilon plc Zeta plc Woolly jumpers Cardigans Telephone 7,000 8,000 500 15,500 15,000 Purchases 7,000 8,000 500 500 Other expenses
2.3 Recording sales and purchase returns in the day books

2.3.1 Sales and purchase returns
Occasionally it happens that goods bought or sold are returned. Possible reasons could be that the goods supplied were the wrong quantity, type, size or colour, or that the goods were damaged or otherwise unsatisfactory. Upon delivery a buyer will inspect the goods to see if they are in accordance with the specications of the contract, that is, the sales and purchase conrmations. When a buyer returns goods for some reason, the buyer usually sends a debit note to the seller. Upon delivery, the seller will inspect the returned goods, record the details for memorandum purposes and then send a credit note to the buyer. The buyer will record that credit note in the purchase returns day book.
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2.3.2
The sales returns day book
A sales returns day book is a list of all the credit notes sent to customers. Every credit note sent out by the seller is recorded in the sales returns day book. Sales returns are also called returns inwards. The layout is the same as that of the sales day book except that the invoice number is replaced by a credit note number.
Sales returns day book Date Credit note no. CN 001 CN 002 CN 003 Customer Description Invoice amount 30 May 30 May 30 May Alpha Ltd Beta Ltd Gamma Ltd Shampoo Toothpaste Shampoo 500 200 100 800
2.3.3
The purchase returns day book
A purchase returns day book is a list of all the credit notes received from suppliers. Every credit note received by a buyer is recorded in the purchase returns day book. Purchase returns are also called returns outwards. For example, the credit note received by Alpha Ltd for 500 of shampoo returned will be recorded in Alpha Ltds purchases returns day book as follows:
Purchase returns day book Date 1 June Supplier Bubbles plc Description Shampoo Credit note no. CN 071 Invoice amount 500 500
2.4 Recording cash transactions in the cash book

2.4.1 Cash
In Session 1 you learned about the distinction between cash and credit transactions. In cash-based transactions payment is settled immediately, whereas in credit-based transactions the seller grants the buyer credit for a certain period of time. In bookkeeping and accounting, the denition of cash is much broader than the coins and notes we associate with the word cash in every day use. It denotes all forms of money including cheques, credit transfers, direct debits and money in the bank. Activity 2.1
Keeping in mind the above denition of cash and the fact that in accounting cash means more than just notes and coins, what kind of information do you expect to nd in the cash book?
Feedback
The cash book contains the amounts received and paid by cheque, details of direct debits, credit transfers and bankers drafts. It also contains information about bank notes and coins paid into the business bank account.
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Activity 2.2
Which source documents are used as evidence to record transactions in the cash book?
Feedback
For payments: For receipts: cheque counterfoils, receipts or invoices, bank statements cheques, paying-in slips, remittance advice statements, bank statements
2.4.2
The cash book
In accounting, the cash book is a record of monetary transfers. The cash book is the book of prime entry for all transactions concerning money. In many businesses the cash book deals with money paid into and out of the business bank account only. This means that any cash sales will be deposited every day. Such businesses usually keep a small amount of cash in notes and coins for certain odd items of expense in a petty cash oat. You will learn how to record cash payments and receipts in a petty cash book in Section 2.5. In other businesses the cash book deals with payments in and out of the bank account as well as the payments and receipts related to cash purchases and sales. Cash books come in different forms and sometimes full slightly different functions. In manual accounting systems there could be a separate book for cash receipts and a separate book for cash payments. There could also be one cash book in which the pages on the left-hand side are for cash receipts and the pages on the righthand side are for cash payments. The simplest cash book has receipts on the left side of a page and payments on the right side. No matter which form the cash book takes, the principle is the same and it looks something like this:
Cash book Receipts Date 1 July 1 July 1 July 1 July 1 July Narrative Balance b/d* Cash sale banked Cheque from Alpha Ltd Bank transfer from Beta Ltd Cheque from Gamma Ltd Amount 50 750 2,000 1,000 1,200 5,000 * b/d stands for brought down. It means that there was 50 of cash available on 30 June.
** c/d stands for carried down. It means that there was a cash balance of 250 available at the end of 1 July, which is also the
beginning balance on 2 July.
*** Notice that 100 was taken out of the bank account to be used as petty cash. Petty cash will be explained in Section 2.5.
1 July 1 July 1 July 1 July 1 July Cheque to ABC Ltd Cheque to Soap plc Gas bill Petty cash*** Balance c/d** Payments Date Narrative Amount 800 3,200 650 100 250 5,000
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Businesses also use analysed cash books. An extract from an analysed cash book could look as follows:
Cash book: receipts Date Narrative Amount received 1 July 1 July 1 July 1 July 1 July 2 July Balance b/d* Cash sale banked Cheque from Alpha Ltd Bank transfer from Beta Ltd Cheque from Gamma Ltd Balance b/d 50 750 2,000 1,000 1,200 5,000 250 2,000 1,000 1,200 4,200 750 0 750 Receivables Cash sales Other
Cash book: payments Date Narrative Amount paid 1 July 1 July 1 July 1 July 1 July Cheque to ABC Ltd Cheque to Soap plc Gas bill Petty cash*** Balance c/d** (5,000 4,750) 800 3,200 650 100 4,750 250 5,000 * b/d stands for brought down. It means that there was 50 of cash available on 30 June. ** c/d stands for carried down. It means that there was a cash balance of 250 available at the end of 1 July, which is also the beginning balance on 2 July. *** Notice that 100 was taken out of the bank account to be used as petty cash. Petty cash will be explained in Section 2.5. 4,000 100 100 650 Payables 800 3,200 650 Petty cash Other
Note that on the receipts side of the cash book the totals in the analysis columns will not add up to the total amount received if there is an opening balance. On the cash payments side, however, the totals in the analysis columns do add up to the total amount paid as there will not be an opening balance. Analysed cash books can have as many columns for analysis as suits the needs of the business. In some businesses where sales and purchases transactions are paid in coins and notes, the cash book deals with both physical cash as well as bank transactions. Therefore, the layout of a cash book in which both payments and receipts for cash and credit sales and purchases are recorded would have columns for both cash and bank. See the example below for an illustration.
Cash book Receipts Narrative Cash Bank Payments Narrative Cash Bank
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Alternatively, such a business could use separate cash books for physical cash and bank transactions. Although you need to know that different forms of cash books exist, this module focuses solely on the scenario where the cash book is used as the book of prime entry for money paid into and out of the bank account. This may take the form of the above examples from the cash book for 1 July. Please note the underlying assumption here is that any cash sales are deposited into the bank daily. Activity 2.3
Looking at the cash book example above, we see that on 1 July a cash sale of 750 took place. How was this sale paid for?
Feedback
We do not know if this sale was paid for by notes and/or coins, debit card or cheque. We only know that payment was settled immediately and thus it is contrasted with credit sales. If it was paid for using notes and/or coins, the amount was paid into the business bank account on that day.
Activity 2.4
Laura is an accountant working for Momoko Toys Ltd. She receives the business bank account statement and nds that there is a difference between the balance in her bank account according to the bank statement and the balance according to the cash book. What could have happened that might explain this difference?
Feedback
In the UK, the most likely explanation would be that the balances are different because of the timing difference between writing out a cheque to pay for goods and the bank deducting the money from the bank account. Also, when a cheque is received and paid into the bank account, it usually takes a few working days before the money appears on the bank statement but it has already been entered into the cash book. In other words, the money is lodged between bank accounts during the time it takes to be transferred from one bank account to another. In the case of credit transfers, in some countries, such as the UK, there is still a delay between the remittance of the amount by the payer and the date that the amount is credited to the payees bank account. This delay allows the bank to earn some additional interest. It looks like cheques will be abolished in the next few years, even in the UK. A second possible explanation is that bank charges or bank interest appear on the bank statement but have not yet been recorded in the cash book. A third possible explanation is that one or more errors have been made, either by the bank (which is very rare but not impossible), or in the cash book. In Unit 4 you will learn how to account for differences between the cash book and the bank statement by preparing a bank reconciliation statement.
2.4.3
Discounts allowed and received
For accounting purposes we distinguish between two types of discount: the trade discount and the settlement discount. Invoices sometimes mention a trade discount. Trade discounts are simply reductions in price, and are the consequence of buying in bulk or of tough negotiation. Businesses sometimes mention the trade discount given on the invoice. However, the amount to be recorded in the accounting books is the sale or purchase price net of the trade discount.
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Cash discounts or settlement discounts are nancial incentives to motivate the customer to pay promptly. For example, an invoice may state that a 10 discount is allowed if the customer pays within seven days. The discount could also be a percentage of the purchase price. For businesses that allow and receive settlement discounts, cash books therefore include memorandum columns for cash discounts allowed and received. Although cash discounts do not actually represent movements of cash, they need to be recorded. The reason is that if a settlement discount is taken up, the amount received or paid is different from the invoice amount. The layout of a cash book with memorandum columns for cash discounts could look like this:
Cash book Receipts Payments Date Narrative Amount Receivables Discount Date Narrative Amount Payables Discount received allowed paid received 90 100 10 1,900 2,000 100
In the example above the business allowed a cash discount of ten per cent if the customer paid the invoice amount of 100 within a specied number of days, and the customer took up the discount. The business received a cash discount of ve per cent on the invoice amount of 2,000 from the supplier when it settled the payment within a specied number of days. Note that the total amount received equals the amount of receivables less the discount allowed, and on the payments side the total amount paid equals the amount of payables less the discount received.
2.4.4
VAT in the cash book
As with the sales and purchases day books, a business registered for VAT will also have columns for VAT on the receipts and payments side. VAT and how to record it will be explained in Unit 3.
2.5 Accounting for petty cash

2.5.1 Petty cash
Most businesses keep a relatively small amount of cash on the premises to make minor cash payments such as for delivery charges, taxi fares, postage stamps, stationery supplies, refreshments for employees working overtime or to reimburse employees for their travel expenses. To permit these cash payments and still maintain adequate control over cash, businesses often establish a petty cash fund, also known as a petty cash oat (or petty cash account), of a round gure, such as 500, by writing a cheque or withdrawing money from the business bank account. Usually one individual, the petty cashier, is in charge of the petty cash oat. When an employee claims expenses, the employee must complete and sign a petty cash voucher indicating the details of the claim. In addition, the employee must present evidence of incurring the cost such as till receipts or invoices which should accompany the voucher. Depending on the amount of the claim, it is often necessary to obtain authorisation from the employees manager to incur the cost and reimburse the employee.
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2.5.2
The petty cash book
Petty cash receipts and payments are recorded in the petty cash book very much like the receipts and payments in the cash book. However, there are usually more payments than receipts as the cash oat is generally replenished once per month or sooner if necessary. Petty cash books are also often analysed, and could look like this:
Petty cash book Receipts Date 500 2 Jan 3 Jan 10 Jan 12 Jan 17 Jan 20 Jan 25 Jan 31 Jan 500 Cash Postage Taxi fare Taxi fare Files Notepads Sandwiches Balance c/d 100 50 30 70 20 80 350 150 500 100 90 80 70 20 80 80 100 50 30 Narrative Payments Total Postage Stationery Travel Other
2.5.3
The imprest system
Under the imprest system the petty cash oat is always replenished to the amount agreed so that the total amount of the payments plus the amount in the cash oat equals the agreed amount. For instance, suppose that in the above example the agreed amount is 500. Because the balance in the petty cash oat at the end of the month is 150, the petty cashier needs to top up the cash oat by 350 (the amount paid out) in order to arrive at a cash oat of 500 again. The vouchers totalling 350 can be presented by the petty cashier to the cheque signatory for approval when the cheque is being signed. Alternatively, the petty cashier may receive the 350 in cash from the person who is allowed to withdraw cash from the business bank account.
2.6 The journal

The journal is the book of prime entry for transactions and events that are not recorded in any of the above books. In practice, this means that the journal is used to record transactions and events that do not occur very frequently. Examples include:
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the credit purchase or sale, as well as the depreciation, of non-current assets the correction of errors the initial contribution of capital the transfer of amounts from one ledger account to another ledger account (ledger accounts will be discussed in Session 3).
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The layout of the journal and how to record transactions in it will be discussed in more detail in Session 3.
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2.7 The non-current asset register

This is a list and description of each non-current asset owned by the business. It contains details of registration numbers, serial numbers or any other identifying marks in respect of each asset. The non-current asset register will be discussed in detail in Session 2 of Unit 3.
2.8 The inventory register

The inventory register is also called the stock ledger. It is a list of raw materials and other goods held for resale. It identies goods by type and indicates the quantities held in stock. The inventory register will be discussed in detail in Session 1 of Unit 3.
Summary
In this session you have learned about the function and format of the sales and purchases day books, the sales and purchases returns day books, the cash book and the petty cash book. Session 2 has also indicated which source documents serve as evidence for the transactions and events recorded in these subsidiary books. Unit 3 will discuss the non-current asset and inventory registers. As mentioned before, the books of prime entry are not part of the nominal ledger. They are the source of double-entry data and, therefore, feed into the nominal ledger accounts. Double-entry bookkeeping is used to enter the data into the nominal ledger accounts. Session 3 of this unit will introduce the double-entry bookkeeping technique and its underlying principles. Before moving on to Session 3, the following three activities will enable you to check whether you have fully understood the books of prime entry. Activity 2.5
Tom: Cash receipts and payments
At the beginning of 31 October, Tom OMalley had 1,100 in the business bank account. During 31 October, Tom had the following receipts and payments.
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Cash sales: 565. Cheque received from credit customer Nelly Smith in settlement of a 1,000 invoice amount with settlement discount of 5 per cent allowed: 950. Cheque paid to Robin Visser in settlement of a 500 invoice amount with a 1 per cent settlement discount taken: 495. Payment to supplier Claudia Cannon by bank transfer: 300. Payment of telephone bill by direct debit: 130. Payment of gas bill by direct debit: 75. Cheque received from credit customer Maurice Baker: 100.
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Required
Prepare Tom OMalleys analysed cash book for 31 October.
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Cash book: receipts Date Narrative Amount received 31 Oct Accounts receivable (debtors) Cash sales Discounts allowed
1 Nov
Cash book: payments Date Narrative Amount paid 31 Oct Payables Petty cash Discounts received
31 Oct
Feedback
Cash book: receipts Date Narrative Amount received 31 Oct 31 Oct 31 Oct 31 Oct Balance b/d Cash sales banked Cheque from Nelly Smith Cheque from Maurice Baker 1,100 565 950 100 2,715 1 Nov Balance b/d 1,715 1,000 100 1,100 565 50 565 50 Receivables Cash sales Discounts allowed
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Cash book: payments Date Narrative Amount paid 31 Oct 31 Oct 31 Oct 31 Oct Cheque to Robin Visser Payment to Claudia Cannon Telephone bill by direct debit Gas bill by direct debit Total payments 31 Oct Balance c/d (2,715 1,000) 495 300 130 75 1,000 1,715 2,715 Note that on the receipts side the total amount received is actually 1,615, which is the total of receivables plus cash sales less discounts received. 2,715 is the total amount received of 1,615 plus the opening balance of 1,100. On the payments side the total amount of payments (1,000) equals the total amount of payables (800) and other (205) less the total of discounts received (5). 800 Payables 500 300 130 75 205 5 Petty cash Discount received 5
Activity 2.6
Angus: Petty cash book
Angus Anderson maintains a petty cash book with an imprest of 250. On 5 May a balance of 127 was brought down from 4 May. The imprest was replenished with a 123 withdrawal from the business bank account, and the following payments were made: l 25 for postage
l l l l l
19 for stationery 8 for taxi fare 37 for train fare 10 for owers for a colleague who is ill 2 for milk in tea/coffee.
Required
Prepare the petty cash book with analysis columns for postage, stationery, travel and other.
Petty cash book Receipts Date Narrative Total payments Postage Stationery Travel Other
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Feedback
Petty cash book Receipts 127 123 5 May Bal b/d Paid in Postage Stationery Taxi fare Train fare Flowers Milk 25 19 8 37 10 2 101 5 May 250 Bal c/d 149 250 25 19 45 25 19 8 37 10 2 12 Date Narrative Total payments Postage Stationery Travel Other
The 127 balance brought down on 5 May plus the 123 top up for the petty cash oat makes total receipts equal 250. Total payments on 5 May are 101, and the 149 balance carried down makes a total of 250. Activity 2.7
Nadia: Day books
The following transactions took place for Nadias business. 20 Nov Invoice No. 3407 for 500 sent to customer Paula Perrera. 21 Nov 21 Nov 23 Nov 24 Nov 25 Nov 26 Nov 26 Nov
Required
Invoice No. 3408 for 700 sent to customer Ali Hanan. Invoice received for goods purchased from Alex Chung for 430. Credit note CN 080 sent to customer Paula Perrera for goods returned to the value of 25. Credit note ACC022 received to the amount of 75 for goods returned to Alex Chung. Invoice No. 3409 for 800 sent to customer Ali Hanan. Credit note CN 081 sent to customer Ali Hanan for goods returned to the value of 80. Invoice received for goods purchased from Mary Smith for 750.
Enter the above transactions into the relevant day books.
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Sales day book Date Invoice Customer Description Invoice amount
Purchase day book Date Supplier Description Invoice amount
Sales returns day book Date Credit note no. Customer Description Invoice amount
Purchase returns day book Date Supplier Description Credit note no. Invoice amount
Feedback
Sales day book Date 20 Nov 21 Nov 25 Nov Invoice 3407 3408 3409 Customer Paula Perrera Ali Hanan Ali Hanan Description Invoice amount 500 700 800 2,000
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Purchase day book Date 21 Nov 26 Nov Supplier Alex Chung Mary Smith Description Invoice amount 430 750 1,180
Sales returns day book Date Credit note no. CN 080 CN 081 Customer Description Invoice amount 23 Nov 26 Nov Paula Perrera Ali Hanan 25 80 105
Purchase returns day book Date 24 Nov Supplier Alex Chung Description Goods returned Credit note no. ACC022 Invoice amount 75 75
Session 3 Double-entry bookkeeping
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SESSION
3 0Double-entry bookkeeping
Introduction
l
understand and explain why the accounting equation is the foundation of double-entry bookkeeping understand and explain the effect of transactions in terms of asset and liability nominal ledger accounts using the duality concept understand and explain how revenue and expenses, prots (or losses), drawings, payables and receivables t into the accounting equation understand and apply the rules for debit and credit entries for nominal ledger accounts and subsidiary ledger accounts, the journal, and for posting totals from day books to nominal ledger accounts understand and explain why many enterprises use receivables and payables ledgers understand and explain why the receivables and payables ledgers are not part of the double-entry system.
In Session 3 you will learn how the individual transactions listed in the books of prime entry are analysed and then summarised in the appropriate nominal ledger accounts. This is Step 2 in the accounting cycle. In order to do this, you will rst learn to understand the accounting equation and the form, principles and rules of the doubleentry bookkeeping system, and the difference between impersonal and personal accounts. Session 3 will teach you what double-entry bookkeeping is, what the rules are and how to apply them. Upon completion of this session you need to be condent that you understand the logic and the technique of double-entry bookkeeping because the rest of this module builds upon the skills you learn here. At the end of this session there are four activities that will help reinforce your understanding of doubleentry bookkeeping. Make sure that you practise until you can enter transactions into ledger accounts without difculty. The activities throughout and at the end of the session may take some time, concentration and effort to complete. Unit 2 will get easier once you have mastered the material in Session 3.
3.1 The functions and foundations of

