Trial Balance

Before preparing financial statements at the end of a period, the books must be balanced, i.e. to determine total debits equal total credits. This is determined by preparing a trial balance. A Trial Balance is a list of accounts and their current balances at a given date. It is usually prepared on the last day of the accounting period and the list of account balances are arranged according to debit and credit balances. Debit balances are listed in one column and credit balances are listed in another. The two column totals should be equal. When this occurs, the ledger is said to be in balance.

Purpose for Preparing a Trial Balance

The primary purpose of a Trial Balance is to prove the mathematical equality of debits and credits in the ledger. According to the double-entry system of recording, if a debit and a credit have been made for each transaction, the total of the debits should be equal to the total of the credits. If the accounts are balanced off and their balances compared, the total of debit balances should be equal to the total of credit balances. In addition, the Trial Balance is useful in the preparation of the Trading and Profit and Loss Accounts, and the Balance Sheet since it lists all the account balances in the ledger.

Note: a trial balance is prepared for two reasons To check the arithmetic accuracy, i.e. The debit totals and the credit totals should be equal if the double- entry system of book-keeping is followed. To write up the financial statements, i.e. Trading and Profit & Loss Accounts, and Balance Sheet.

i. ii.

Limitations of a Trial Balance

Although the Trial Balance is used to prove the accuracy of the double-entry system of recording, it has its limitations. A Trial Balance that balances does not prove that all the transactions have been recorded or that the ledger is correct. This is because numerous mistakes may exist even though the Trial Balance totals are in agreement.

Types of Errors

Errors can be classified into two categories

Errors not revealed by the Trial Balance Errors revealed by the Trial Balance

Errors Not Revealed by the Trial Balance

The following errors do not affect the equality of the Trial Balance totals: 1. Errors of Omission: A transaction is omitted completely from the books so that there is no debit and credit entry of the transaction, e.g. Drawings of $50 cash by the proprietor was not recorded. 2. Errors of Commission: An entry is posted to the correct side of the ledger but to the wrong account, i.e. items have been posted to the wrong account of the same class, e.g. Payment of $100 cash by a customer A. John was wrongly posted to the account of another customer, B. Johan. 3. Errors of Principle: An entry is made in the wrong class of account, i.e. when an expense is treated as an asset and vice versa, e.g. Repairs to building $400 was debited to the Building Account. 4. Complete Reversal of Entries: An account that should be debited is credited and vice versa, e.g. A cheque $200 received from Cyril was debited to the account of Cyril and credited to the Bank Account. 5. Compensating Errors: Errors (or error) on one side of the ledger are compensated by an error (or errors), e.g. The Purchases Account and Sales Account were both overcast by $150. 6. Errors of Original Entry: The original figure may be incorrectly entered although the correct double-entry principle has been observed