double-entry bookkeeping
3.1.1 From single-entry to double-entry bookkeeping

In Unit 1 you learned that accounting is the process of identifying, organising, classifying, recording, summarising and communicating information about transactions and events. Session 2 of this unit explained how to record transactions in day books. Recording transactions in day books is practising single-entry bookkeeping.
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For centuries, single-entry bookkeeping was how businesses kept track of their transactions. It follows that in the early days the main purpose of bookkeeping was to provide a record of transactions for the owner of the business rather than to provide information about debtors, creditors or protability. Over time, societies have developed in such a way as to enable enterprises to grow larger. Legal systems have developed laws that protect private property rights. Money has become the most important means of payment, and methods of extending credit (whilst at the same time securing guaranteed repayment) have been developed. With businesses growing larger and the number of creditbased transactions increasing, historically it became harder to keep track of all the information a business needed to carry out its operations. Double-entry bookkeeping developed out of the need to summarise large numbers of credit transactions in order to keep control over credits extended and debts owed. Double-entry bookkeeping is the result of the accumulation of bookkeeping practices by merchants and traders in Mesopotamia, India, China, the Middle East and Europe. In 1494 the monk and mathematician Luca Pacioli published a book in which one chapter summarised and explained double-entry accounting as it was then used by Venetian merchants. The title of the book was Summa de Arithmetica, Geometrica, Proportioni et Proportionalitia. The doubleentry system as described in Paciolis book was popularised in the rest of Europe via translations of the ideas into Dutch, French and English. This is the reason why, for many centuries, double-entry bookkeeping was called Italian bookkeeping.
The rst modern publication on double-entry bookkeeping was a treatise published in 1494 by an Italian monk, Pacioli
Three concepts form the basis of double-entry bookkeeping. These are the entity concept, the duality concept and the accounting equation.
3.1.2
The entity concept
Double-entry bookkeeping is rst and foremost based on the entity concept (also called the business entity concept or entity convention). This is the idea that for accounting purposes, the proprietor of the business is separate from the business itself.
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As a consequence, the money that the proprietor pays into the business as contributed capital is on the one hand accounted for as a resource (or asset) of the business. On the other hand, it is accounted for as a source with which the asset has been nanced. The resources (or assets) of a business must be equal to the sources with which the assets have been nanced. The equation that expresses this relation is: RESOURCES OF THE BUSINESS = SOURCES OF FINANCING In many continental European countries we nd assets on the left-hand side (called actives) and sources of nancing on the right-hand side (called passives). ACTIVES = PASSIVES It may help to think of actives as being resources that are actively employed in the business to create value and make a prot. Examples include machines, premises, computers, inventory, etc. In contrast, passives make it possible for the business to purchase the actives, but they do not create value. Over time, the convention has been adopted that in a horizontal balance sheet actives are on the left-hand side and passives are on the right-hand side. The sources of nancing usually include the proprietors capital (Capital) as well as money borrowed from others (Liabilities). This translates into the following accounting equation, which will be discussed in greater detail below. ASSETS = LIABILITIES + CAPITAL It is important to note that there is a difference between the legal entity concept and the business entity concept in accounting. A legal entity has rights and responsibilities before the law in more or less the same way that a person does. The law allows a legal entity (also called a legal person) to engage in property ownership and contracts, and it can therefore be involved in lawsuits for the purpose of enforcing property rights and contracts. As you learned in Unit 1, the law does not distinguish between the legal entity and the accounting entity in the case of sole traders and partnerships. The proprietors bear legal and personal liability for the debts that the business incurs. However, in the case of limited liability companies the owners can only be held liable for the debts incurred by the company to the extent of the amount that they have agreed to pay for the companys shares. The shareholders personal assets are protected by limited liability.
3.1.3
The duality concept (or dual effect)
Double-entry bookkeeping is based on the idea that there are at least two sides to every transaction. In other words, a transaction produces at least two effects, the net result of which is that total assets continue to equal total liabilities plus total capital. For example: Tina pays 25,000 of her private savings into a business bank account and starts a business as a sole trader. The two effects are:
l l
the business has an asset of 25,000 in the bank the business has an obligation to Tina of 25,000 in respect of owners capital.
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The business opens an asset account (cash) of 25,000 and a capital account (owners capital) of 25,000. Consider another example. Tina purchases a second-hand delivery van for 5,000, paying by debit card. The two effects are:
l l
the asset of cash in the bank is reduced by 5,000 to 20,000 the business has an asset in the form of a van worth 5,000.
It is important to remember that each transaction produces at least two effects that are recorded in ledger accounts using double-entry bookkeeping. The double entry is made by at least two entries in the appropriate ledger accounts. There are two types of entry, which are referred to as debit and credit entries. For every debit entry there is at least one equal and opposite credit entry. Therefore, total assets continue to equal total liabilities plus total capital. Later in this session you will learn what ledger accounts, debits and credits are, and how to make debit and credit entries in ledger accounts to record the dual aspects of transactions.
3.1.4
The accounting equation
As mentioned above, in a sole proprietorship or basic partnership all the debts of the business are in fact the proprietors liabilities. If the business makes a prot this will increase the proprietors capital, but if the business makes a loss this will decrease the proprietors capital. In order to express the fact that the proprietors are the residual beneciaries of the business, the accounting equation can also be rearranged as: ASSETS LIABILITIES = CAPITAL This is often referred to as the balance sheet equation. Assets less liabilities is called net assets or net worth. Therefore, capital is sometimes also called net assets or net worth. Net assets are calculated as the remainder of assets after all liabilities have been deducted. The amount indicates the residual interest of the proprietors of the business. You may come across different forms of the accounting and balance sheet equations, but the substance is the same. Together, the entity concept, the duality concept and the accounting equation form the logic underpinning double-entry bookkeeping. First, the entity concept sees the business as separate from its owner(s), as a consequence of which the resources of the business (assets) must equal the sources with which the assets have been nanced. Second, the duality concept underpins the use of debit and credit entries in nominal ledger accounts to record the dual aspects of transactions. Remember that total debits must equal total credits. Third, the accounting and balance sheet equations provide the basis for the logic behind the rules of double-entry bookkeeping, which will be explained in Section 3.2. Before getting to the rules of double-entry bookkeeping, it is necessary to become familiar with the elements of nancial statements and the various ledger accounts of which they are comprised.
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3.1.5
Double-entry accounts and books
Periodically, the totals in the books of prime entry are posted to the nominal ledger accounts. There are nominal ledger accounts for the various asset, liability, capital, revenue and expense items, which constitute the main elements of the nancial statements. Activity 3.1
In Unit 1 you learned about the main elements in the nancial statements. Take a moment and make a list of some assets, liabilities, capital, revenue and expense items that you can think of.
Feedback
You may have included the following items: Assets Property Fittings Motor vehicles Inventory Receivables Prepaid rent Cash Liabilities Loans Payables Accrued interest Bank overdraft Capital Owners capital Prot Revenues Interest received Expenses Interest paid Rent Utilities Salaries Insurance Stationery
Sales revenue Purchases
Are you surprised that prot is included under capital? Do not worry if you had not thought of that, or some of the other items listed. You will get used to thinking like a true bookkeeper or accountant in the next few weeks and months. The reason why prot is grouped under capital will be explained when we talk about the accounting equation and the general ledger below.
The ledger accounts are kept in the nominal ledger (also called the general ledger). The nominal ledger in manual accounting is a big book where each account has its name (hence the word nominal) and often a code. In computerised accounting the ledger does not physically exist as a book, but the same accounts are kept as one or more les in a computer. Examples of accounts in the nominal ledger include:
Assets Property at cost Fittings at cost Motor vehicles at cost Inventory Receivables Liabilities Bank loan Payables Accruals Capital Owners capital Prot for the year Drawings (drawings reduce capital) Revenues Expenses Sales revenue Purchases Interest received Income from services provided Interest paid Rent
Bank overdraft Accumulated depreciation on property Accumulated depreciation on ttings Accumulated depreciation on motor vehicles
Utilities Wages and salaries Insurance
Prepayments
Cash
Stationery
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The above account names and their meanings will become clear during the rest of Session 3. For now, it is enough to know that these are some of the accounts which feature in the nancial statements that are prepared at the end of an accounting period. Activity 3.2
Total assets less total liabilities leaves the proprietors capital. This is also called the net worth of the business. In our lives we can also estimate our own net worth at certain points in time. It is common for people to own furniture, a computer, perhaps a car, a house, even investments in debt and equity securities. These are all assets. When people buy a computer they may have used their savings, but many people who buy a car will take out a loan to nance the car, and when people buy a house they usually have to take out a mortgage. Loans and mortgages are liabilities. In the horizontal balance sheet below is an estimation of Joes net worth as at todays date.
Joes balance sheet as at todays date Assets Assets: Cash in the bank Computer Bicycle Car Total 10 500 165 3,000 3,675 Liabilities + Capital Liabilities: Bank loan Money owed to my sister Capital: Net worth (balancing gure) Total 1,000 3,675 2,600 75
Spend a few minutes estimating your own net worth. You can also invent the assets, debts and equity that you wish you had if you fear that your real net worth will make you depressed! You can write down your assets and debts in the blank horizontal balance sheet below, or one like it on a separate sheet, and calculate your real or desired net worth. Keep in mind that this is a simplied balance sheet. The usual layout for the balance sheet of a sole trader will be discussed in Unit 4, and the respective formats for partnerships and companies will be discussed in Unit 5.
Feedback
The purpose of this activity is to relate the idea of capital (or net worth) of businesses to the reality of every day life. At any point in time a business or a person can draw up a balance sheet representing their assets and liabilities to determine their net worth using the accounting equation: ASSETS LIABILITIES = CAPITAL Your balance sheet as at todays date Assets Assets: Liabilities + Capital Liabilities:
Capital: Total Total
In order to arrive at net worth we deduct total liabilities from total assets.
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3.2 The accounting equation and the nominal ledger

3.2.1
Assets
The accounting equation extended

= Liabilities + Capital
By now you should remember the accounting equation:
Since the proprietors are the residual beneciaries of the business, prots will increase the owners capital and losses will decrease their capital. In addition, capital increases when the owners introduce new capital into the business and capital decreases when the owners withdraw capital from the business. Capital must therefore be made up of different elements. This can be expressed as follows:
Assets = Liabilities + Capital Capital introduced Prot or (loss)* (Drawings**)* * In accounting, numbers in brackets are either negative or must be deducted. In this example, it means that a loss and drawings reduce the amount of equity capital. ** Drawings is the term for capital withdrawn from the business by the owner(s) in the form of money or assets. This only applies to unincorporated businesses. In limited companies shareholders are not allowed to withdraw capital from the business, although they usually do receive dividends when the company has made a prot.
Thus, equity capital in the accounting equation consists of:

Capital introduced in previous periods and in the current period + = Prot earned in previous periods and in the current period, or Losses Capital withdrawn in previous periods and the current period (= Drawings) Owners capital
Prot earned in previous periods appears as retained prot in the balance sheet of a sole trader. At the end of an accounting period the prot earned in the current period will be transferred to the retained prots account. Conceptually, there are two ways to calculate prot earned in the current period that in practice must produce the same outcome. The rst is the balance sheet approach to the determination of prot (also called asset/liability approach) and the second is the income statement approach (also called prot and loss approach). Prot earned in the current period can be calculated as:
1 = + = Balance sheet approach Assets at end of period Liabilities at end of period Net assets at end of period Retained prot from previous periods Drawings in the current period Capital introduced (current and previous) Prot earned in the current period = 2 Income statement approach Revenues for the period Expenses for the period Prot earned in the current period
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How does the accounting equation form the basis for the double-entry bookkeeping system? In order to nd that out, we will look at some examples in Section 3.2.2.
3.2.2 The effect of transactions on assets, liabilities and capital

1 Setting up a business On 2 January 20X1 William starts a business and puts 10,000 of his savings into a business bank account. This transaction increases the asset of money in the bank by 10,000 and capital by 10,000.
Assets Bank 10,000 = = Liabilities 0 + Capital introduced + Capital 10,000
2 Buying assets On 2 January 20X1 William purchases a van for 4,000, paying by cheque. This transaction increases assets by 4,000 but the asset of money in the bank decreases by 4,000.
Assets Bank Van 6,000 4,000 10,000 = 0 + 10,000 = Liabilities 0 + Capital introduced + Capital 10,000
3 Introducing capital On 2 January 20X1 William purchases 1,000 of goods for resale, paying by personal debit card, that is, he pays the money from his private bank account. As a consequence of this transaction the asset of inventory increases by 1,000 and Williams capital contribution increases by 1,000 (i.e., total sources of nancing increases by 1,000).
Assets Bank Van Inventory 6,000 4,000 1,000 11,000 = 0 + Capital introduced 1,000 11,000 = Liabilities 0 + Capital introduced + Capital 10,000
4 Borrowing money to buy an asset On 3 January 20X1 William borrows 2,000 from his mother to buy a computer including an accounting software package.
Assets Bank Van Inventory Computer 6,000 4,000 1,000 2,000 13,000 = 2,000 + 11,000 Capital introduced 1,000 Loan = Liabilities 2,000 + Capital introduced + Capital 10,000
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5 Introducing prot into the accounting equation On 5 January 20X1 William has a very good day and sells his entire inventory for 1,500 in cash.
Assets Bank Van Inventory Computer Inventory Cash 6,000 4,000 1,000 2,000 (1,000) 1,500 13,500 = 2,000 + Prot 500 11,500 Capital introduced 1,000 Loan = Liabilities 2,000 + Capital introduced + Capital 10,000
Note that amounts in brackets need to be deducted. William operates as a sole proprietor and because he has sold goods costing 1,000 for 1,500, he earned a prot from this transaction of 500. The prot belongs to William and is accounted for as an addition to his proprietary capital. 6 Drawings On 6 January 20X1 William takes 50 cash from the business and takes his girlfriend out for dinner in order to celebrate his rst week of trading and the fact that he has made a prot.
Assets Bank Van Inventory Computer Inventory Cash Cash 6,000 4,000 1,000 2,000 (1,000) 1,500 (50) 13,450 = 2,000 + Prot Drawings 500 (50) 11,450 Capital introduced 1,000 Loan = Liabilities 2,000 + Capital introduced + Capital 10,000
As a result, the asset of cash is reduced to 1,450. Note that the 50 drawings are accounted for as a reduction of capital, not as a reduction of prot. Remember that prot = revenues expenses. Drawings are not an expense to the business, but a reduction of the proprietors stake in the business, that is, a reduction of the proprietors capital. Activity 3.3
Calculate the prot earned by William in his week of trading using both the balance sheet approach and the income statement approach.
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Feedback
1 = + = Balance sheet approach Assets at end of period Liabilities at end of period Net assets at end of period Retained prot from previous periods Drawings in the current period Capital introduced (current and previous) Prot earned in the current period 50 (11,000) 500 13,450 (2,000) 11,450
2 =
Income statement approach Revenues for the period Expenses for the period Prot earned in the current period
1,500 (1,000) 500
Credit purchases
On 9 January 20X1 William bought 1,600 worth of goods on credit for sale. This increases the asset in the form of inventory by 1,600 and the liability in the form of trade payables by 1,600.
Assets Bank Van Inventory Computer Inventory Cash Cash Inventory 6,000 4,000 1,000 2,000 (1,000) 1,500 (50) 1,600 15,050 = 3,600 + 11,450 Prot Drawings 500 (50) Loan Payables = Liabilities 1,600 Capital introduced 1,000 + Capital
2,000 + Capital introduced 10,000
8 Credit sales
On 14 January 20X1 William sells goods that had cost him 1,000 for
1,500 on credit. This increases the asset of trade receivables by 1,500,
decreases the asset of inventory by 1,000 and increases prot by 500.
Assets Bank Van Inventory Computer Inventory Cash Cash Inventory Inventory Receivables 6,000 4,000 1,000 2,000 (1,000) 1,500 (50) 1,600 (1,000) 1,500 15,550 = 3,600 + 11,950 Prot Drawings Prot 500 (50) 500 Loan Payables = Liabilities 1,600 Capital introduced 1,000 + Capital
2,000 + Capital introduced 10,000
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Have you understood the eight examples above? If not, go over the examples again to make sure that you have understood how the various transactions affect assets and liabilities, and how liabilities are different from capital even though they are both sources of nancing. After each transaction the accounting equation (assets = liabilities + capital) holds. When you learn the rules of double-entry bookkeeping, it is important to remember that with every transaction that you enter into the nominal ledger accounts, the accounting equation must hold and total debits must equal total credits.
3.3 The rules of double-entry bookkeeping

3.3.1 Nominal ledger accounts
In manual accounting systems, nominal ledger accounts are typically represented by T-accounts, such as the one below. For each element in the nancial statements there is a separate nominal ledger account.
Title of the account Debit Date Details Folio Amount
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Credit Date Details Folio Amount
The title of the nominal ledger account is the name of the account or type of transaction as it appears in the nancial statements. The convention is that debits are on the left and credits are on the right of the T-account. Debit is often abbreviated to Dr and credit to Cr. The date refers to the date of the transaction as it is entered in the books of prime entry. The details column refers to the other ledger account that contains the second part of the dual effect. Folio is a reference to the book of prime entry in which this transaction has been entered and the source document that provides the evidence. The amount column shows the amount of the transaction.
3.3.2 Debits and credits: the rules of double-entry bookkeeping

Double-entry bookkeeping makes use of debits and credits in ledger accounts. Debits are always on the left-hand side and credits on the right-hand side of the ledger account. The word debit comes from the Latin debere, which means to owe; credit comes from credere, which means to believe or to have faith in (Hendriksen and van Breda, 1992, p. 36). On the debit side the business records the amounts owed by the debtors to the business, and on the credit side the business records the sums owing to the liability holders (including the creditors) of the business. Remember that total assets equal total liabilities.
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Capital is a liability and therefore increases by making credit entries to the capital account. Revenues increase capital and expenses decrease capital. Therefore, revenues are increased by credit entries and expenses by debit entries. An excess of revenues over expenses is called a prot and increases capital. On the other hand, an excess of expenses over revenues is called a loss and decreases capital. In terms of assets, liabilities, capital, revenues and expenses:
l
An entry on the debit side of an asset account will increase the asset. An entry on the credit side of an asset account will decrease the asset. An entry on the credit side of a liability account will increase the liability. An entry on the debit side of a liability account will decrease the liability. An entry on the credit side of a capital account will increase capital. An entry on the debit side of a capital account will decrease capital. An entry on the debit side of an expense account will increase expenses. An entry on the credit side of an expense account will decrease expenses. An entry on the credit side of a revenue account will increase revenues. An entry on the debit side of a revenue account will decrease revenues.
ASSETS/EXPENSES LIABILITIES/CAPITAL/REVENUES Credit Debit Debit Credit
INCREASE DECREASE
In T-account form, the rules look like this.

Asset account Debit Increases asset Credit Decreases asset
Liability account Debit Decreases liability Credit Increases liability
Capital account Debit Decreases capital Credit Increases capital
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Expense account Debit Increases expense Credit Decreases expense
Revenue account Debit Decreases revenue Credit Increases revenue
If it is difcult to remember these rules, try to link them to the horizontal balance sheet, and think of revenue and expense accounts as an extension of the capital account. As shown below, in a horizontal income statement expenses appear on the left and revenues appear on the right. In the books of a sole proprietor, at the end of an accounting period the prot or loss for that period will be transferred to the capital account. You will learn how to do this in Unit 4. Revenues increase the prot that will be transferred to the capital section of the balance sheet, but expenses decrease it. Prot increases the balance of the capital account, but loss decreases the balance of the capital account.
Balance sheet ASSETS LIABILITIES CAPITAL + Profit or (Loss)
Income statement Total EXPENSES Balance: (Loss) Total REVENUES Balance: Profit
As capital increases with credit entries, all accounts that increase capital such as sales revenues also increase with credits and decrease with debits.
3.3.3
Debit balances and credit balances
At the end of an accounting period ledger accounts need to be balanced off in order to know the amount of the balance in the account. Session 4 will teach you how to do this. Asset accounts will normally have a debit balance and liability (including capital) accounts will normally have a credit balance. Expense accounts usually have a debit balance and revenue accounts will usually have a credit balance. See also the horizontal balance sheet and income statement above. Activity 3.4
You have just learned about normal debit and credit balances in general ledger accounts.
l
What would be the normal balance on: m cash? m electricity expenses?

m
trade payables?
Where would a bank overdraft appear?
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Feedback
The normal balance on cash is debit, on electricity expenses is debit, and on trade payables is credit. When the bank account is in overdraft, it means that the balance on the cash account is a credit instead of a debit. In other words, it is not a normal balance.
3.3.4
Nominal/general ledger account names
Unfortunately, sometimes there are differences in the titles of T-accounts depending on the terminology demanded by the accounting standards that a business must follow. The glossary will indicate whether a term is used under UK accounting standards (UK) or international accounting standards (INT). It is important to be familiar with both, and in addition recognise that in practice some businesses will sometimes use additional different account names. Moreover, in countries such as the UK a business can open any ledger account it sees t. In some other countries, such as France, however, every business is obliged to use only nominal/general ledger accounts that are consistent with a chart of accounts stipulated by the government.
3.4
Recording transactions in ledger accounts
3.4.1 Cash payments and receipts
The duality concept requires that recording transactions in ledger accounts be done using double entries. Remember that for every debit entry there must be at least one equal and opposite credit entry. In this section you will learn how to record cash transactions using double entries by correctly recording amounts on the debit and credit side of the appropriate ledger accounts. In Section 3.4.2 you will learn how to do the same thing for credit sales and purchases. Later, in Section 3.6 you will learn how to make double entries in the form of journal entries, which are double entries in journal format, complete with the date of the transaction and a descriptive narrative. Throughout Section 3.4.1 and Section 3.4.2 the example of Natasha illustrates how to record cash transactions in the appropriate ledger accounts. For each transaction, the example rst identies its dual effect on the appropriate nominal ledger accounts. It then shows the double entry, and nally it illustrates how the double entry is recorded in the nominal ledger accounts. This process of recording transactions in nominal ledger accounts is also called posting. For the moment we will use simplied T-accounts without the columns for the date and folio name or number. In order to illustrate the essence of the double-entry principles, the examples below only use the columns for details and amount. Example Natasha decides to set up a business as a sole trader and enters into the following transactions. Assume that the transactions have already been recorded in her cash book as you learned in Session 2. 1 She puts 10,000 of her private savings into a business bank account to start up the business.
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2 3 4 5 6 7 8
She purchases a van for 4,000, paying by cheque.

She purchases goods for resale for 1,600, paying by debit card.
She pays 500 in cash for shop rental.
She pays 150 in cash for a newspaper advertisement.
She purchases some xtures for the shop for 700, paying by debit
card. She takes 70 from the business bank account for her own personal expenses. She sells goods for cash, totalling 2,000.
Transaction 1 Natasha puts 10,000 into the business bank account to start up the business. Dual effect: Increases the asset of cash by 10,000 and increases capital by 10,000. Double entry:
DEBIT CREDIT Bank Capital Bank (asset) Dr 1. Capital 10,000 Capital (capital) Dr 1. Bank 10,000 Cr Cr 10,000 10,000
Note that the T-accounts in this example have been simplied. Usually there would be dates and folio numbers. Transaction 2 Natasha purchases a van for 4,000, paying by cheque.
Dual effect: Increases the asset of van by 4,000 and decreases the
asset of cash by 4,000.
Double entry:
DEBIT CREDIT Van Bank Van (asset) Dr 2. Bank 4,000 Bank (asset) Dr Capital 10,000 2. Van 4,000 Cr Cr 4,000 4,000
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Transaction 3 Natasha purchases goods for resale for 1,600, paying by debit card. Dual effect: Increases the purchases account (expense) by 1,600 and
decreases the asset of cash by 1,600.
Double entry:
DEBIT CREDIT Purchases Bank Purchases (expense) Dr 3. Bank 1,600 Bank (asset) Dr 1. Capital 10,000 2. Van 3. Purchases 4,000 1,600 Cr Cr 1,600 1,600
You may have been surprised by the way that Natashas purchase of inventory has been recorded and how the dual effect has been classied. Compare this example with Section 3.2.2, where William bought inventory for 1,000 which increased the asset of inventory. Why does the example above not record an increase in Natashas inventory? Of course, in Natashas case, inventory also increases but the purchase of inventory is recorded as an increase in the purchases account, which is an expense account where the purchase of goods for resale is recorded. In fact, there are different ways of recording the purchase and sale of inventory. For businesses where inventory consists of large and expensive items that are easily counted individually, the number of daily transactions will not be high. In that case it could make sense to record increases and decreases in inventory at the time that they occur. In such businesses, bookkeeping follows the physical ow of the goods. For example: (i) Purchases of inventory are recorded in an inventory account as an asset. (ii) When an item is sold, the sale is recorded as sales revenue and the cost of the inventory is transferred from the purchases account to a cost of sales account, which is an expense account. (iii) At the end of the accounting period the balance in the cost of sales account is transferred to the revenue and expense account from which the prot or loss is transferred to the capital account. (iv) For most businesses following the physical ow of the goods is not a practical approach because inventory may have been bought in bulk or may consist of different items bought at different times and at different prices. Therefore, the approach that you will learn in this module is the following.
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(v) Purchases of inventory are recorded in the purchases account as an expense. (vi) The sale of inventory is recorded in the sales account (also called the sales revenue account). (vii) At the end of the accounting period inventory is counted and the value of the closing inventory is used in the calculation of the cost of sales. You will learn how to account for end of period inventory in Unit 3. Transaction 4 Natasha pays 500 in cash for shop rental.
Dual effect: Increases the expense of rent by 500 and decreases cash
in the bank by 500.
Double entry:
DEBIT CREDIT Rent Bank Rent (expense) Dr 4. Bank 500 Bank (asset) Dr 1. Capital 10,000 2. Van 3. Purchases 4. Rent 4,000 1,600 500 Cr Cr 500 500
Transaction 5 Natasha pays 150 for a newspaper advertisement. Dual effect: Increases advertising expenses by 150 and decreases
cash in the bank by 150.
Double entry:
DEBIT CREDIT Advertising Bank Advertising (expense) Dr 5. Bank 150 Bank (asset) Dr 1. Capital 10,000 2. Van 3. Purchases 4. Rent 5. Advertising 4,000 1,600 500 150 Cr Cr 150 150
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Transaction 6 Natasha pays 700 for shop xtures by debit card. Dual effect: Increases the asset of xtures by 700 and decreases the
asset of cash by 700.
Double entry:
DEBIT CREDIT Fixtures Bank Fixtures (asset) Dr 6. Bank 700 Bank (asset) Dr 1. Capital 10,000 2. Van 3. Purchases 4. Rent expense 5. Advertising 6. Fixtures 4,000 1,600 500 150 700 Cr Cr 700 700
Transaction 7 Natasha takes 70 of cash out of the business bank account for
personal expenses.
Dual effect: Increases drawings by 70 and decreases cash by 70.
Double entry:
DEBIT CREDIT Drawings Bank Drawings (capital) Dr 7. Bank 70 Bank (asset) Dr 1. Capital 10,000 2. Van 3. Purchases 4. Rent expense 5. Advertising 6. Fixtures 7. Drawings 4,000 1,600 500 150 700 70 Cr Cr 70 70
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Transaction 8 Natasha sells goods for cash, totalling 2,000. Dual effect: Increases cash in the bank by 2,000 and increases sales
revenue by 2,000.
Double entry:
DEBIT CREDIT Bank Sales Bank (asset) Dr 1. Capital 8. Sales revenue 10,000 2,000 2. Van 3. Purchases 4. Rent expense 5. Advertising 6. Fixtures 7. Drawings Sales (revenue) Dr 8. Bank 2,000 Cr 4,000 1,600 500 150 700 70 Cr 2,000 2,000
3.4.2
Credit sales and credit purchase transactions
Natasha also buys and sells goods on credit. Assume that the credit transactions have rst been recorded in the appropriate day books. The transactions recorded in the day books are as follows. 9 The purchases day book shows that Natasha purchased goods for sale from supplier Milner on credit for 3,000. 10 The sales day book shows that Natasha sold goods on credit to customer Cherry for 3,500. 11 The purchases returns day book shows that Natasha returned goods costing 300 to supplier Milner. 12 The sales returns day book shows that customer Cherry returned goods sold to him for 400. 13 The cash book indicates that Natasha received 3,038 from customer Cherry, taking up a 2 per cent settlement discount. 14 Furthermore, the cash book shows that Natasha paid 2,619 to supplier Milner for her purchase, taking up a 3 per cent settlement discount. Transaction 9 Natasha purchases goods for sale on credit for 3,000. Dual effect: Increases the purchases account (expense) by 3,000 and increases the payables account to supplier Milner (liability) by 3,000.
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Double entry:
DEBIT CREDIT Purchases Payables Purchases (expense) Dr 3. Bank 9. Payables: Milner 1,600 3,000 Payables: Milner (liability) Dr 9. Purchases 3,000 Cr Cr 3,000 3,000
Transaction 10 Natasha sells goods on credit for 3,500. Dual effect: Increases the receivables account (asset) by 3,500 and
increases the sales account (revenue) by 3,500.
Double entry:
DEBIT CREDIT Receivables: Cherry Sales revenue Receivables: Cherry (asset) Dr 10. Sales revenue 3,500 Sales (revenue) Dr 8. Bank 10. Receivables: Cherry 2,000 3,500 Cr Cr 3,500 3,500
Transaction 11 Natasha returns goods purchased for 300. Dual effect: Decreases the payables account to supplier Milner by 300 and increases the purchases returns (or returns outwards) account by 300. Double entry:
DEBIT CREDIT Payables: Milner Purchase returns Payables: Milner (liability) Dr 11. Purchase returns 300 9. Purchases 3,000 Cr 300 300
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Purchases returns (income) Dr 11. Payables: Milner 300 Cr
Note that the purchase returns account is an income account. A negative expense is accounted for as income. Transaction 12 Customer Cherry returns goods sold to him for 400.
Dual effect: Increases sales returns (expense) by 400 and decreases
the asset of receivables from customer Cherry.
Double entry:
DEBIT CREDIT Sales returns Receivables: Cherry Sales returns (expense) Dr 12. Receivables: Cherry 400 Cr 400 400
Receivables: Cherry (asset) Dr 10. Sales revenue 3,500 12. Sales returns 400 Cr
Note that the sales returns account is an expense account. Negative sales revenue is accounted for as an expense. Transaction 13 Natasha receives payment of 3,038 from customer Cherry, taking advantage of a 2 per cent settlement discount. Dual effect: Increases the asset of cash in the bank by 3,038 and the expense of discounts allowed by 62, but decreases the asset of receivables from customer Cherry by 3,100. Double entry:
DEBIT CREDIT Bank Discounts allowed Receivables: Cherry 3,100 Bank (asset) Dr 1. Capital 8. Sales revenue 13. Receivables: Cherry 10,000 2,000 3,038 2. Van 3. Purchases 4. Rent expense 5. Advertising 6. Fixtures 7. Drawings 4,000 1,600 500 150 700 70 Cr 3,038 62 3,100 3,100
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Discounts allowed (expense) Dr 13. Receivables: Cherry 62 Cr
Receivables: Cherry (asset) Dr 10. Sales revenue 3,500 12. Sales returns 13. Bank 13. Discounts allowed 400 3,038 62 Cr
Transaction 14 Natasha pays supplier Milner 2,619 for goods purchased, making use of a 3 per cent settlement discount. Dual effect: Decreases the liability of payables to supplier Milner by 2,700 and decreases the asset of cash in the bank by 2,700. Double entry:
DEBIT CREDIT Payables: Milner Bank Discounts received 2,700 Payables: Milner (liability) Dr 11. Purchase returns 14. Bank 14. Discounts received 300 2,619 81 Bank (asset) Dr 1. Capital 8. Sales revenue 13. Receivables: Cherry 10,000 2,000 3,038 2. Van 3. Purchases 4. Rent expense 5. Advertising 6. Fixtures 7. Drawings 14. Payables: Milner Discounts received (income) Dr 14. Payables: Milner 81 Cr 4,000 1,600 500 150 700 70 2,619 Cr 9. Purchases 3,000 Cr 2,700 2,619 81 2,700
Note that in this example Natashas business has only one credit supplier and one credit customer. In reality, a business is likely to have more credit suppliers and credit customers. If there are only a
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few of each, Natasha could simply open a new payables account in the general ledger for each credit supplier as she has done for supplier Milner, and a new receivables account in the general ledger for each credit customer as she has done for customer Cherry. However, if there are many credit suppliers and customers it becomes difcult to keep track of total payables and receivables as well as all the details of all the different payables and receivables accounts. In Section 3.5 you will learn about receivables and payables ledgers, which serve as subsidiary ledgers and make it easier to keep track of the total receivables and payables in the general ledger. Activity 3.5
Felix: Double entry
Felix owns a business with only few suppliers and customers. The following transactions took place. (a) He pays 500 in wages. (b) He pays an electricity bill of 200. (c) He buys a computer for ofce use for 3,000, by cheque. (d) He sends a credit note for 80 to customer Christopher Brown. (e) He receives a credit note for 60 from supplier Theresa O Donnell. (f) He buys goods on credit from supplier Wendy Williams for 10,000. (g) He receives rent bill from the landlord of 1,400. (h) He pays 1,400 in rent to the landlord.
Required
Write up the double entries for the above transactions.
Feedback
(a) DEBIT CREDIT (b) DEBIT CREDIT (c) DEBIT CREDIT (d) DEBIT CREDIT (e) DEBIT CREDIT (f) DEBIT CREDIT (g) DEBIT CREDIT (h) DEBIT CREDIT Wages (expense) Bank (asset) Electricity (expense) Bank (asset) Computer (asset) Bank (asset) Sales returns Receivables: Christopher Brown Payables: Theresa O Donnell Purchase returns Purchases Payables: Wendy Williams Rent expense Payables: Landlord Payables: Landlord Bank 1,400 1,400 1,400 1,400 10,000 10,000 60 60 80 80 3,000 3,000 200 200 500 500
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Activity 3.6
Jennie: T-accounts
Here are some transactions in respect of a new business that was started by Jennie on 1 May. 1 May 2 May 3 May 4 May 5 May 6 May 7 May 8 May She starts the business by depositing a cheque for 40,000 into the business bank account. She purchases machinery worth 11,000 by cheque. She purchases inventory on credit for 23,000. She sells goods for 5,000 in cash. She pays 15,000 to the supplier of the goods purchased on 3 May. This is a part payment of the total amount due. She sells goods on credit for 8,500. She writes a cheque to withdraw 1,500 from the business. She receives a business loan of 50,000.
Required
(a) Make a list of the names of the nominal ledger accounts required to record these transactions. (b) Write up the transactions in the T-accounts you have identied in part (a) above.
Feedback
(a)
l l l l l l l l l
Nominal ledger accounts:

bank account
capital account
machinery account
purchases account
sales revenues account
payables account
receivables account
drawings account
loan account.
Note 1: in practice, personal accounts would also need to be amended for credit sales and purchases, but these are not nominal ledger accounts. Note 2: you may have opened a cash account to deal with the cash sale on 4 May. That is not a problem at this stage. Strictly speaking, the distinction here is between cash and credit transactions, rather than the form of monetary transfer. (b) T-accounts Bank (asset) Dr May 1 4 8 Capital Sales revenue Loan 40,000 5,000 50,000 May 2 5 7 Machinery Payables Drawings 11,000 15,000 1,500 Cr
Capital (capital) Dr May May 1 Bank 40,000 Cr
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Machinery (asset) Dr May 2 Bank 11,000 May Cr
Purchases (expense) Dr May 3 Payables 23,000 May Cr
Sales (revenue) Dr May May 4 6 Bank Receivables 5,000 8,500 Cr
Payables (liability) Dr May 5 Bank 15,000 May 3 Purchases 23,000 Cr
Receivables (asset) Dr May 6 Sales 8,500 May Cr
Drawings (capital) Dr May 7 Bank 1,500 May Cr
Loan (liability) Dr May May 8 Bank 50,000 Cr
Activity 3.7
Manuel: Double entry and T-accounts Manuel decides to start a business. The following events and transactions take place. 1 He puts 10,000 of his savings in a business bank account. 2 3 4 He rents a shop and pays 750 in rent for the month. He purchases ttings and furniture for 2,000 and pays by cheque. He purchases goods for resale for 3,500 from supplier Fredericks on credit.
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5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
He sells goods for 800 in cash (cash is banked on the same day). He sells goods for 2,600 on credit to customer Tinker. He sells goods for 1,000 on credit to customer Zeff. A customer, Tinker, pays 2,548, taking up a 2 per cent settlement discount. He issues a credit note to customer Zeff for 100 for goods returned. He purchases goods for resale for 4,000 from supplier Chen on credit. He returns goods to supplier Chen and receives a credit note for 300. He pays wages of 150. He sells goods for 2,200 on credit to customer Tinker. A customer, Zeff, pays 900. He takes up a bank loan for 5,000. He purchases a van for 4,700. He pays 300 for car insurance for the van. He sells goods for 2,000 on credit to customer Zeff. A customer, Zeff, pays 1,960, taking up a 2 per cent settlement discount. He pays supplier Chen 3,589, taking up a 3 per cent settlement discount.
Required Write up the double entry for each event and transaction and set out the nominal ledger accounts at the end of the period. Write the transaction numbers in the date columns. Manuel has only a few suppliers and customers. Therefore, each supplier and customer has a nominal ledger account.
Feedback
1 Puts 10,000 of his savings in a business bank account Bank Capital 10,000 10,000 DEBIT CREDIT 2
Rents a shop and pays 750 in rent for the month Rent Bank 750 750
DEBIT CREDIT 3
Purchases xtures and ttings for 2,000 and pays by cheque Fixtures and ttings Bank 2,000 2,000
DEBIT CREDIT 4
Purchases goods for resale for 3,500 from supplier Fredericks on credit Purchases Payables: Fredericks 3,500 3,500
DEBIT CREDIT 5
Sells goods for 800 in cash (cash is banked on the same day) Bank Sales revenue 800 800
DEBIT CREDIT 6
Sells goods for 2,600 on credit to customer Tinker Receivables: Tinker Sales revenue 2,600 2,600
DEBIT CREDIT
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Sells goods for 1,000 on credit to customer Zeff Receivables: Zeff Sales revenue 1,000 1,000
DEBIT CREDIT 8
Customer Tinker pays 2,548, taking up a 2 per cent settlement discount Bank Receivables: Tinker 2,548 2,548
DEBIT CREDIT
And to account for the discount allowed: DEBIT CREDIT Discount allowed Receivables: Tinker 52 52
Or combining the above two double entries into one: DEBIT CREDIT Bank Discount allowed Receivables: Tinker 2,600 9 Issues a credit note to customer Zeff for 100 of goods returned Sales returns Receivables: Zeff 100 100 2,548 52 2,600 2,600
DEBIT CREDIT
10 Purchases goods for resale for 4,000 from supplier Chen on credit DEBIT CREDIT Purchases Payables: Chen 4,000 4,000
11 Returns goods to supplier Chen and receives a credit note for 300 DEBIT CREDIT Payables: Chen Purchase returns 300 300
12 Pays wages of 150 DEBIT CREDIT Wages Bank 150 150
13 Sells goods for 2,200 on credit to customer Tinker DEBIT CREDIT Receivables: Tinker Sales revenue 2,200 2,200
14 Customer Zeff pays 900 DEBIT CREDIT Bank Receivables: Zeff 900 900
15 Takes up a bank loan for 5,000 DEBIT CREDIT Bank Bank loan 5,000 5,000
16 Purchases a van for 4,700 DEBIT CREDIT Van Bank 4,700 4,700
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17 Pays 300 for car insurance DEBIT CREDIT Insurance Bank 300 300
18 Sells goods for 2,000 on credit to customer Zeff DEBIT CREDIT Receivables: Zeff Sales revenue 2,000 2,000
19 Customer Zeff pays 1,960, taking advantage of a 2 per cent settlement discount DEBIT CREDIT Bank Receivables: Zeff 1,960 1,960
And to account for the discount allowed: DEBIT CREDIT Discount allowed Receivables: Zeff 40 40
Or combining the above two double entries into one: DEBIT CREDIT Bank Discount allowed Receivables: Zeff 2,000 1,960 40 2,000 2,000
20 Pays supplier Chen 3,589, taking up a 3 per cent settlement discount DEBIT CREDIT Payables: Chen Bank 3,589 3,589
And to account for the discount received: DEBIT CREDIT Payables: Chen Discounts received 111 111
Or combining the above two double entries into one: DEBIT CREDIT Payables: Chen Bank Discounts received 3,700 Nominal ledger accounts Bank (asset) Dr 1 5 8 14 15 19 Capital Sales revenue Receivables: Tinker Receivables: Zeff Bank loan Receivables: Zeff 10,000 800 2,548 900 5,000 1,960 2 3 12 16 17 20 Rent Fixtures & ttings Wages Van Car insurance Payables: Chen 750 2,000 150 4,700 300 3,589 Cr 3,700 3,589 111 3,700
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Note that the numbers in the date columns represent the transaction numbers. Capital (capital) Dr 1 Bank 10,000 Cr
Fixtures and ttings (asset) Dr 3 Bank 2,000 Van (asset) Dr 16 Bank 4,700 Purchases (expense) Dr 4 10 Payables: Fredericks Payables: Chen 3,500 4,000 Sales (revenue) Dr 5 6 7 13 18 Bank Receivables: Tinker Receivables: Zeff Receivables: Tinker Receivables: Zeff 800 2,600 1,000 2,200 2,000 Cr Cr Cr Cr
Payables: Fredericks (liability) Dr 4 Purchases 3,500 Cr
Payables: Chen (liability) Dr 11 20 20 Purchase returns Bank Discount received 300 3,589 111 10 Purchases 4,000 Cr
Receivables: Tinker (asset) Dr 6 13 Sales revenue Sales revenue 2,600 2,200 8 8 Cash Discount allowed 2,548 52 Cr
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Receivables: Zeff (asset) Dr 7 18 Sales revenue Sales revenue 1,000 2,000 9 14 19 19 Sales returns Bank Bank Discount allowed 100 900 1,960 40 Cr
Rent (expense) Dr 2 Bank 750 Discount allowed (expense) Dr 8 19 Receivables: Tinker Receivables: Zeff 52 40 Cr Cr
Discount received (income) Dr 20 Payables: Chen 111 Cr
Sales returns (expense) Dr 9 Receivables: Zeff 100 Cr
Purchase returns (income) Dr 11 Payables: Chen 300 Cr
Wages (expense) Dr 12 Bank 150 Cr
Bank loan (liability) Dr 15 Bank 5,000 Cr
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Car insurance (expense) Dr 17 Bank 300 Cr
Note: from this point onwards, T-accounts will no longer note Dr on the debit side and Cr on the credit side as you are now expected to know about debits and credits.
3.5 Receivables ledgers, payables ledgers and control accounts

3.5.1 Nominal ledger accounts and subsidiary ledger accounts
As mentioned before, the nominal ledger accounts make up the double-entry system. These are called impersonal accounts because they all relate to the elements that make up nancial statements such as revenues, expenses, assets and liabilities (including capital). Most businesses have many suppliers and even more customers. In order to know how much each individual customer owes the business or how much the business owes a particular supplier at a point in time, the business needs to record all individual transactions in personal accounts for their customers and suppliers. A business that has multiple suppliers and customers would therefore create subsidiary ledgers such as the receivables ledger (UK: sales ledger or debtors ledger) and payables ledger (UK: purchases ledger or creditors ledger). Subsidiary ledgers are memorandum books that are not part of the nominal ledger. A business that uses subsidiary ledgers will post the individual transactions to the personal accounts in the subsidiary ledger, and will post the totals of the day books to the relevant control accounts in the nominal ledger. Businesses that use receivables and payables ledgers will therefore also use a receivables control account and a payables control account by means of which total receivables and total payables appear in the nominal ledger. Section 3.5.4 briey discusses the double entry for control accounts, but Unit 4 will discuss the content and operation of control accounts in detail.
3.5.2 The receivables ledger

The receivables ledger contains the personal accounts for each customer to whom the business sells goods or services on a credit basis. It summarises all the credit transactions with each customer. A receivables ledger contains the information from the sales day book for each customer plus the information from the cash book on the payments received. These will be discussed here. In addition, a receivables ledger contains information about sales returns, discounts allowed, irrecoverable debts and contra entries in the receivables control account, and these will all be discussed in Unit 4.
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Example Suppose a business made three sales in one week. On the invoices it says that the business allows a discount of 10 per cent for payment within one week. The sales day book for the business would look like this:
Sales day book Date 2 July 3 July 4 July Invoice 0211 0212 0213 Customer Arthur Brenda Chris Description Chocolate Jelly beans Biscuits Invoice amount 2,000 1,500 3,000 6,500
These entries are also made in the receivables ledger.

Receivables ledger: customer Arthur 1 July 2 July Balance b/d Sales (SDB) inv. 0211 300 2,000
Receivables ledger: customer Brenda 1 July 3 July Balance b/d Sales (SDB) inv. 0212 500 1,500
Receivables ledger: customer Chris 1 July 4 July Balance b/d Sales (SDB) inv. 0213 100 3,000
The balances brought down from the previous month indicate that the customers had not settled all their bills fully. Subsequently, payments are received and recorded in the cash book and in the personal accounts in the receivables ledger. If there are any discounts allowed, these are also recorded in the cash book and the personal accounts. In this example, the payments received do not relate to the balances brought down but rather to the later invoices. In reality, most businesses will pay older outstanding balances before later invoices. The purpose here is to illustrate that there are usually balances brought down from one period to the next.
Cash book: receipts Date Narrative Total amount received 8 July 8 July 8 July Cheque from Arthur Cheque from Brenda Cheque from Chris 1,800 1,350 2,700 5,850 Receivable Discounts allowed 2,000 1,500 3,000 6,500 200 150 300 650 Other
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These are also entered into the receivables ledger accounts.

Receivables ledger: customer Arthur 1 July 2 July Balance b/d Sales (SDB) inv. 0211 300 2,000 2,300 9 July Balance b/d 300 8 July 8 July 8 July Bank Discount allowed Balance c/d 1,800 200 300 2,300
Receivables ledger: customer Brenda 1 July 3 July Balance b/d Sales (SDB) inv. 0212 500 1,500 2,000 9 July Balance b/d 500 8 July 8 July 8 July Bank Discount allowed Balance c/d 1,350 150 500 2,000
Receivables ledger: customer Chris 1 July 4 July Balance b/d Sales (SDB) inv. 0213 100 3,000 3,100 9 July Balance b/d 100 8 July 8 July 8 July Bank Discount allowed Balance c/d 2,700 300 100 3,100
Note: remember that the personal accounts are not nominal ledger accounts. The receivables ledger is a memorandum (or subsidiary) ledger.
3.5.3
The payables ledger
The payables ledger contains the personal accounts for each supplier
from whom the business purchases goods or services on a credit basis.
It summarises all the credit transactions with each supplier.
A payables ledger contains the information from the purchases day
book for each supplier plus the information from the cash book on the
payments made to them. These will be discussed here. In addition,
a payables ledger contains information about purchase returns,
discounts received and contra entries in the payables control account,
and all of these will be discussed in Unit 4.
Example Suppose the business also made three purchases in the same week. The supplier also offers a ten per cent settlement discount. The purchase day book would look like this:
Purchase day book Date 3 July 4 July 5 July Supplier Deirdre Eric Frances Description Chewing gum Liquorice Wafers Invoice amount 1,000 1,200 800 3,000
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These are also entered into the payables ledger accounts as follows.
Payables ledger: supplier Deirdre 1 July 3 July Balance b/f Purchases (PDB) 50 1,000
Payables ledger: supplier Eric 1 July 4 July Balance b/f Purchases (PDB) 200 1,200
Payables ledger: supplier Frances 1 July 5 July Balance b/f Purchases (PDB) 80 800
On 8 July the business made the payments as written in the cash payments book below.
Cash book: payments Date Narrative Total amount paid 8 July 8 July 8 July Remittance to Deirdre Remittance to Eric Remittance to Frances 900 1,080 720 2,700 Accounts Discounts received payable (creditors) 1,000 1,200 800 3,000 100 120 80 300 Other
In this example, too, the payments made do not relate to the balances brought down but rather to the later invoices. As mentioned above, in reality most businesses will pay older outstanding balances before later invoices. The purpose here is to illustrate that there are usually balances brought down from one period to the next. These payments are entered into the payables ledger accounts as follows.
Payables ledger: supplier Deirdre 8 July 8 July 8 July Cash Discount received Balance c/d 900 100 50 1,050 9 July Balance b/d 1,050 50 1 July 3 July Balance b/f Purchases (PDB) 50 1,000
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Payables ledger: supplier Eric 8 July 8 July 8 July Cash Discount received Balance c/d 1,080 120 200 1,400 9 July Balance b/d 1,400 200 1 July 4 July Balance b/f Purchases (PDB) 200 1,200
Payables ledger: supplier Frances 8 July 8 July 8 July Cash Discount received Balance c/d 720 80 80 880 9 July Balance b/d 880 80 1 July 5 July Balance b/f Purchases (PDB) 80 800
Note: remember that the personal accounts are not double-entry accounts. The payables ledger is a memorandum (or subsidiary) ledger. Only general ledger accounts are part of the double-entry system.
3.5.4
Control accounts
A control account is a nominal ledger account that summarises all the individual entries in subsidiary accounts. Control accounts are often used for payables and receivables, but they can also be prepared for other items such as cash, inventory and salaries. Control accounts are useful for three reasons. First, because control accounts are summary accounts they enable accountants to compare information from different parts of the accounting system at a glance. Second, control accounts are useful in detecting accounting errors in manual accounting systems where subsidiary ledgers are used. Third, control accounts are a way to reconstruct incomplete accounting records. The latter two will be discussed in Unit 4. Below you will learn about the receivables and payables control accounts.
3.5.5
Receivables control account (RCA)
In a manual accounting system each sales transaction in the sales day book is individually posted to the personal account of the customer in the receivables ledger. The total of the receivables in the sales day book is periodically posted to the receivables control account in the nominal ledger. As you have seen, the invoices that a business sends out are entered into the sales day book and the sales ledger, and the payments received are recorded in the cash book and the receivables ledger. Periodically, the totals from the cash book and the sales day book are posted to the receivables control account in the nominal ledger. In a computerised accounting system all these postings are done automatically. After the totals in the sales day book and the cash book (from the example of the confectionery sales to Arthur, Brenda and Chris in Section 3.5.2) have been posted to the receivables control account, the receivables control account would appear in the nominal ledger as shown below. The 900 balance brought down on 1 July is the total of
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the balances brought forward in the personal accounts. The 6,500 is the total of sales for the week posted from the sales day book. Similarly, the 5,850 is the total of payments received by the business from Arthur, Brenda and Chris in the week from 1 to 8 July posted from the cash book. Furthermore, there is the total of 650 in discounts allowed, also posted from the cash book. Finally, the balance of 900 is the new total of the balances in their personal accounts as at 9 July.
Receivables control account 1 July 8 July Balance b/d Total sales invoices (SDB) 900 6,500 8 July 8 July 8 July 7,400 9 July Balance b/d 900 Total payments received (CB) Total discounts allowed (CB) Balance c/d 5,850 650 900 7,400
3.5.6
Payables control account (PCA)
Similarly, the invoices received from suppliers are recorded in the purchase day book and the payables ledger. Payments made toward these invoices are recorded in the cash book and personal accounts in the payables ledger. When the totals in the purchase day book and the cash book from the example of Deirdre, Eric and Frances in Section 3.5.3 are posted to the payables control account, the payables control account looks like this.
Payables control account 8 July 8 July 8 July Total payments (CB) Total discounts received (CB) Balance c/d 2,700 300 330 3,330 9 July Balance b/d 3,330 330 1 July 8 July Balance b/d Total purchase invoices (PDB) 330 3,000
3.5.7
Cash at bank account
Many businesses use the cash book as the book of prime entry and nominal ledger account. However, there are businesses that use a cash control account which is called cash at bank. Assuming that the business in the above examples had a balance of 150 in the bank account, the cash at bank account would look like this on 9 July.
Cash at bank account 1 July 8 July Balance b/d Total cash received (CB) Balance b/d 150 5,850 6,000 9 July 3,300 8 July 8 July Total cash paid (CB) Balance c/d 2,700 3,300 6,000
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Activity 3.8
Sophie: Day books and subsidiary ledger accounts Sophie has a business selling ofce supplies. On credit transactions she offers a settlement discount of 5 per cent for payment within 7 days. In November she engages in the following transactions. 1 Nov 2 Nov 3 Nov 4 Nov 5 Nov 6 Nov 7 Nov 8 Nov 9 Nov 10 Nov 11 Nov 12 Nov 13 Nov 14 Nov 15 Nov 16 Nov 17 Nov 18 Nov 19 Nov 20 Nov She purchases 2,300 of goods for resale on credit from Tirthankar (purchase invoice TT0307). She sells goods for 500 in cash. She sells goods for 1,200 on credit to Lee (sales invoice SLS 0049). She pays the amount due to Tirthankar, making use of a 2 per cent settlement discount. She purchases 2,500 of goods for resale from Suraya (purchase invoice S20011). She returns goods to Suraya and receives a credit note for 500 (SCN0120). She sells goods for 2,000 on credit to Nanda (sales invoice SLS 0050). She sells goods for 1,600 on credit to Minko (sales invoice SLS 0051). Lee pays 1,140, making use of the settlement discount Sophie offers. She sells goods for 300 in cash. She receives goods returned from Minko and sends a credit note for 100 (SOPCN0012). She pays the amount due to Suraya, making use of a 3 per cent settlement discount. She purchases 3,800 of goods for resale on credit from Tirthankar (purchase invoice TT0335). She returns goods to Tirthankar and receives a credit note for 200 (TTCN700). She sells goods for 3,000 on credit to Wolf (sales invoice SLS 0052). She sells goods for 1,400 on credit to Nanda (sales invoice SLS 0053). Nanda pays 2,000. Nanda pays 1,330, making use of the settlement discount Sophie offers. Wolf pays 2,850, making use of the settlement discount Sophie offers. Minko pays 1,425, making use of the settlement discount. Sophie complains that his payment was received after more than seven days but Minko refuses to pay the remaining 75. Sophie shrugs it off but decides not to sell to Minko again.
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Required (a) Record these transactions in the appropriate day books and other books of prime entry. (b) Record these transactions in the personal accounts in the receivables and payables ledgers.
Feedback
(a) Day books Sales day book (SDB) Date 3 Nov 7 Nov 8 Nov Invoice SLS 0049 SLS 0050 SLS 0051 Customer Lee Nanda Minko Wolf Nanda Description Invoice amount 1,200 2,000 1,600 3,000 1,400 9,200 Purchase day book (PDB) Date 1 Nov 5 Nov Supplier Tirthankar Suraya Description Invoice no. TT0307 Invoice no. S20011 Invoice no. TT0335 Invoice amount 2,300 2,500 3,800 8,600
15 Nov SLS 0052 16 Nov SLS 0053
13 Nov Tirthankar
Sales returns day book (SRDB) Date Credit note no. Customer Description Invoice amount 11 Nov SOPCN0012 Minko 100 100
Purchase returns day book (PRDB) Date 6 Nov Customer Suraya Description Credit note no. SCN0120 TTCN700 Invoice amount 500 200 700 14 Nov Tirthankar
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Cash book: receipts Date Narrative Total amount Receivables received 2 Nov 9 Nov Sales Lee, inv. SLS 0049 500 1,140 300 2,000 1,330 2,850 1,425 9,545 1 Dec Balance b/d 5,351 2,000 1,400 3,000 1,500 9,100 800 70 150 75 355 1,200 300 Cash sales 500 60 Discounts allowed
10 Nov Sales 17 Nov Nanda, inv. SLS 0050 18 Nov Nanda, inv. SLS 0053 19 Nov Wolf, inv. SLS 0052 20 Nov Minko, inv. SLS 0051
Cash book: payments Date Narrative Total amount paid 4 Nov Tirthankar, inv. TT0307 2,254 1,940 4,194 5,351 9,545 (b) Personal accounts Receivables ledger: Lee 3 Nov (SDB) inv. SLS 0049 1,200 9 Nov 9 Nov (CB) inv. SLS 0049 (CB) Discounts allowed 1,140 60 Payables 2,300 2,000 4,300 0 Other Discounts received 46 60 106
12 Nov Suraya, inv. S20011 Total payments 30 Nov Balance c/d (9,545 4,194)
Receivables ledger: Nanda 7 Nov (SDB) inv. SLS 0050 2,000 1,400 17 Nov (CB) inv. SLS 0050 18 Nov (CB) inv. SLS 0053 18 Nov (CB) Discounts allowed Receivables ledger: Minko 8 Nov (SDB) inv. SLS 0051 1,600 11 Nov (SRDB) SOPCN0012 Sales returns 20 Nov (CB) inv. SLS 0051 20 Nov (CB) Discounts allowed 100 2,000 1,330 70
16 Nov (SDB) inv. SLS 0053
1,425 75
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Receivables ledger: Wolf 15 Nov (SDB) inv. SLS 0052 3,000 19 Nov (CB) inv. SLS 0052 19 Nov (CB) Discounts allowed Payables ledger: Tirthankar 4 Nov 4 Nov (CB) inv. TT0307 (CB) Discounts received 2,254 46 200 1 Nov (PDB) inv. TT0307 13 Nov (PDB) inv. TT0335 2,300 3,800 2,850 150
14 Nov (PRDB) TTCN700 Purchase returns
Payables ledger: Suraya 6 Nov (PRDB) SCN0120 Purchase returns 500 1,940 60 5 Nov (PDB) inv. S20011 2,500
12 Nov (CB) inv. S20011 12 Nov (CB) Discounts received
3.6 Analysing the day books and posting the totals to the nominal ledger
3.6.1 The journal (JNL)
The journal is used in manual accounting systems to record the following types of transactions and events. 1 The journal is a book of prime entry for transactions when other books of prime entry are not suitable for opening a new account. In other words, it is the book of prime entry for transactions or events that are not recorded in the sales, purchases, sales returns and purchases returns day books or the cash book or the petty cash book. It is therefore the book of prime entry for transactions that do not occur very often. Such transactions include: l opening entries, such as establishing the equity capital and assets and liabilities at the start of the business
l
the purchase or sale of xed assets on credit.
2 The journal is also used to record entries involving the transfer of amounts from one general ledger account to another. Examples include: l the correction of errors
l l
end of period adjustments

the depreciation of xed assets.
3 The journal is also used as a memorandum in which to record the totals of the day books and cash book for the purpose of posting the double entry to the appropriate nominal ledger accounts. In larger businesses the person in charge of recording transactions in the books of prime entry will not be the same as the person in charge of
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the nominal ledger. The person in charge of the nominal ledger will post the data via the journal to the nominal ledger accounts. The roles of the journal in the accounting information system are: l to reduce the risk of fraud because it reduces the possibility that unauthorised transactions will be entered into the accounting records
l
to keep the records of and facilitate the auditing of non-routine transactions to explain the reasons for making changes or adjustments to ledger accounts.
The format of a journal entry is: Date: Account to be debited Account to be credited Narrative to explain the transaction Debit XX XX Credit
Example 1: Opening entry On 25 November 20X1 Kim Ingles started her business and put 10,000 in a business bank account.
Date: 25 November 20X1 Bank Capital Kim Ingles Opening capital introduced Debit 10,000 10,000 Credit
Example 2: Opening entry On 21 December 20X1 Paul Appleton started his business with 7,000 in the bank, 3,000 stock of goods for sale, and machinery with a cost of 2,500.
Date: 21 December 20X1 Bank Inventory Machinery Capital Paul Appleton Total 12,500 Assets and liabilities introduced at the start of business Debit 7,000 3,000 2,500 12,500 12,500 Credit
Note that the debit entry always comes rst. Journal entries such as the two examples above show the double entry necessary for posting these transactions to the nominal ledger accounts.
3.6.2
Sales day book (SDB)
In Session 2 you learned about the sales day book and the analysed sales day book. Every day (or every week or month, depending on the volume of transactions) the totals should be posted to the receivables control account in the nominal ledger. Below is the sales day book from Session 2.
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Sales day book Date 28 May 28 May 28 May Invoice 0203 0204 0205 Customer Alpha Ltd Beta Ltd Gamma Ltd Description Shampoo Toothpaste Shampoo Invoice amount 2,500 1,200 1,500 5,200
The total of the sales day book for 28 May is posted to the receivables control account in the nominal ledger as follows.
Date: 28 May Receivables control account Sales revenue Debit 5,200 5,200 Credit
Posting the sales day book to the receivables control account and the sales revenue account
A total sales amount is not very informative if the business sells many different products. Therefore, many businesses use an analysed sales day book and sales accounts for their main product groups.
Analysed sales day book Date Invoice Customer Alpha Ltd Beta Ltd Gamma Ltd Invoice amount Shampoo Toothpaste 28 May 0203 28 May 0204 28 May 0205 2,500 1,200 1,500 5,200 1,500 4,000 1,200 2,500 1,200
The analysed sales are posted to the receivables control account in the nominal ledger as follows.
Date: 28 May Receivables control account Sales of shampoo Sales of toothpaste Total 5,200 Debit 5,200 4,000 1,200 5,200 Credit
Posting the sales day book to the receivables control account and the sales revenue accounts
The business uses a different sales account for each product it sells in its nominal ledger.
3.6.3
Purchase day book (PDB)
Similarly, the total of purchases for the day needs to be posted to the payables control account in the nominal ledger. Below is the purchase day book from Session 2.
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Purchase day book Date Supplier Description Woolly jumpers Cardigans Telephone Invoice amount 28 July Delta plc 28 July Epsilon plc 28 July Zeta Ltd 7,000 8,000 500 15,500
The total of the purchase day book for 28 July is posted to the payables control account in the nominal ledger as follows.
Date: 28 July Purchases Payables control account Debit 15,500 15,500 Credit
Posting the purchase day book to the payables control account and the purchases account
As you learned in Session 2, the analysed purchase day book would look like this:
Analysed purchase day book Date Supplier Description Invoice amount 28 July 28 July 28 July Delta plc Woolly jumpers Telephone 7,000 8,000 500 15,500 15,000 Purchases 7,000 8,000 500 500 Other expenses
Epsilon plc Cardigans Zeta Ltd
This is posted to the nominal ledger as follows.

Date: 28 July Purchases Other expenses Payables control account Total 15,500 Debit 15,000 500 15,500 15,500 Credit
Posting the purchase day book to the payables control account and the purchases and other expenses accounts
3.6.4
Sales returns day book (SRDB)
The sales returns day book from Session 2 looked like this.
Sales returns day book Date Credit Customer note no. CN 001 CN 002 CN 003 Alpha Ltd Beta Ltd Gamma Ltd Description Invoice amount 30 May 30 May 30 May Shampoo Toothpaste Shampoo 500 200 100 800
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The total sales returns amount is posted to the nominal ledger as follows.
Date: 30 May Sales returns Receivables control account Debit 800 800 Credit
Posting the sales returns day book to the receivables control account and the sales returns account
3.6.5
Purchase returns day book (PRDB)
The example of the purchase returns book in Session 2 looked like this:
Purchase returns day book Date June 1 Supplier Bubbles plc Description Shampoo Credit note no. CN 071 Invoice amount 500 500
The total of purchase returns for 1 June is posted to the nominal ledger as follows.
Date: 1 June Payables control account Purchase returns Debit 500 500 Credit
Posting the purchase returns day book to the payables control account and the purchase returns account
3.6.6
Cash book (CB)
Here is the example of the cash book from Session 2:

Cash book Receipts Date 1 July 1 July 1 July 1 July 1 July Narrative Balance b/d Cash sale banked Cheque from Alpha Ltd Bank transfer from Beta Ltd Cheque from Gamma Ltd Balance b/d 50 750 2,000 1,000 1,200 5,000 2 July 250 1 July Cheque to ABC Ltd 1 July Cheque to Soap plc 1 July Gas bill 1 July Petty cash 1 July Balance c/d Payments Amount Date Narrative Amount 800 3,200 650 100 250 5,000
Small businesses using a manual accounting system sometimes opt to use the cash book as both a book of prime entry and a nominal ledger account. In this case there is no need to post the cash book to a cash control account (usually called cash at bank account or bank account) in the nominal ledger, because it is part of the double-entry
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bookkeeping system. To enable a cash book to serve both as a book of prime entry and a nominal ledger account, it would need to include all the information a cash double-entry account would require. It would look like this:
Cash account (asset) Dr 1 July Balance b/d 1 July Sales revenue, cash sale 1 July Receivable: Alpha Ltd 1 July Receivable: Beta Ltd 1 July Receivable: Gamma Ltd 2 July Balance b/d 50 750 2,000 1,000 1,200 5,000 250 1 July Payable: ABC Ltd 1 July Payable: Soap plc 1 July Gas expense 1 July Petty cash 1 July Balance c/d 800 3,200 650 100 250 5,000 Cr
However, many businesses use a cash book only as a book of prime entry with a separate nominal ledger account called cash at bank (or bank) account. In this case the cash book needs to be posted to the cash at bank nominal ledger account. Businesses often prefer to use an analysed cash book format because it is more informative. Below is the example of the analysed cash receipts and payments book from Session 2.
Cash book: receipts Date Narrative Total received 50 750 2,000 1,000 1,200 5,000 2 July Balance b/d 250 Receivables Cash sales 750 2,000 1,000 1,200 4,200 750 0 Other
1 July 1 July 1 July 1 July 1 July
Balance b/d Cash sale banked Cheque from Alpha Ltd Bank transfer from Beta Ltd Cheque from Gamma Ltd
Cash book: payments Date Narrative 1 July 1 July 1 July 1 July 1 July Cheque to ABC Ltd Cheque to Soap plc Gas bill Petty cash Balance c/d (5,000 4,750)
Total paid 800 3,200 650 100 4,750 250 5,000
Payables 800 3,200
Petty cash
Other
650 4,000 100 100 650
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The journal entry to post the cash receipts to the nominal ledger bank account is as follows.
Date: 1 July Cash at bank account Receivables control account Sales Total 4,950 Debit 4,950 4,200 750 4,950 Credit
Posting the cash receipts to the cash at bank control account and other accounts, as specied
Note that the total amount received on 1 July is not 5,000 but 5,000 less the opening balance of 50, which is 4,950. The journal entry to post the cash payments for the day is as follows.
Date: 1 July Payables account Petty cash control account Gas expense Cash at bank Total 4,750 Debit 4,000 100 650 4,750 4,750 Credit
Posting the cash payments to the cash at bank control account and other accounts, as specied
In this case the cash at bank account looks like this after posting the cash book:
Cash at bank account 1 July Balance b/d 50 1 July Total payments: Payables control account, petty cash control account, gas expense 4,950 1 July Balance c/d 4,750
1 July Total receivables: Receivables control account and sales account 2 July Balance b/d
250
5,000 250
5,000
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3.6.7
Petty cash book (PCB)
Below is the example of the analysed petty cash book from Session 2.
Petty cash book Receipts Date 500 2 Jan 3 Jan Cash Postage 100 50 30 70 20 80 350 31 Jan Balance c/d 500 150 500 100 90 80 70 20 80 80 100 50 30 Narrative Payments Total Postage Stationery Travel Other
10 Jan Taxi fare 12 Jan Taxi fare 17 Jan Files 20 Jan Notepads 25 Jan Sandwiches
Assume that on 2 January the business started with a cash oat of 500. The payment from the business bank account to petty cash is recorded as follows.
Date: 2 January Petty cash control account Cash at bank control account Posting payment from bank account into the petty cash oat Debit 500 500 Credit
On 31 January the total payments in the petty cash book are posted to nominal ledger accounts as follows.
Date: 31 January Postage expense Stationery expense Travel expense Other expenses Petty cash control account Total 350 Debit 100 90 80 80 350 350 Credit
Posting the petty cash control account to the relevant expense accounts, as specied
Under the imprest system the petty cash oat needs to be replenished to 500 again. Hence, at 31 January there needs to be a payment of 350 from the bank account into the petty cash oat. The double entry for topping up the petty cash account is as follows.
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Date: 31 January Petty cash control account Cash at bank control account
Debit 350
Credit 350
Posting payment from bank account into the petty cash oat
The petty cash book for January would then look like this.
Petty cash book Receipts Date 500 2 Jan 3 Jan Bank Postage 100 50 30 70 20 80 350 350 31 Jan Bank 31 Jan Bal c/d 850 500 1 Feb Bal b/d 500 850 100 90 80 70 20 80 80 100 50 30 Narrative Payments Total Postage Stationery Travel Other
10 Jan Taxi fare 12 Jan Taxi fare 17 Jan Files 20 Jan Notepads 25 Jan Sandwiches
If the business were to prepare a petty cash control account, it would look like this.
Petty cash control account 2 Jan 31 Jan 1 Feb Bank Bank Balance b/d 500 350 850 500 31 Jan 31 Jan Total payments Balance c/d 350 500 850
Activity 3.9
Tom: Posting to nominal ledger accounts
Below are the cash receipts and payments for Tom OMalley from Activity 2.5.
Cash book: receipts Date Narrative Amount received 31 Oct Balance b/d 31 Oct Cash sales banked 31 Oct Cheque from Nelly Smith 31 Oct Cheque from Maurice Baker 1 Nov Balance b/d 1,100 565 950 100 2,715 1,715 1,000 100 1,100 565 50 565 50 Receivables Cash sales Discount allowed
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Cash book: payments Date Narrative Amount paid 31 Oct Cheque to Robin Visser 31 Oct Payment to Claudia Cannon 31 Oct Telephone by direct debit 31 Oct Gas bill by direct debit Total payments 31 Oct Balance c/d (2,715 - 1,000) 495 300 130 75 1,000 1,715 2,715 Required 800 Payables 500 300 130 75 205 5 Other Discount received 5
Write up the journal entries for posting Tom OMalleys cash receipts and payments to the nominal ledger accounts.
Feedback
Date: 31 October Cash at bank control account (total cash receipts) Discounts allowed Receivables control account Sales 1,665 Posting cash receipts to the cash at bank control account (Note that total receipts 1,615 = 1,100 - 50 + 565) Debit 1,615 50 1,100 565 1,665 Credit
Date: 31 October Payables control account Other expenses Cash at bank account (total cash payments) Discounts received Total
Debit 800 205
Credit
1,000 5 1,005 1,005
Posting cash payments to the cash at bank control account (Note that total payments 1,000 = 800 - 5 + 205)
Activity 3.10
Sophie: Posting to nominal ledger accounts
Below are the day books in which the transactions of Activity 3.8 (Sophie) have been recorded.
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Sales day book Date 3 Nov 7 Nov 8 Nov 15 Nov 16 Nov Invoice SLS 0049 SLS 0050 SLS 0051 SLS 0052 SLS 0053 Customer Lee Nanda Minko Wolf Nanda Description Invoice amount 1,200 2,000 1,600 3,000 1,400 9,200 Purchase day book Date 1 Nov 5 Nov Supplier Tirthankar Suraya Description Invoice no. TT0307 Invoice no. S20011 Invoice no. TT0335 Invoice amount 2,300 2,500 3,800 8,600 Sales returns day book Date Credit note no. SOPCN0012 Customer Description Invoice amount 11 Nov Minko 100 100
13 Nov Tirthankar
Purchase returns day book Date 6 Nov Customer Suraya Description Credit note no. SCN0120 TTCN700 Invoice amount 500 200 700 14 Nov Tirthankar
Cash book: receipts Date Narrative Total amount Receivables received 2 Nov 9 Nov Sales Lee, inv. SLS 0049 500 1,140 300 2,000 1,330 2,850 1,425 9,545 1 Dec Balance b/d 5,351 2,000 1,400 3,000 1,500 9,100 800 70 150 75 355 1,200 300 Cash sales 500 60 Discounts allowed
10 Nov Sales 17 Nov Nanda, inv. SLS 0050 18 Nov Nanda, inv. SLS 0053 19 Nov Wolf, inv. SLS 0052 20 Nov Minko, inv. SLS 0051
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Cash book: payments Date Narrative Total amount paid 4 Nov Tirthankar, inv. TT0307 2,254 1,940 4,194 5,351 9,545 Payables 2,300 2,000 4,300 0 Other Discounts received 46 60 106
12 Nov Suraya, inv. S20011 Total payments 30 Nov Balance c/d (9,545 4,194)
Required
Analyse the day books, write down the journal entries to post the amounts to the appropriate general ledger accounts, and show the nominal ledger accounts.
Feedback
Date: 30 November Receivables control account Sales Debit 9,200 9,200 Credit
Posting the sales day book to the receivables control account and the sales account
Date: 30 November Purchases Payables control account
Debit 8,600
Credit 8,600
Posting the purchases day book to the purchases account and the payables control account
Date: 30 November Sales returns Receivables control account
Debit 100
Credit 100
Posting the sales returns day book to the sales returns account and the receivables control account
Date: 30 November Payables control account Purchases returns
Debit 700
Credit 700
Posting the purchases returns day book to the payables control account and the purchases returns account
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Date: 30 November Cash at bank (total cash receipts) Discounts allowed Receivables control account (cash received 8,745 + discounts allowed 355) Sales Total
Debit 9,545 355
Credit
9,100 800 9,900 9,900
Posting cash receipts to the cash at bank account and other accounts as specied (Total receipts 9,545 = 9,100 355 + 800) Date: 30 November Payables control account Cash at bank (total cash paid) Discounts received Total 4,300 Debit 4,300 4,194 106 4,300 Credit
Posting cash payments to the cash at bank account and other accounts as specied (Total payments 4,194 = 4,300 106) Sales account 30 Nov Balance c/d 10,000 30 Nov Receivables control (SDB) 30 Nov Bank (CB) 10,000 1 Dec Balance b/d 9,200 800 10,000 10,000
Purchases account 30 Nov Payables control (PDB) 1 Dec Balance b/d 8,600 8,600 8,600 Discounts allowed account 30 Nov Receivables control (CB) 1 Dec Balance b/d 355 355 355 Discounts received account 30 Nov Balance c/d 106 106 1 Dec Balance b/d 30 Nov Payables control (CB) 106 106 106 30 Nov Balance c/d 355 355 30 Nov Balance c/d 8,600 8,600
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Sales returns account 30 Nov Receivables control account (SRDB) 1 Dec Balance b/d 100 100 100 30 Nov Balance c/d 100 100
Purchase returns account 30 Nov Balance c/d 700 700 1 Dec Balance b/d 30 Nov Payables control (PRDB) 700 700 700
Receivables control account 30 Nov Sales (SDB) 9,200 30 Nov Sales returns (SRDB) 30 Nov Cash at bank (CB) 8,745 + Discounts allowed (CB) 355 9,200 (Note that 8,745 = total cash received 9,545 cash sales 800) Payables control account 30 Nov Purchase returns (PRDB) 30 Nov Cash at bank 4,194 (CB) + Discounts received 106 (CB) 30 Nov Balance c/d 700 4,300 30 Nov Purchases (PDB) 8,600 100 9,100
9,200
3,600 8,600 1 Dec Balance b/d 8,600 3,600
Cash at bank account 30 Nov Total cash receipts: Receivables control (CB) Sales (CB) 9,545 30 Nov Total cash payments: 4,194 Payables control (CB) 30 Nov Balance c/d 9,545 1 Dec Balance b/d 5,351 5,351 9,545
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Summary
In this session you have learned about the entity concept, the duality concept and the accounting equation as the three ideas that form the basis of the double-entry bookkeeping system. Furthermore, it has explained debits and credits and the rules of double entry in relation to asset, liability, revenue and expense accounts, and why prots increase owners equity (or equity capital). Thirdly, it has introduced recording individual sales and purchases transactions in personal accounts in the receivables and payables ledgers. Finally, it has explained the double entry for posting totals in the day books to the appropriate ledger accounts, including the payables and receivables control accounts. In Session 4 you will learn how to balance ledger accounts and collect the balances into an unadjusted trial balance, and what the trial balance is used for in manual accounting systems. Before moving on to Session 4, the following four activities will enable you to check whether you have fully understood the topics discussed in Session 3. Activity 3.11
Valerie: The effect of cash transactions on nominal ledger accounts
The following transactions took place in Valeries business. Valerie uses a cash book that is also a nominal ledger account. All cash sales are banked on the same day. Transaction 1 She sets up a business as a sole trader by introducing 100,000 into a business bank account. Transaction 2 Transaction 3 Transaction 4 Transaction 5 Transaction 6 Transaction 7 Transaction 8 She purchases property for 50,000 paid in cash. She purchases goods for resale costing 3,000, paid in cash. She sells goods for 5,000 in cash. She pays electricity bill 80 in cash. She purchases goods costing 7,000 in cash. She sells goods for 8,000 in cash. She pays 500 wages to an employee in cash.
Transaction 9 She pays telephone bill 200 in cash. Transaction 10 She sells goods for 2,000 in cash.
Required
Enter the above transactions in the appropriate nominal ledger accounts.

Capital
Property
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Purchases
Sales revenue
Electricity expense
Wages expense
Telephone expense
Cash account
Feedback
Capital 1 Cash 100,000
Property 2 Cash 50,000
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Purchases 3 6 Cash Cash 3,000 7,000
Sales revenue 4 7 10 Cash Cash Cash 5,000 8,000 2,000
Electricity expense 5 Cash 80
Wages expense 8 Cash 500
Telephone expense 9 Cash 200
Cash account 1 4 7 10 Capital Sales Sales Sales 100,000 5,000 8,000 2,000 2 3 5 6 8 9 Property Purchases Electricity expense Purchases Wages expense Telephone expense 50,000 3,000 80 7,000 500 200
Activity 3.12
Thomas: The effect of credit transactions on nominal ledger accounts
In his rst month of trading Thomas engaged in 14 transactions. Thomas has only one credit supplier and one credit customer. He uses a cash book that doubles as the nominal ledger cash account. Transaction 1 Transaction 2 Transaction 3 Transaction 4 Transaction 5 Transaction 6 He sets up a business as a sole trader by introducing 500,000 into a business bank account. He purchases property for 100,000, paid by cheque. He purchases goods for resale costing 200,000 on credit. He sells goods for 45,000 on credit. He pays electricity bill, 200 by direct debit. He purchases goods costing 70,000 on credit.
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Transaction 7 Transaction 8 Transaction 9
He sells goods for 155,000 on credit. He receives payment of 45,000 in respect of goods sold (in Transaction 4 above). He pays his supplier 100,000.
Transaction 10 He sells goods for 2,000 in cash. Transaction 11 He receives payment of 100,000 from his customer. Transaction 12 He takes out a bank loan of 15,000. Transaction 13 He pays wages of 1,500. Transaction 14 He withdraws 500 in cash for own use.
Required
Enter the above transactions into the appropriate nominal ledger accounts.
Capital
Property
Purchases
Sales revenue
Payables
Receivables
100
Electricity expense
Wage expense
Bank loan
Drawings
Cash
Feedback
Purchases 3 6 Payables Payables 200,000 70,000
Sales revenue 4 7 10 Receivables Receivables Cash 45,000 155,000 2,000
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Payables 9 Cash 100,000 3 6 Purchases Purchases 200,000 70,000
Receivables 4 7 Sales Sales 45,000 155,000 8 11 Cash Cash 45,000 100,000
Wage expense 13 Cash 1,500
Bank loan 12 Cash 15,000
Drawings 14 Cash 500
Cash 1 8 10 11 12 Capital Receivables Sales Receivables Bank loan 500,000 45,000 2,000 100,000 15,000 2 5 9 13 14 Property Electricity Payables Wage expense Drawings 100,000 200 100,000 1,500 500
Activity 3.13
Yannick: Cash and credit transactions
Here are some transactions in respect of a new business started by Yannick on 1 June. 1 June 2 June 3 June 4 June 5 June He sets up a business as a sole trader by introducing 200,000 into a business bank account. He purchases a delivery van for 7,000, paid in cash. He pays rent for a shop, 1,200 in cash. He purchases goods for resale costing 40,000 on credit from supplier Bert Nichols (invoice no. BN00123). He sells goods for 25,000 on credit to customer Jay Kodwani (invoice no. SL0897).
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6 June He pays energy bill, 160 in cash. 7 June He sends out credit note to customer Jay Kodwani for goods returned for 800 (CN0122). 8 June He purchases goods costing 30,000 on credit from supplier Judy Richards (invoice no. JR3347). 9 June He sells goods for 55,000 on credit to customer Amy Vandenberg (invoice no. SL0898). 10 June He receives payment of 24,200 from customer Jay Kodwani re. invoice no. SL0897. 11 June He pays supplier Bert Nichols 39,000, making use of the cash discount for swift payment. 12 June He sells goods for 2,000 in cash. 13 June He receives payment of 53,000 from customer Amy Vandenberg, allowing 2,000 discount for quick payment. 14 June He purchases goods costing 35,000 from supplier Bert Nichols on credit (invoice no. BN00227). 15 June He sells goods for 17,000 to customer Jay Kodwani on credit (invoice no. SL0899). 16 June He sells goods to customer Amy Vandenberg for 12,000 on credit (invoice no. SL0900).
Required
(a) Enter the following transactions into the cash book and other appropriate day books as well as the receivables and payables ledgers. (b) Write down the double entries to post the transactions to the appropriate general ledger accounts including the cash at bank, receivables and payables control accounts. (c) Finally, write up the nominal ledger accounts. (a)
Cash book: receipts Date Narrative Total Receivables Other Discounts allowed
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Cash book: payments Date Narrative Total Payables Other Discounts received
Payables ledger: Bert Nichols
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Payables ledger: Judy Richards
Receivables ledger: Jay Kodwani
Receivables ledger: Amy Vandenberg
(b)
Posting the cash book and the day books Date: Debit Credit
Posting cash receipts
Date:
Debit
Credit
Posting cash payments
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Date:
Debit
Credit
Posting the sales day book
Date:
Debit
Credit
Posting the purchase day book
Date:
Debit
Credit
Posting the sales returns day book
(c)
The nominal ledger accounts, after posting Capital account
Van account
Payables control account
Receivables control account
Sales account
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Purchases account
Sales returns account
Discounts allowed account
Discounts received account
Rent expense account
Energy expense account
Feedback
(a) Cash book: receipts Date Narrative Total 1 June Capital 200,000 24,200 2,000 53,000 55,000 24,200 2,000 2,000 10 June Customer Jay Kodwani SL0897 12 June Sales 13 June Customer Amy Vandenberg SL0898 Receivables Other 200,000 Discounts allowed
279,200 1 July Balance b/d 231,840
79,200
202,000
2,000
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Cash book: payments Date Narrative Total 2 June 3 June 6 June Van Rent Energy bill 7,000 1,200 160 39,000 47,360 40,000 40,000 8,360 Payables Other 7,000 1,200 160 1,000 1,000 Discounts received
11 June Supplier Bert Nichols BN00123 Total payments
30 June Balance c/d 231,840 (279,200 47,360) 279,200
Sales day book Date 5 June 9 June 15 June 16 June Invoice SL0897 SL0898 SL0899 SL0900 Customer Jay Kodwani Amy Vandenberg Jay Kodwani Amy Vandenberg Description Invoice amount 25,000 55,000 17,000 12,000 109,000
Purchase day book Date 4 June 8 June Supplier Bert Nichols Judy Richards Description BN00123 JR3347 BN00227 Invoice amount 40,000 30,000 35,000 105,000
14 June Bert Nichols
Sales returns day book Date Credit note no. CN0122 Customer Description Invoice amount 7 June Jay Kodwani 800 800 Payables ledger: Bert Nichols 11 June Cash 11 June Discount received 30 June Balance c/d 39,000 1,000 35,000 75,000 1 July Balance b/d 75,000 35,000 4 June Purchases (PDB) Inv. BN00123 40,000 35,000
14 June Purchases (PDB) Inv. BN00227
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Payables ledger: Judy Richards 8 June Purchases (PDB) Inv. JR3347 30,000
Receivables ledger: Jay Kodwani 5 June Sales (SDB) Inv. SL0897 25,000 17,000 7 June (SRDB) CN0122 800 24,200 17,000 42,000
15 June Sales (SDB) Inv. SL0899
10 June Cash 30 June Balance c/d
42,000 1 July Balance b/d 17,000
Receivables ledger: Amy Vandenberg 9 June Sales (SDB) Inv. SL0898 55,000 12,000 13 June Cash 13 June Discount allowed 30 June Balance c/d 67,000 1 July (b) Posting the cash book and the day books Date: 30 June Cash at bank (total cash receipts) Discounts allowed Receivables control account Sales Capital Total Posting cash receipts (Total receipts 279,200 = 200,000 + (79,200 2,000 discounts) + 2,000 cash sales) Date: 30 June Payables control account Van Rent expense Energy expense Cash at bank (total cash paid) Discounts received Total Posting cash payments (Total payments 47,360 = (40,000 1,000) + 7,000 + 1,200 + 160) 48,360 Debit 40,000 7,000 1,200 160 47,360 1,000 48,360 Credit 281,200 Debit 279,200 2,000 79,200 2,000 200,000 281,200 Credit Balance b/d 12,000 53,000 2,000 12,000 67,000
16 June Sales (SDB) Inv. SL0900
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Date: 30 June Receivables control account Sales Posting the sales day book
Debit 109,000
Credit 109,000
Date: 30 June Purchases Payables control account Posting the purchase day book
Debit 105,000
Credit 105,000
Date: 30 June Sales returns Receivables control account Posting the sales returns day book (c) The nominal ledger accounts, after posting Capital account
Debit 800
Credit 800
30 June Cash at bank 200,000
Van account 30 June Cash at bank 7,000
Payables control account 30 June 30 June Cash at bank Discounts received 39,000 1,000 30 June Purchases 105,000
Receivables control account 30 June Sales 109,000 30 June Cash at bank 30 June Sales returns 30 June Discounts allowed 77,200 800 2,000
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Sales account 30 June Receivables control a/c 30 June Cash at bank 109,000 2,000
Purchases account 30 June Payables control a/c 105,000
Sales returns account 30 June Receivables control a/c 800
Discounts allowed account 30 June Receivables control a/c 2,000
Discounts received account 30 June Payables control a/c Rent expense account 30 June Cash at bank 1,200 Energy expense account 30 June Cash at bank 160 Cash at bank account 30 June 279,200 Total cash received: Capital, receivables control, sales 30 June Total cash paid: Van, rent, energy expense, payables control 47,360 1,000
Activity 3.14
Normal balances
Below is a table with account titles and account types for a sole trader. For each of the accounts in the table indicate whether it is an expense, revenue, asset, liability or capital account, and indicate whether its normal account balance is a debit or a credit balance.
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Account Buildings Furniture and xtures Stationery Drawings Sales revenue Wages and salaries Bank Advertising Payables Interest received on bank balance Inventory Rent Sales returns Discounts received Receivables Discounts allowed Prots
Expense
Revenue
Asset
Liability
Capital
Feedback
Account Buildings Furniture and xtures Stationery Drawings Sales revenue Wages and salaries Bank Advertising Payables Interest received on bank balance Inventory Rent Sales returns Discounts received Receivables Discounts allowed Prots DR CR DR DR CR DR CR DR DR CR DR DR CR DR DR Expense Revenue Asset DR DR Liability Capital
Session 4 Balancing off ledger accounts
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SESSION
4 0Balancing off ledger accounts

Introduction
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balance off ledger accounts prepare an unadjusted trial balance explain the purpose of the unadjusted trial balance explain which errors are not revealed by the unadjusted trial balance.
In Session 3 you learned how to post the totals in the day books to the appropriate nominal ledger accounts using double-entry bookkeeping. In Session 4 you will learn how to balance off nominal ledger accounts, collect the balances and extract an unadjusted trial balance. This is Step 3 in the accounting cycle. As a result of recording transactions using double-entry bookkeeping, total debits should equal total credits. Therefore, an unadjusted trial balance can be used to test the accuracy of accounting records, although it will not disclose certain types of errors.
4.1 Introduction to the trial balance

4.1.1 What is an unadjusted trial balance?
An unadjusted trial balance is a list of all the balances in the nominal ledger accounts. It serves as a tool in manual double-entry bookkeeping to nd some types of mistakes in the double entries. If all the double entries have been carried out correctly, the total of the debit balances in the trial balance should equal the total of the credit balances. Furthermore, in both manual and computerised accounting systems, the unadjusted trial balance forms the starting point for the end of period adjustments that are necessary in order to prepare the nancial statements. The end of period adjustments will be discussed in Unit 4.
4.1.2 Errors that can be detected by the trial balance

If the total of the debit balances does not equal the total of the credit balances, it means one of three things: 1 one or more account balances have been copied down wrongly or omitted entirely 2 there is an error in the calculation of one or more account balances 3 there are one or more errors in the double entries recorded in the ledger accounts. Examples of errors:
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Transposition errors. When a number is transposed in error and entered or posted wrongly, for example, 35 as 53. Addition errors. When, in the trial balance itself or in a nominal ledger account, an addition error has been made.
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Posting errors. When one side of a transaction is posted to the wrong side of an account. Partial omission errors. When one side of a transaction is not posted. Unequal posting errors. When the debit side of a posting does not equal the credit side.
If such errors are discovered, it is necessary to go back to the original accounts and see what the cause is. Errors in the nominal ledger are corrected by making entries in the journal and posting these to the appropriate nominal ledger accounts. There are also six types of error that are not revealed by the trial balance. The detection and correction of such errors is discussed in detail in Unit 4. Note that in a computerised accounting system the above errors do not occur. The computer posts each double entry automatically, therefore transposition, posting, partial omission and unequal posting errors cannot occur. The computer will not accept single entries, or entries that do not balance. Naturally, addition errors do not occur in a computerised accounting system. Errors of original entry, however, are made by humans and still do occur.
4.2 How to balance and close off ledger accounts

In order to prepare an unadjusted trial balance at any given time, it is necessary to determine the balance on an account at that date. In a computerised accounting system this is done automatically each time an amount is posted. In a manual accounting system, bookkeepers and accountants do this by balancing the account. At the end of an accounting period this is called closing off the accounts. Balancing an account is done as follows. Example 1
Bank Capital Sales revenue Receivables control 20,000 10,000 7,000 Van Purchases Rent expense Telephone expense Drawings Payables control 5,000 8,000 500 200 800 2,000
Step 1: Total both the debit and credit columns to nd the larger total. In the example above, you will nd that the larger total is 37,000 on the debit side of the T-account. In other words, total cash receipts equal 37,000. Thus, total payments of 16,500 on the credit side of the T-account is the smaller total, as shown below.
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Bank Capital Sales revenue Receivables control 20,000 10,000 7,000 Van Purchases Rent expense Telephone expense Drawings Payables control 37,000 5,000 8,000 500 200 800 2,000 16,500
Step 2: Find the difference between the two totals and insert this gure on the side of the smaller total and label it balance carried down (Balance c/d). Balance carried down indicates the balance at the end of the period carried down to the next period. In the example below it is necessary to carry down a credit balance of 37,000 16,500 = 20,500 to make the totals on both sides equal.
Bank Capital Sales revenue Receivables control 20,000 10,000 7,000 Van Purchases Rent expense Telephone expense Drawings Payables control Balance c/d 37,000 5,000 8,000 500 200 800 2,000 20,500 37,000
Step 3: Enter the balance brought down (Balance b/d) from the previous period, on the opposite side below the totals. In the example below this means that in the new period the opening balance in the bank account is 20,500.
Bank Capital Sales revenue Receivables control 20,000 10,000 7,000 Van Purchases Rent expense Telephone expense Drawings Payables control Balance c/d 37,000 Balance b/d 20,500 5,000 8,000 500 200 800 2,000 20,500 37,000
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Example 2 If the totals on both sides are equal there is no balance, so all one needs to do is rule off the account, as shown below.
Payables control Bank 10,000 Purchases 10,000
Example 3 As this is a sales revenue account which will appear in the income statement, the account needs to be totalled, as shown below, so that total sales revenue can be collected in the unadjusted trial balance.
Sales revenue Bank Receivables control 50,000 12,000 62,000
However, if it had been a balance sheet account, it would have needed to be balanced so that the balance could be carried down to the next period. For example:
Motor vehicles at cost Bank Bank 50,000 12,000 62,000 Balance b/d 62,000 62,000 Balance c/d 62,000
4.3 How to prepare an unadjusted trial balance

We will use the ledger accounts of Natasha in Sections 3.4.1 and 3.4.2 to illustrate how to prepare an unadjusted trial balance. Assume that the accounts are balanced on 31 May. Natashas balanced accounts are as follows.
Capital 1 Van 2 Bank 4,000 Sales 8 10 Bank Receivables 2,000 3,500 5,500 Bank 10,000
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Sales returns 12 Receivables 400 Purchases 3 9 Bank Payables 1,600 3,000 4,600 Purchases returns 11 Receivables 10 Sales revenue 3,500 12 13 13 3,500 Payables 11 14 14 Purchases returns Bank Discounts received 300 2,619 81 3,000 Bank 1 8 13 Capital Sales revenue Receivables 10,000 2,000 3,038 2 3 4 5 6 7 14 31 May 15,038 1 June Balance b/d 5,399 Fixtures 6 Bank 700 Drawings 7 Bank 70 Date Van Purchases Rent expense Advertising Fixtures Drawings Payables Balance c/d 4,000 1,600 500 150 700 70 2,619 5,399 15,038 3,000 9 Purchases 3,000 Sales returns Bank Discounts allowed 400 3,038 62 3,500 Payables 300
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Advertising 5 Bank 150 Rent 4 Bank 500 Discounts allowed 13 Receivables 62 Discounts received 14 Payables 81
The next step is to collect the balances of the ledger accounts and produce the following trial balance.
Trial balance for Natasha as at 31 May Debit Capital Van Sales revenue Sales returns Purchases Purchases returns Receivables Payables Bank Fixtures Drawings Advertising expense Rent expense Discounts allowed Discounts received Total 15,881 5,399 700 70 150 500 62 81 15,881 0 0 400 4,600 300 4,000 5,500 Credit 10,000
Total debits equals total credits in Natashas trial balance. This indicates that we have not made any of the ve errors listed in Section 4.1.2.
Summary
In this session you have learned how to balance off ledger accounts and collect the balances in order to prepare an unadjusted trial balance. You have also learned that the unadjusted trial balance is a tool in identifying accounting errors that show up when the trial balance does not balance.
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In Unit 4 you will learn how to extend the unadjusted trial balance in order to perform the end of period adjustments and prepare the nancial statements. For now, the following three activities give you the opportunity to practise what you have learned in Session 4. Activity 4.1
Valerie
Below are Valeries ledger accounts in answer to Activity 3.11. Suppose that the date is 31 May.
Required
Balance off the accounts, collect the balances and prepare an unadjusted trial balance.
Purchases 3 6 Cash Cash 3,000 7,000
Sales revenue 4 7 10 Cash Cash Cash 5,000 8,000 2,000
Wages expense 8 Cash 500
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Telephone expense 9 Cash 200
Cash at bank 1 4 7 10 Capital Sales Sales Sales 100,000 5,000 8,000 2,000 2 3 5 6 8 9 Property Purchases Electricity expense Purchases Wages expense Telephone expense 50,000 3,000 80 7,000 500 200
Trial balance as at 31 May Debit Credit
Feedback
Purchases 3 6 1 June Cash Cash Balance b/d 3,000 7,000 10,000 10,000 10,000 31 May Balance c/d 10,000
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Sales revenue 31 May Balance c/d 15,000 4 7 10 15,000 1 June Balance b/d Cash Cash Cash 5,000 8,000 2,000 15,000 15,000
Electricity expense 5 Cash 80 Wages expense 8 Cash 500 Telephone expense 9 Cash 200 Cash at bank 1 4 7 10 Capital Sales Sales Sales 100,000 5,000 8,000 2,000 2 3 5 6 8 9 31 May 115,000 1 June Balance b/d 54,220 Property Purchases Electricity expense Purchases Wages expense Telephone expense Balance c/d 50,000 3,000 80 7,000 500 200 54,220 115,000
The correct trial balance should be as follows. Trial balance as at 31 May Debit Capital Property Purchases Sales revenue Electricity expense Wages expense Telephone expense Cash Total 80 500 200 54,220 115,000 115,000 50,000 10,000 15,000 Credit 100,000
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Activity 4.2
Thomas
Below are Thomass ledger accounts in answer to Activity 3.12. Suppose that the date is 30 April.
Required
Balance the accounts, collect the balances and prepare an unadjusted trial balance.
Purchases 3 6 Payables Payables 200,000 70,000
Sales 4 7 10 Receivables Receivables Cash 45,000 155,000 2,000
Payables 9 Cash 100,000 3 6 Purchases Purchases 200,000 70,000
Receivables 4 7 Sales Sales 45,000 155,000 8 11 Cash Cash 45,000 100,000
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Wage expense 13 Cash 1,500
Bank loan 12 Cash 15,000
Drawings 14 Cash 500
Cash 1 8 10 11 12 Capital Receivables Sales Receivables Bank loan 500,000 45,000 2,000 100,000 15,000 2 5 9 13 14 Property Electricity Payables Wage expense Drawings 100,000 200 100,000 1,500 500
Trial balance as at 30 April Debit Credit
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Feedback
Purchases 3 6 1 May Payables Payables Balance b/d 200,000 70,000 270,000 270,000 270,000 30 April Balance c/d 270,000
Sales 30 April Balance c/d 202,000 4 7 10 202,000 1 May Balance b/d Receivables Receivables Cash 45,000 155,000 2,000 202,000 202,000
Payables 9 30 April Cash Balance c/d 100,000 170,000 270,000 1 May Balance b/d 3 6 Purchases Purchases 200,000 70,000 270,000 170,000
Receivables 4 7 Sales Sales 45,000 155,000 200,000 1 May Balance b/d 55,000 8 11 30 April Cash Cash Balance c/d 45,000 100,000 55,000 200,000
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Wage expense 13 Cash 1,500 Bank loan 12 Drawings 14 Cash 500 Cash 1 8 10 11 12 Capital Receivables Sales Receivables Bank loan 500,000 45,000 2,000 100,000 15,000 662,000 1 May Balance b/d 459,800 2 5 9 13 14 30 April Property Electricity Payables Wage expense Drawings Balance c/d 100,000 200 100,000 1,500 500 459,800 662,000 Cash 15,000
The trial balance is as follows. Trial balance as at 30 April Debit Capital Property Purchases Sales revenue Payables Receivables Electricity expense Wages expense Bank loan Drawings Cash at bank Total 500 459,800 887,000 887,000 55,000 200 1,500 15,000 100,000 270,000 202,000 170,000 Credit 500,000
Activity 4.3
Yannick
Below are Yannicks ledger accounts in answer to Activity 3.13.

Required
Balance the nominal ledger accounts, collect the balances and prepare an unadjusted trial balance as at 30 June.
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Capital account 30 June Cash 200,000
Van account 30 June Cash 7,000
Payables control account 30 June Cash 30 June Discounts received 39,000 1,000 30 June Purchases 105,000
Receivables control account 30 June Sales 109,000 30 June Cash 30 June Sales returns 30 June Discounts allowed 77,200 800 2,000
Sales account 30 June Receivables control 30 June Cash 109,000 2,000
Purchases account 30 June Payables control 105,000
Sales returns account 30 June Receivables control 800
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Discounts allowed account 30 June Receivables control 2,000
Discounts received account 30 June Payables control 1,000
Rent expense account 30 June Cash 1,200
Energy expense account 30 June Cash 160
Cash at bank account 279,200 30 June Total cash paid: 30 June Total cash Van, rent, energy received: Capital, expense, receivables control, sales payables control 47,360
Trial balance as at 30 June Debit Credit
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Feedback
Capital account 30 June Cash Van account 30 June Cash 7,000 Payables control account 30 June Cash 30 June Discounts received 30 June Balance c/d 39,000 30 June Purchases 1,000 65,000 105,000 1 July Balance b/d 105,000 65,000 105,000 200,000
Receivables control account 30 June Sales 109,000 30 June Cash 30 June Sales returns 30 June Discounts allowed 30 June Balance c/d 109,000 1 July Balance b/d 29,000 Sales account 30 June Balance c/d 111,000 30 June Receivables control 30 June Cash 111,000 1 July Balance b/d 109,000 2,000 111,000 111,000 77,200 800 2,000 29,000 109,000
Purchases account 30 June Payables control 1 July Balance b/d 105,000 30 June Balance c/d 105,000 105,000 Sales returns account 30 June Receivables control 800 105,000 105,000
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Discounts allowed account 30 June Receivables control 2,000
Discounts received account 30 June Payables control 1,000
Rent expense account 30 June Cash 1,200
Energy expense account 30 June Cash 160
Cash at bank account 279,200 30 June Total cash received: Capital, receivables control, sales 279,200 1 July Balance b/d 231,840 30 June Total cash paid: Van, rent, energy expense, payables control 30 June Balance c/d 47,360
231,840 279,200
Trial balance as at 30 June Debit Capital Van Payables control Receivables control Sales Purchases Sales returns Discount allowed Discounts received Rent Energy Cash at bank Total 1,200 160 231,840 377,000 377,000 105,000 800 2,000 1,000 29,000 111,000 7,000 65,000 Credit 200,000
Session 5 Accounting systems and the impact of IT on nancial reporting and control
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SESSION
5 0Accounting systems and the impact of IT on nancial reporting and control

Introduction
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understand and explain the relationship between the day books, cash book, journal, subsidiary ledgers and nominal ledger in a manual accounting system understand and explain the structure and applications of a computerised accounting system evaluate the differences between manual and computerised accounting systems evaluate the benets of computerised accounting systems for the purpose of control over business transactions such as sales, purchases, payments, credit lines, capital expenditure and ofce administration explain the inputs, processes and outputs from the payables ledger system explain the inputs, processes and outputs from the receivables ledger system explain controls over cash receipts and payments understand and explain the advantages and disadvantages of manual and computerised accounting systems.
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In Session 5 you will learn about the structure of manual accounting books and compare them with the form and functions of integrated accounting software packages and the most commonly used modules that, when combined, constitute a computerised accounting system. In addition, this session discusses what an integrated accounting system looks like and how it enhances controls over cash, creditors, purchases and other nancial functions related to business administration.
5.1 Accounting information systems and sources of information

5.1.1 The structure of manual and computerised accounting information systems
So far Unit 2 has considered source data entered into the books of prime entry and the subsidiary ledgers, the totals of which are then summarised in the nominal ledger. This could be expressed visually as shown in Figure 8.
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Source data: invoices, credit notes, receipts, etc.
Books of prime entry: purchases day book, sales day book, purchases returns day book, sales returns day book, cash book, petty cash book
Individual transactions
Totals
Subsidiary ledgers: payables ledger, receivables ledger, inventory ledger, non-current assets register
Nominal ledger
Figure 8
The ow from source data to nominal ledger
In a computerised accounting system an accounting package usually consists of modules that correspond in part to the memorandum books and the nominal ledger, and in part to the separate functions that the main nancial business systems perform. For example, an accounting package can consist of the following modules:
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receivables ledger payables ledger cash book inventory register non-current assets register invoicing payroll report generator job costing module.
These modules are usually integrated with each other so that data entered into one module will automatically be transferred to the others. For example, the data entered into the invoicing module in order to authorise the despatch of an invoice to a customer automatically links to:
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the receivables ledger by posting the invoice to the customers personal account the inventory module by reducing the quantity and value of inventory in the records and recording the movement of inventory the nominal ledger by posting the sale to the sales account and the receivables account (no more need for a receivables control account) the report generator in order to include the sale in the sales analysis
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the job costing module where the cost of sales is recorded on the job cost le (job costing is part of management accounting and will be discussed in B292 Management accounting).
Figure 9 shows what the structure of a computerised accounting

system could look like.
Bank
Payables
External stakeholders
Receivables Financial statements Payroll General ledger Report generator: Spreadsheets Inventory Management information system
Non-current assets
Job costing
Figure 9 The structure of a computerised accounting system
Such an accounting system provides data and information to the management of a business (cost and management accounting) and also produces the nancial statements for the external stakeholders of the business (nancial accounting). The coloured areas are primarily the concern of nancial accounting. An example of the structure of a computerised accounting system is that of Sage Instant Accounts which, if you wish, you can familiarise yourself with using the Sage Instant Accounts Training CD-ROM that is supplied with this module. As you can see below, its main modules are: customers (receivables), suppliers (payables), nominal (general ledger), bank and nancials (trial balance, income statement and balance sheet).
Sage Instant Accounts Modules Customers Traditional Books of Account Sales Day Book Sales Returns Day Book Receivables Ledger Purchase Day Book Purchase Returns Day Book Payables Ledger Journal General Ledger Multipurpose Cash Book (i.e., containing all bank and cash accounts) Trial Balance Income Statement Balance Sheet
Suppliers
Nominal Bank
Financials
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5.2 The place of the accounting information system in a business organisation

5.2.1 The purposes of information in business and other organisations
Organisations require information for the following purposes: 1 Decision making. An organisation must make decisions regarding its mission and goals. To achieve these goals, the organisation needs to base strategies and operations on information in respect of perceived needs, opportunities and resources in order to make plans and implement these plans. 2 Planning. Planning requires information regarding available resources, time scales for implementation, and different scenarios and back-up plans in order to deal with the insecurity and risk of a business environment. 3 Controlling. The implementation of plans requires controls in order to produce feedback as a result of which plans can be adjusted. 4 Recording transactions. In order to know what the organisation is doing and how it is performing, it needs documentation and a record of all its transactions. In addition, particularly for companies there is a legal requirement to keep records. 5 Performance measurement. The information recorded by the organisation is then used to evaluate its performance. Based upon such an evaluation, the organisation will make new decisions about its mission and goals in order to adjust its planning.
5.2.2 Organisational structure and information in the business organisation

Business organisations are often made up of different functional areas. For example, most large businesses have different departments for sales and marketing, purchasing, nance, accounting, human resources and, depending on the type of business, manufacturing as shown in Figure 10. Even in small businesses one or more people are involved in making decisions, planning, controlling, recording transactions and measuring performance in each of these areas.
Sales and marketing
Purchasing
Finance
Accounting
Human resources
Figure 10
Different functional areas of a large business
The sales and marketing department deals with all aspects of selling, advertising and the administration in support of these areas. The purchasing department is in charge of purchasing goods for resale or raw materials for manufacture. The nance department could consist of a treasury function in charge of managing working capital, a nance function for nancial management, raising nancing and investor relations, and the accounting function. In other organisations the accounting department could be separate.
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The accounting function is in charge of recording transactions, sending out invoices, payment of suppliers, receipt of payment from customers, paying bills and salaries. The human resources function is responsible for hiring, dismissing and training staff, and for maintaining their general wellbeing. In large business organisations the decisions that need to be made regarding each of these functional areas are made at different levels. At the top, strategic decisions are made by senior managers. They require strategic plans, nancial reports, nancial, capital and product market analyses, and information about competitors. Often, tactical decisions are made at the level of middle management. At this level managers require historical and budget data in order to compare plans and budgets with actual outcomes. They will summarise the data, use variance analysis and other types of statistical analysis to produce reports for senior management. These topics are explained in detail in B292 Management accounting. Operational decisions are made at the level of operational management. At this level the managers are responsible for ensuring correct data entry and records of transactions based on source documents. They update les and generate reports for middle management. Accounting records business transactions, payments and receipts, and thus provides the data that can be transformed into the nancial information that supports decision making, planning, controlling and performance evaluation throughout the organisation. In addition, it forms the basis for the nancial reports that are presented to shareholders and prospective investors.
5.3 Accounting information systems and business transactions

5.3.1 Business transactions
The main business transactions that a business enterprise engages in on a recurring basis are:
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making sales to customers making purchases from suppliers purchasing non-current assets paying expenses so the business can operate
paying employees for their work.
5.3.2
Sales and purchases
Accounting information systems provide a tool in the business systems and procedures in order to ensure that relationships with customers and suppliers are managed effectively. Payments and collections of payments must be managed and not duplicated. Similarly, the despatch of goods, invoices, statements, etc., must be correct, accurate and dependable.
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In a small business such as a sole trader, all these functions have to be carried out by one person or a few people. In larger organisations there will usually be separate departments for each business function. There could, for example, be a sales and marketing department. This department would take care of relations with customers in terms of making the sales. The accounts department would then take care of the invoicing of the customer and recording the sales in the books. Similarly, in a larger business the making of purchases is the domain of the purchasing department when prompted by the person in charge that an item of inventory is running out. After an order is placed and the goods are received, the accounting department receives the invoice, checks whether or not the invoice is correct, and will arrange payment when due.
5.3.3
Non-current assets
Non-current assets are assets that are not intended for resale but are used in the business for the longer term. Such items support the operating capacity of the business and are in economic terms called capital assets. In accounting, the money spent on such assets is called capital expenditure. Examples include cars, transportation equipment, ofce furniture, machinery, computers, property and factories. The manager of the department that requires the purchase of non current assets will usually ll out a purchase requisition, which needs to be authorised by a person at a more senior management level. In general, one can say that the more expensive the asset, the more senior the manager who will need to authorise the purchase. Upon authorisation, the purchasing department will search for the best deal or the most appropriate supplier. When the purchases order has been placed, the details will be passed on to the accounting department where in due course the invoice will be paid and the accounting entries made. Corporate managers usually try to plan their purchases of non current assets on an annual basis. They start out with an annual asset purchases budget which is discussed at the most senior level, because such a potentially large budget involves major strategic decisions.
5.3.4
Overhead expenses
In addition to capital expenditure there is also revenue expenditure. Revenue expenditure is all the expenditure incurred by a business other than capital expenditure. Purchases, for example, are included in the calculation of the cost of goods sold and are therefore revenue expenditure. However, another type of revenue expenditure is overhead costs. These include the cost of rent and rates, telephone, energy, insurance, advertising, etc., that are incurred by the business as a whole but cannot be directly included in the cost of goods sold or produced by the business. Determining which expenditures can be attributed to the cost of manufacturing goods or producing services is the domain of cost and management accounting.
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Bills for such expenses are passed to the accounting department, which will check if the expense has indeed been incurred and will then process the expense for payment and record it in the accounts.
5.3.5
Payroll
Every business that hires employees must pay their salaries and wages on a monthly, weekly or daily basis. How to account for payroll is one of the topics discussed in Unit 3. In larger organisations there is usually a payroll department, otherwise the payroll clerk in the accounting department takes care of the calculations, paperwork, payment and recording. Salaries are often the largest expense in an organisation. The payroll system is therefore subject to strict controls, of which the rst is a separation of the human resources and accounting functions.
5.4 Accounting information systems and the nance function

5.4.1 The nance function
In order to nance its business operations, an enterprise must have a person or a department in charge of the nance function. The nance function is concerned with the following: 1 raising money in order to pay for investment in capital assets and sometimes also for working capital needs or even dividend payments 2 recording and controlling what happens to money, such as payroll and credit control 3 providing information to managers in order to facilitate planning, decision making and control of budgets, costs and the analysis of protability 4 reporting to stakeholders, such as shareholders, lenders and the tax authorities.
5.4.2
Raising funds
Businesses can raise money from different sources such as the following.
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Retained earnings. Instead of distributing prot to the owners of the business, the owners and management can decide to use the prot for new investment in capital assets or other improvements of the business intended to make the business more protable in the future. Bank borrowings. Small and large businesses can borrow money from banks on a short- or long-term basis. Money markets. Short-term nancial instruments such as bills of exchange (mainly used in international trade) and certicates of deposit can provide a source of liquidity. Capital markets. Public limited companies will raise equity and debt capital (as discussed in Unit 1) on primary capital markets by issuing long-term securities such as new shares (new listings), rights (existing companies issue additional shares) and loan
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capital (called debentures or bonds). These are then traded on secondary capital markets such as the Stock Exchange or the Alternative Investment Market.
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International money and capital markets. Securities and nancial instruments denominated in a currency other than that of the country where issued: eurobonds (for example, a bond denominated in US dollars but issued in Japan by a Japanese company) and eurocurrency (for example, a deposit with a Malaysian bank denominated in Australian dollars). Government sources. Examples include subsidies, grants and tax reliefs. Venture capital. Venture capitalists may invest in a business in return for a strong inuence in the management of the business and a share of the prots.
Small businesses will have their options limited to retained earnings, bank borrowings, government sources, partnerships and loans from relatives or friends. Listed companies often show a preference for using retained earnings in order to nance investment in new operating capacity.
5.4.3 Recording nancial transactions and nancial reporting to stakeholders

Companies are required to maintain adequate nancial records by the laws governing nancial accounting in a given jurisdiction. This information must be reported to the shareholders and, in the case of listed companies, must also be made public so that other stakeholders can access the information.
5.4.4 Financial information for management

Accounting information serves different types of managerial decisions. Financial and strategic management concern decisions regarding:
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investment (what to invest in, and what to invest in rst) nancing (how to pay for these investments) dividends operating decisions related to pricing and costs.
Treasury management plans and controls the sources and uses of funds in the business, including:
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working capital management, which is management of creditors (payables) and credit control, payment by debtors (receivables), stock (inventory) and arranging overdraft facilities repaying loans managing foreign currency dealings and exchange rate risk.
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Operations management relies on nancial information for the purposes of planning, decision making and control.
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Planning involves drawing up budgets which direct and allocate resources to departments or strategic purposes, and forecasting of anticipated future results.
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Proposed decisions are assessed using predictions based on models of expenditures and cash ows. Control involves comparing budgets and forecasts with actual outcomes in order to adjust plans and budgets for the future.
5.5 The inputs, outputs and controls of the main nancial business systems
5.5.1 Cash
Business payments are usually made by cheque, bank transfer, standing order or direct debit. Documentary evidence in the form of source documents such as cheques, cheque counterfoils, bank statements and invoices form the basis for the inputs for cash payments and receipts. The cash account must be reconciled with the business bank statement. The principles of bank reconciliation are the same in both manual and computerised accounting and will be discussed in Session 3 of Unit 4. Control over receipts Cash receipts must be banked promptly and the record of receipts must be complete. Loss of receipts must be prevented. This is usually done by the segregation of duties between the person banking the money and the person recording the transaction in the accounts. Control over payments Business and other organisations must control each and every payment very strictly in order to limit the scope for cheating and dishonesty. The controls are applied in three ways. First, documentary evidence must be obtained of the reason for the payment, such as an invoice. Second, the payment needs to be authorised by a manager at the appropriate level. Third, the authority to make the payment must be restricted to certain specied individuals. For example, the signature of the person authorised to make payments can be registered at the bank. In case of Internet banking, the password will only be known to the people with the authority to make the payments. Reconciliations are important in detecting errors or fraud. Petty cash must be reconciled when the cash oat is being replenished. Bank reconciliations must be carried out at least once a month.
5.5.2
The payables ledger system
Inputs to a computerised payables ledger system are those details that go into the purchases day book and purchases returns day book, such as the details recorded on invoices received and credit notes received. Other inputs are the details of payment as per the cash book and the corresponding source documents which serve as the basis for entries in the payables ledger.
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Outputs from a computerised payables ledger system are:

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purchases day book listings that provide an audit trail (information used by external auditors to verify the information in the accounts) an analysis of expenditure for the general ledger a list of the balances of all payables and a reconciliation between the balance brought forward, the transactions of the month and the balance carried forward copies of suppliers accounts details of payments to be made special reports for costing purposes, non-current asset records, comparisons with budgets, lists of dates by which suppliers need to be paid (aged creditors list).
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Controls over purchases Controls that relate to the ordering process must make sure orders are authorised so that only purchases necessary for the business are made, orders are placed with authorised suppliers, and at competitive prices. Goods received must be checked with respect to accuracy of the invoice, quality, quantity and condition of the goods by comparison with the purchase order, and whether the purchase has been authorised. The accounting function must make sure that the expenditure is authorised and has been incurred for goods that have been received. The expenditure must be recorded promptly and correctly in the day books, the nominal and purchases ledgers. Periodically, the purchases ledger control account must be reconciled to the total of the balances in the purchases ledger accounts.
5.5.3
The receivables ledger system
Inputs to the sales ledger system are those details that are recorded
in the sales day book and sales returns day book, such as the details
recorded on invoices and credit notes sent out. Other inputs are the
details of receipt of payment as per the cash book and the
corresponding source documents, which serve as the basis for entries
in the sales ledger.
Outputs from a computerised sales ledger system are:
sales day book listings that provide an audit trail (information used
by external auditors to verify the information in the accounts) invoices debtors statements list of debtors that need to pay their invoices (an aged receivables list) sales analysis reports list of customer details responses to customer enquiries output to other modules such as the inventory module and the nominal ledger module.
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Controls over sales With respect to order processing and granting of credit, goods and services must only be supplied to customers with good credit ratings. Credit limits are established by senior staff for each customer in accordance with his or her credit ratings after references or credit checks have been obtained. The despatch and invoicing of goods should be authorised after checking the sales order, examining the goods for despatch and recording goods outward. Customers should be required to sign for delivery. Sales invoices must be matched with despatch notes and sales orders. All sales that have been invoiced must be recorded in the day books, general and sales ledgers accurately and promptly. Credit notes should be recorded too. Potentially doubtful debts must be identied. Receivables statements should be prepared regularly, and cash receipts must be matched with invoices.
5.5.4
The payroll system
A payroll system computes salaries of employees before and after tax,

pensions and national insurance contributions. It produces payslips
for all the employees and a list of instructions for the businesss bank
to make the payments to the employees bank accounts.
Payroll les consist of an individual record for each employee,
including:
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personal details
salary (or wage in case of weekly pay)
details of deductions
holiday entitlement
other information, for example, overtime worked with authorisation.
Inputs to a monthly payroll system are automatic except in case of

overtime or bonuses. Inputs to a weekly payroll system are time
sheets, bonus calculations and overtime details.
Outputs from a payroll system are payslips, payroll (copy of the
payslips), payroll analysis, forms required for income tax purposes,
credit transfer forms or cheques, or BACS instructions for the bank.
Controlling the payroll system The main features of payroll control are detailed below.
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Setting of wages and salaries by the human resources department, with the payroll function being the responsibility of the accounting or payroll department. Within the payroll function there must be segregation of duties. For example, the preparation of pay packets must be done by a person not involved in the distribution of cash wages. Accurately recording wages and salaries (gross and net) on the payroll. This information must be checked, approved and recorded in the general ledger. Payment of wages and salaries, which must be done carefully. The payroll must be compared with the bank transfer list and/or
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cheques. After the payment the bank records and the payroll must be reconciled that is, checked for any possible errors and discrepancies.
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Correct calculation and authorisation of tax, national insurance, pension and other deductions.
5.6 Computerised accounting systems

5.6.1 Accounting packages
These days, only some of the smallest businesses use manual accounting systems. The options open to small businesses include packages such as Sage, Microsoft Ofce Accounting Express, KashFlow and many others. It is important for a small business to know exactly what it wants from an accounting package. Is it mainly to full recording and reporting purposes, or is it also to serve as a basis for management decisions? It is therefore important to know the modules which are included, how they are connected and the type of reports the package can generate. Medium-sized and large businesses will need to use more elaborate and sophisticated packages or even packages that are specically developed for a certain industry or tailor-made for a particular company. A large developer and supplier of business software is SAP. Activity 5.1
Find the websites for Sage and SAP and see what kind of software products and services they have to offer. Spend no more than 10 minutes on each website.
Feedback
On the Sage website you will see Sage 50 Accounts and payroll products starting from around 550. These are for small businesses. Businesses can upgrade to Sage 200 or Sage 1000 products when they grow in size and complexity. Sage distributes its off-the-shelf products in more than 100 countries. On the SAP website you will see solutions for small businesses and mid-size companies, but they are very strong in enterprise software for large enterprises. SAP operates in more than 50 countries. In terms of company size measured by assets and turnover, SAP is larger than Sage.
5.6.2
Coding of nominal ledger accounts
As information needs to be digitised in computers, it is necessary to give ledger accounts codes in addition to names. However, even in oldfashioned manual accounting systems of large companies there would usually be a chart of accounts with numerical codes as well as account names. Accountants often knew the codes by heart and could work faster and more efciently using account numbers instead of names. In most accounting packages codes have already been assigned to the standard accounts. A business will be able to add accounts when necessary because the coding leaves space for lling in accounts of a certain type.
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For example, a computerised accounting package may have assigned codes to the most common nominal ledger accounts, as in the following chart of accounts.
Account code 000000 000100 001000 005000 100200 100300 100201 100301 200000 300000 400000 500130 500140 500150 500160 500170 500180 600000 700000 800000 Account name Ordinary share capital Share premium Preference share capital Prot and loss (retained prots) account Buildings and property at cost Motor vehicles at cost Buildings and property accumulated depreciation Motor vehicles accumulated depreciation Inventory Receivables control account Payables control account Wages and salaries Rent expenses Advertising expenses Bank charges Motor expenses Telephone expenses Sales Purchases Bank
You may not yet be familiar with some terms in the list above but you will learn about them later, throughout this module. Activity 5.2
Looking at the list above, which codes would you assign to accounts for ofce equipment and accumulated depreciation on ofce equipment?
Feedback
Ofce equipment could receive code number 100400 because capital asset accounts are a 100000 code. Ofce equipment accumulated depreciation could then be 100401.
5.6.3 The use of coding in entries to the integrated accounting system

Supplier and customer accounts have codes too. When the details of a supplier are entered for the rst time, the supplier will receive a number.
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Example Suppose that a business uses an integrated accounting system and receives an invoice from a supplier (e.g., Williams, with code 3457) for 10,000 for the purchase of goods for sale. If we use the above list of codes this transaction could be coded for input to the accounting system as follows.
Nominal ledger Supplier 3457 Debit 700000 Credit 400000 Value 10,000 Inventory Code 201344 Quantity 1,000
200000 is the code for inventory, and 201344 is the code for this particular type of inventory. In this way the payables ledger, general ledger and inventory ledger are all updated by one input.
5.6.4 Inputs to the nominal ledger where the accounting system is not integrated
If the accounting modules are not integrated, the output from one module has then to be input into the nominal ledger. This is done using journal entries, as shown in Section 3.6.1. For the above example, the journal entry in a case where the accounting system is not integrated would be as follows:
Date: Todays date A/c 700000 A/c 400000 Posting purchases ledger amount to the payables control a/c Debit 10,000 10,000 Credit
5.6.5 Outputs from a general ledger

The main outputs from the general ledger include:
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unadjusted trial balance

adjusted trial balance
nancial statements
listings of individual general ledger accounts.
5.7 Manual versus computerised accounting systems

5.7.1 Advantages of accounting packages
Computerised accounting is the same as manual accounting in the sense that it uses the ideas of day books, subsidiary ledger accounts, nominal ledger accounts, trial balances and nancial statements. However, as we have seen in this session, the advantages of computerised accounting packages are that they:
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can be used by people who are not bookkeepers or accountants can process large amounts of data quickly
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are more accurate than people in processing information (provided that people have entered the information and instructions correctly) can analyse data and present the data as information much more quickly, accurately and exibly.
5.7.2
Disadvantages of accounting packages
In most businesses the benets will outweigh the costs, but for very small businesses there may be the following possible disadvantages:
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the time and costs of purchasing and installing the system and training staff to work with the accounting system the necessity to develop a system of coding the need for additional security checks in order to protect the data from being accessed by unauthorised personnel the lack of an audit trail because it is sometimes not easy to see where a mistake has been made.
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Summary
In this session you have learned about the structure of manual and computerised accounting systems and the purposes for which businesses require accounting information systems. Session 5 has also explained the functions of the components of accounting information systems within functional areas of business organisations. These functional areas include the sales and marketing function, the nance and accounting functions, and various control functions. Examples of control functions are cash payments and receipts, purchases, sales and payroll. Subsequently, this session has explained the use of coding in the accounting system and discussed advantages and disadvantages of computerised accounting systems. For those students interested in becoming more familiar with Sage accounting software, you should now have enough bookkeeping and accounting knowledge to start working with the Sage Instant Accounts Training CD-ROM.
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Unit summary
You have now reached the end of Unit 2. In Session 1 you learned about the transaction and accounting cycles. You also learned how to classify transactions, in particular cash and credit transactions, and sales and purchase transactions. In addition, you learned to identify data from source documents based on which transactions are to be recorded in the books of prime entry. In Session 2 you learned how to record cash, petty cash, credit sales and credit purchase transactions in the appropriate books of prime entry. In Session 3 you learned that double-entry bookkeeping is logically based on the business entity concept, the duality concept and the accounting equation. You are now expected to know the rules of double-entry bookkeeping and how to post totals in the day books to nominal ledger accounts. You have also learned about control accounts and their function, and should be able to use payables and receivables ledgers and payables and receivables control accounts. In Session 4 you learned how to balance off ledger accounts and prepare an unadjusted trial balance. In Session 5 you learned some of the differences between manual and computerised accounting information systems. Session 5 also enabled you to understand the basic structure of accounting information systems. Keep in mind that all the examples in Unit 2 concern businesses that are not VAT registered. In Unit 3 you will learn about VAT and how to record transactions for businesses that are registered for VAT purposes. This means that all the books of prime entry will have an additional analysis column for VAT and there will be a VAT account in the nominal ledger. Unit 2 has dealt mainly with the problem of recording cash transactions, credit sales and purchase transactions in the books of prime entry, and posting the totals to the appropriate nominal ledger accounts. However, as you learned in Session 1 of this unit, there are many more transactions and events that businesses need to record and account for. Unit 3 will teach you how to do that. Finally, what you have learned in this unit, particularly in Sessions 2, 3 and 4, is the foundation of what you will learn in Units 3, 4 and 5. It is therefore very important that you have understood the material. Here are three self-assessed questions to test your understanding of what you have learned in Unit 2. Self-assessed Questions Question 1
Basics Ltd is a building materials and tools company. Here is some more information about the company.
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Approximately 500 invoices are received by the company each month. Basics Ltd has 1,150 suppliers. Most of the companys sales transactions are cash because many of its customers are small businesses and DIY enthusiasts. However, about 70 customers are sent sales invoices each month. The company has a total of about 150 customers who are allowed to
Unit summary
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buy goods on credit. These customers must pay their accounts within one month or their credit facilities will be withdrawn.
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The assets of the company include a small eet of vehicles, plant and equipment, ofce equipment and freehold premises. The company has approximately 2,500 items of stock, ranging from raw materials, such as sand and bricks, to tools such as sanders and drills.
Required
Imagine you are going to talk to someone who does not know anything about accounting or accounting systems. Spend about 15 minutes writing your answer to the following question in words you think they would understand. Write a description of the kind of accounting system that would be appropriate for Basics Ltd. You should identify the components of the system and describe what each component does.
Suggested answer
A description of the accounting system of Basics Ltd: Basics Ltd is a building supplies merchant that supplies both trade and retail customers. Like all businesses, it keeps books as follows. The Cash Book This records money received through the tills and cheques received from trade customers. The cash book also records money paid to suppliers and other payments such as wages, salaries and operating costs such as rates, electricity and water. The Purchase Day Book This records invoices received from suppliers. The Payables Ledger This contains an account for each of the 1,150 suppliers of the company. In each account, invoices received from a supplier are compared with cheque payments made to that supplier. It is a way of working out which of the suppliers bills have been paid. The Sales Day Book This records sales invoices sent out to customers who purchase goods from the company on credit. The Receivables Ledger This contains an account for each of the 70 customers. It is similar in many respects to the payables ledger. In each customers account, sales invoices are compared with funds received. The Inventory Ledger This is a list of raw materials and other goods held for resale. It identies goods by type and indicates the quantities held in stock. The Non-current Asset Register This is a list and description of each non-current asset owned by the company. It contains details of registration numbers, serial numbers or any other identifying marks in respect of each non-current asset. The Nominal Ledger Basics Ltd has various classes of assets (i.e., things it owns) and various classes of liability (i.e., amounts payable to others). In addition, the company will have a number of categories of income and expenditure. The
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Nominal Ledger contains accounts that record every class of asset, liability, owners capital, revenue and expense. It is a summary of all the information in the accounting system.
Question 2
Mary Kowalski set up a business on 1 February. The following transactions and events took place in February. 1 Feb 2 Feb 3 Feb 4 Feb 5 Feb 6 Feb 7 Feb 8 Feb 9 Feb Mary set up a business as a sole trader by introducing 300,000 into a business bank account. Mary purchased property to be used as a shop for 150,000, paid in cash. Mary paid 20,000 in cash for a van. Mary purchased goods for resale costing 25,000 on credit from Anton Sandos (invoice no. VK003). Mary sold goods for 20,000 on credit to Jose Ibanez (invoice no. SL0001). Mary paid telephone bill, 200 in cash. Mary sold goods for 7,500 on credit to Philippe Lemaitre (invoice no. SL0002). Mary purchased goods costing 60,000 on credit from Anton Sandos (invoice no. VK012). Mary sent a credit note for 500 to Philippe Lemaitre for goods returned (credit note no. CN001).
10 Feb Jose Ibanez paid 19,600, taking advantage of a 2 per cent settlement discount with respect to invoice no. SL0001. 11 Feb Mary paid Anton Sandos 24,750 with respect to invoice VK003, making use of a one per cent settlement discount. 12 Feb Mary sold goods for 5,000 in cash. 13 Feb Mary sold goods for 45,000 on credit to Laura Livingstone (invoice no. SL0003). 14 Feb Mary purchased goods costing 35,000 from Freddy Muller on credit (invoice no. FM229). 15 Feb Mary returned goods worth 5,000 to Freddy Muller and received credit note no. FMCN229. 16 Feb Philippe Lemaitre paid 7,000 with respect to invoice SL0002. 17 Feb Laura Livingstone paid 44,100 with respect to invoice SL0003, making use of a two per cent settlement discount. 18 Feb Mary paid 300 car insurance. 19 Feb Mary paid Anton Sandos 59,400 with respect to invoice VK012, making use of a one per cent settlement discount. 20 Feb Mary sold goods for 36,000 to Jose Ibanez on credit (invoice no. SL0004).
Required
(a) Enter the above transactions into the cash book, the appropriate day books, and the receivables and payables ledgers. (b) Post the transactions to the appropriate nominal ledger accounts. (c) Balance off the nominal ledger accounts and prepare an unadjusted trial balance.
Unit summary
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(d) Compare the total of the balances in the payables ledger with the balance of the payables control account, and compare the total of the balances in the receivables ledger with the balance in the receivables control account. (a) Day books
Cash book: receipts Date Narrative Total Receivables Other Discounts allowed
Cash book: payments Date Narrative Total Payables Other Discounts received
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Payables and receivables ledgers

Payables ledger: Anton Sandos
Payables ledger: Freddy Muller
Receivables ledger: Jose Ibanez
Receivables ledger: Philippe Lemaitre
Unit summary
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Receivables ledger: Laura Livingstone
(b) Posting as at 28 February

Date: 28 February Debit Credit
Date: 28 February
Debit
Credit
Date: 28 February
Debit
Credit
Date: 28 February
Debit
Credit
Date: 28 February
Debit
Credit
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Date: 28 February
Debit
Credit
Posting the purchase returns day book
Nominal ledger accounts

Capital account
Property account
Van account
Sales account
Purchases account
Unit summary
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Purchase returns account
Telephone expense account
Car insurance expense account
(c)
Trial balance as at 28 February Debit Credit
(d)
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Suggested answer
(a) Day books Cash book: receipts Date Narrative Total 1 Feb Opening capital 300,000 19,600 5,000 7,000 44,100 375,700 1 Mar Balance b/d 121,050 7,000 45,000 72,000 305,000 900 1,300 20,000 5,000 10 Feb Jose Ibanez, inv. SL0001 12 Feb Cash sale 16 Feb Philippe Lemaitre, inv. SL0002 17 Feb Laura Livingstone, inv. SL0003 Receivables Other 300,000 400 Discounts allowed
Cash book: payments Date Narrative Total 2 Feb 3 Feb 6 Feb Property Van Telephone expenses 150,000 20,000 200 24,750 300 59,400 254,650 121,050 375,700 60,000 85,000 170,500 25,000 300 600 850 Payables Other 150,000 20,000 200 250 Discounts received
11 Feb Anton Sandos, inv. VK003 18 Feb Car insurance 19 Feb Anton Sandos, inv. VK012 Total payments 28 Feb Balance c/d
Sales day book Date 5 Feb 7 Feb 13 Feb 20 Feb Invoice SL0001 SL0002 SL0003 SL0004 Customer Jose Ibanez Philippe Lemaitre Laura Livingstone Jose Ibanez Description Invoice amount 20,000 7,500 45,000 36,000 108,500
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Purchase day book Date 4 Feb 8 Feb Supplier Anton Sandos Anton Sandos Description Inv. VK003 Inv. VK012 Inv. FM229 Invoice amount 25,000 60,000 35,000 120,000
14 Feb Freddy Muller
Sales returns day book Date Credit note no. CN001 Customer Description Invoice amount 9 Feb Philippe Lemaitre 500 500
Purchase returns day book Date Supplier Description Credit note no. FMCN229 Invoice amount 15 Feb Freddy Muller 5,000 5,000
Payables and receivables ledgers Payables ledger: Anton Sandos 11 Feb Bank, inv. VK003 (CB) 11 Feb Discount received, inv. VK003 (CB) 19 Feb Bank, inv. VK012 (CB) 19 Feb Discount received, inv. VK012 (CB) 24,750 4 Feb 250 8 Feb 59,400 600 85,000 85,000 Purchase inv. VK003 25,000 (PDB) Purchase inv. VK012 60,000 (PDB)
Payables ledger: Freddy Muller 15 Feb FMCN229 (PRDB) 28 Feb Balance c/d 5,000 14 Feb Purchase inv. FM229 35,000 (PDB) 30,000 35,000 1 Mar Balance b/d 35,000 30,000
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Receivables ledger: Jose Ibanez 5 Feb Sales inv. SL0001 (SDB) 20,000 10 Feb Inv. SL0001 (CB) 36,000 10 Feb Discount allowed, inv. SL0001 (CB) 28 Feb Balance c/d 56,000 1 Mar Balance b/d 36,000 19,600 400 36,000 56,000
20 Feb Sales inv. SL0004 (SDB)
Receivables ledger: Philippe Lemaitre 7 Feb Sales inv. SL0002 (SDB) 7,500 9 Feb CN001 (SRDB) 500 7,000 7,500
16 Feb Bank, inv. SL0002 (CB) 7,500
Receivables ledger: Laura Livingstone 13 Feb Sales inv. SL0003 (SDB) 45,000 17 Feb Inv. SL0003 (CB) 17 Feb Discount allowed (CB) 45,000 44,100 900 45,000
(b) Posting as at 28 February Date: 28 February Cash at bank Discounts allowed Receivables control Sales (cash sales) Capital 377,000 Posting cash receipts Debit 375,700 1,300 72,000 5,000 300,000 377,000 Credit
Unit summary
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Date: 28 February Payables control Property Van Telephone expenses Car insurance expense Cash at bank Discounts received
Debit 85,000 150,000 20,000 200 300
Credit
254,650 850 255,500 255,500
Date: 28 February Receivables control Sales Posting the sales day book
Debit 108,500
Credit 108,500
Date: 28 February Purchases Payables control Posting the purchase day book
Debit 120,000
Credit 120,000
Date: 28 February Sales returns Receivables control Posting the sales returns day book
Debit 500
Credit 500
Date: 28 February Payables control Purchases returns Posting the purchase returns day book
Debit 5,000
Credit 5,000
Nominal ledger accounts Capital account 28 Feb Cash at bank (CB) 300,000
Property account 28 Feb Cash at bank (CB) 150,000
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Van account 28 Feb Cash at bank (CB) 20,000
Payables control account 28 Feb Cash at bank (CB) + Discounts received (CB) 28 Feb Purchases returns (PRDB) 28 Feb Balance c/d 85,000 28 Feb Purchases (PDB) 120,000
5,000 30,000 120,000 1 Mar 120,000 30,000
Receivables control account 28 Feb Sales (SDB) 108,500 28 Feb Cash at bank (CB) + Discounts allowed (CB) 28 Feb Sales returns (SRDB) 28 Feb Balance c/d 108,500 1 Mar Balance b/d 36,000 72,000
500 36,000 108,500
Sales account 28 Feb Cash at bank (CB) 28 Feb Receivables control (SDB) 5,000 108,500 113,500
Purchases account 28 Feb Payables control (PDB) 120,000
Sales returns account 28 Feb Receivables control (SRDB) 500
Purchase returns account 28 Feb Payables control (PRDB) 5,000
Unit summary
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Discounts allowed account 28 Feb Receivables control (CB) 1,300
Discounts received account 28 Feb Payables control (CB) 850
Telephone expense account 28 Feb Cash at bank 200
Car insurance expense account 28 Feb Cash at bank 300
Cash at bank account 28 Feb Total cash received (CB) 375,700 28 Feb Total cash paid (CB) 28 Feb Balance c/d 375,700 1 Mar Balance b/d 121,050 254,650 121,050 375,700
(c) Trial balance Trial balance as at 28 February Debit Capital Property Van Payables control Receivables control Sales Purchases Sales returns Purchases returns Discounts allowed Discounts received Telephone expense Car insurance expense Cash at bank 200 300 121,050 449,350 449,350 1,300 850 120,000 500 5,000 36,000 113,500 150,000 20,000 30,000 Credit 300,000
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(d) The 30,000 payable to Freddy Muller equals the balance of 30,000 in the payables control account. The 36,000 receivable from Jose Ibanez equals the balance of 36,000 in the receivables control account.
Question 3
Ayo Annan set up a business on 1 March. The following transactions and events took place in March. 1 March 2 March 3 March 4 March 5 March 6 March 7 March 8 March 9 March 10 March 11 March 12 March 13 March 14 March 15 March 16 March 17 March 18 March 19 March 20 March 21 March 22 March Ayo set up a business as a sole trader by introducing 70,000 into a business bank account. Ayo rented a shop and paid 2,000 for the month. Ayo paid 18,000 in cash for a van. Ayo purchased goods costing 6,000 on credit from Victoria (invoice no. Vic0475). Ayo sold goods for 1,000 on credit to Truman (invoice no. AA0001). Ayo sold goods for 500 in cash. Ayo sold goods for 3,500 on credit to Shari (invoice no. AA0002). Ayo purchased goods costing 8,000 on credit from Peter (invoice no. P3380). Ayo sent a credit note for 500 to Shari for goods returned (credit note no. AACN001). Truman paid 950, taking advantage of a 5 per cent settlement discount with respect to invoice no. AA0001. Shari paid 2,850, taking advantage of a 5 per cent settlement discount with respect to invoice no. AA0002. Ayo paid Victoria 5,820 with respect to invoice Vic0475, making use of a 3 per cent settlement discount. Ayo sold goods for 1,500 in cash. Ayo purchased goods costing 7,000 on credit from Victoria (invoice no. Vic0489). Ayo returned goods to Victoria and received a credit note for 700 (VicCN0112). Ayo sold goods for 2,000 on credit to Shari (invoice no. AA0003). Ayo sold goods for 5,000 on credit to Truman (invoice no. AA0004). Ayo sold goods for 3,000 on credit to Bruce (invoice no. AA0005). Ayo sent a credit note for 500 for goods returned by Truman (credit note no. AACN002). Shari paid 1,900, taking advantage of a 5 per cent settlement discount with respect to invoice no. AA0003. Truman paid 4,275, taking advantage of a 5 per cent settlement discount with respect to invoice no. AA0004. Ayo paid Peter 8,000 with respect to invoice no. P3380.
Unit summary
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23 March 24 March
Ayo purchased goods costing 2,000 on credit from Peter (invoice no. P3397). Ayo sold goods for 3,800 on credit to Shari (invoice no. AA0006).
Required
(a) Enter the above transactions into the appropriate day books, receivables and payables ledgers. (b) Post the transactions to the appropriate nominal ledger accounts. (c) Balance off the nominal ledger accounts and prepare an unadjusted trial balance. (d) Compare the total of the balances in the payables ledger with the balance of the payables control account, and compare the total of the balances in the receivables ledger with the balance in the receivables control account. (a) Cash book and day books
Cash book: receipts Date: Narrative Total Receivables Other Discounts allowed
Cash book: payments Date: Narrative Total Payables Other Discounts received
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Payables and receivables ledgers

Payables ledger: Victoria
Unit summary
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Payables ledger: Peter
Receivables ledger: Truman
Receivables ledger: Shari
Receivables ledger: Bruce
(b) Posting the nominal ledger accounts

Date: 31 March Debit Credit
Date: 31 March
Debit
Credit
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Date: 31 March
Debit
Credit
Date: 31 March
Debit
Credit
Posting the purchase returns day book
Date: 31 March
Debit
Credit
(Total receipts
= (
)+
Date: 31 March
Debit
Credit
(Total payments Nominal ledger accounts
= (
)+
Sales account
Unit summary
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Purchases account
Purchase returns account
Rent expense account
Van account
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Capital account
(c) Trial balance

Trial balance as at 31 March Debit Credit
(d)
Suggested answer
(a) Cash book and day books Cash book: receipts Date: Narrative Total 1 March 6 March Capital Cash sale 70,000 500 950 2,850 1,500 1,900 4,275 81,975 1 April Balance b/d 48,155 2,000 4,500 10,500 72,000 1,000 3,000 1,500 100 225 525 Receivables Other 70,000 500 50 150 Discounts allowed
10 March Truman, AA0001 11 March Shari, AA0002, AACN001 13 March Cash sale 20 March Shari, AA0003 21 March Truman, AA0004, AACN002
Unit summary
167
Cash book: payments Date: Narrative Total 2 March 3 March Rent for March Van 2,000 18,000 5,820 8,000 33,820 31 March Balance c/d (81,975 33,820) 48,155 81,975 6,000 8,000 14,000 20,000 180 Payables Other 2,000 18,000 180 Discounts received
12 March Victoria, Vic0475 22 March Peter, P3380
Sales day book Date 5 March 7 March 16 March 17 March 18 March 24 March Invoice AA0001 AA0002 AA0003 AA0004 AA0005 AA0006 Customer Truman Shari Shari Truman Bruce Shari Description Invoice amount 1,000 3,500 2,000 5,000 3,000 3,800 18,300
Purchase day book Date 4 March 8 March Supplier Victoria Peter Description Inv. Vic0475 Inv. P3380 Inv. Vic0489 Inv. P3397 Invoice amount 6,000 8,000 7,000 2,000 23,000
14 March Victoria 23 March Peter
Sales returns day book Date Credit note no. AACN001 AACN002 Customer Description Invoice amount 9 March 19 March Shari Truman Inv. AA0002 Inv. AA0004 500 500 1,000
Purchase returns day book Date Supplier Description Inv. Vic0489 Credit note no. VicCN0112 Invoice amount 15 March Victoria 700 700
168
Payables and receivables ledgers Payables ledger: Victoria 12 March Cash, inv. Vic0475 (CB) 12 March Discount received (CB) 15 March VicCN0112, Vic0489 (PRDB) 31 March Balance c/d 5,820 4 March Purchase inv. Vic0475 (PDB) 6,000 7,000
180 14 March Purchase inv. Vic0489 (PDB) 700 6,300 13,000 1 April Balance b/d
13,000 6,300
Payables ledger: Peter 22 March Cash, inv. P3380 (CB) 31 March Balance c/d 8,000 8 March Purchase inv. P3380 (PDB) 8,000 2,000 10,000 1 April Balance b/d 2,000
2,000 23 March Purchase inv. P3397 (PDB) 10,000
Receivables ledger: Truman 5 March Sales inv. AA0001 (SDB) 1,000 5,000 10 March Cash, inv. AA0001 (CB) 10 March Discount allowed (CB) 19 March Sales return, AACN002 (SRDB) 21 March Cash, inv. AA0004 21 March Discount allowed (CB) 6,000 Receivables ledger: Shari 7 March Sales inv. AA0002 (SDB) 3,500 2,000 3,800 9 March Sales return, AACN001 (SRDB) 500 2,850 150 1,900 100 3,800 9,300 950 50 500 4,275 225 6,000
17 March Sales inv. AA0004 (SDB)
16 March Sales inv. AA0003 (SDB) 24 March Sales inv. AA0006 (SDB)
11 March Cash, inv. AA0002 (CB) 11 March Discount allowed (CB) 20 March Cash, inv. AA0003 (CB) 20 March Discount allowed (CB) 31 March Balance c/d
9,300 1 April Balance b/d 3,800
Unit summary
169
Receivables ledger: Bruce 18 March Sales inv. AA0005 (SDB) 3,000
(b) Posting day books and cash book to the nominal ledger accounts Date: 31 March Receivables control account Sales Posting the sales day book Debit 18,300 18,300 Credit
Date: 31 March Purchases Payables control account Posting the purchase day book
Debit 23,000
Credit 23,000
Date: 31 March Sales returns Receivables control account Posting the sales returns day book
Debit 1,000
Credit 1,000
Date: 31 March Payables control account Purchases returns Posting the purchase returns day book
Debit 700
Credit 700
Date: 31 March Cash at bank Discounts allowed Receivables control account Sales (cash sales) Capital Total Posting cash receipts
Debit 81,975 525
Credit
10,500 2,000 70,000 82,500 82,500
(Total receipts 81,975 = (10,500 525) + 2,000 + 70,000)
170
Date: 31 March Payables control account Rent expense Van Cash at bank Discounts received Total Posting cash payments
Debit 14,000 2,000 18,000
Credit
33,820 180 34,000 34,000
(Total payments 33,820 = (14,000 180) + 2,000 + 18,000) Nominal ledger accounts Sales account 31 March Receivables control (SDB) 31 March Cash at bank (CB) 18,300 2,000 20,300
Purchases account 31 March Payables control (PDB) 23,000
Sales returns account 31 March Receivables control (SRDB) 1,000
Purchase returns account 31 March Payables control (PRDB) 700
Receivables control account 31 March Sales (SDB) 18,300 31 March Sales returns (SRDB) 1,000
31 March Discounts 10,500 allowed (CB) + Cash at bank (CB) 31 March Balance c/d 18,300 1 April Balance b/d 6,800 6,800 18,300
Unit summary
171
Payables control account 31 March Purchase returns (PRDB) 700 31 March Purchases (PDB) 23,000
14,000 31 March Discounts received (CB) + Cash at bank (CB) 31 March Balance c/d 8,300 23,000 1 April Balance b/d 23,000 8,300
Discounts allowed account 31 March Receivables control (CB) 525
Discounts received account 31 March Payables control (CB) 180
Rent expense account Cash at bank (CB) 2,000
Van account 31 March Cash at bank (CB 18,000
Capital account 31 March Cash at bank (CB) 70,000
Cash at bank account 31 March Total receipts (CB) 81,975 31 March Total payments (CB) 31 March Balance c/d 81,975 1 April Balance b/d 48,155 33,820 48,155 81,975
172
(c) Trial balance Trial balance as at 31 March Debit Sales Purchases Sales returns Purchases returns Receivables control Payables control Discounts allowed Discounts received Rent Van Capital Cash at bank 48,155 99,480 99,480 2,000 18,000 70,000 525 180 6,800 8,300 23,000 1,000 700 Credit 20,300
(d) The 2,000 payable to Peter plus the 6,300 payable to Victoria equals the balance of 8,300 in the payables control account. The 3,000 receivable from Bruce plus the 3,800 receivable from Shari equals the balance of 6,800 in the receivables control account.
References
173
References
Hendriksen, E. S. and van Breda, M. F. (1992) Accounting Theory (5th edn), Homewood, IL and Boston, MA, Richard D. Irwin, Inc.

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B291 Financial accounting

Written by Carien van Mourik

Session 5 Accounting systems and the impact of IT on

Unit 2 Double-entry bookkeeping

I always wanted to be an accountant

Learning aims and outcomes of Unit 2

1 0The accounting cycle, the transaction cycle and source documents

1.1 The accounting cycle

Unit 2 Double-entry bookkeeping

Figure 1 The accounting cycle owchart

How long is an accounting cycle?

Unit 2 Double-entry bookkeeping

1.2 Transactions and recordable events

Unit 2 Double-entry bookkeeping

1.2.3 Capital expenditures and revenue expenditures

1.2.4 Transaction cycles for cash transactions and credit transactions

Unit 2 Double-entry bookkeeping

Option 4 Pay by credit card.

1.2.5 Other ways of distinguishing between transactions

Unit 2 Double-entry bookkeeping

1.3 Data sources and source documents

Source documents in credit transactions

Figure 2 Source documents in credit transactions

the name and address of the business quoting

the name and address of the business placing

Sales conrmation: Delivery note:

Unit 2 Double-entry bookkeeping

QTY 10,000 1,000

ITEM # OBU COAST B291 D0

DESCRIPTION OBU COAST 010 BOOKLET B291 D0 Reader

UNIT PRICE 1.50 2.50

LINE TOTAL 13,500 2,500

1,500 Subtotal 16,000 2,800 18,800

SALES TAX (VAT) TOTAL

THANK YOU FOR YOUR BUSINESS!

Figure 3 Example of a price quotation

SHIPPING METHOD UPS Parcel

QTY 10,000 1,000

ITEM # OBU Coast B291

DESCRIPTION 010 Booklet B291 D0 Reader

JOB OBU Coast B291 DO

UNIT PRICE 1.35 2.50

LINE TOTAL 13,500 2,500

16,000 2,800 18,800

Authorised by Mary Maloney

Figure 4 Example of a purchase order

Unit 2 Double-entry bookkeeping

DELIVERY DATE 8 February, 2010

PAYMENT TERMS Up to 14 days after delivery

DUE DATE 22 February, 2010

QTY 10,000 1,000

ITEM # OBU COAST B291 D0

DESCRIPTION OBU COAST 010 BOOKLET B291 D0 Reader

UNIT PRICE 1.50 2.50

LINE TOTAL 13,500 2,500

1,500 Subtotal 16,000 2,800 18,800

SALES TAX (VAT) TOTAL

Figure 5 Example of an invoice

Unit 2 Double-entry bookkeeping

DATE 15/1/2010 8/2/2010

BALANCE 4,000 18,800

AMOUNT 4,000 18,800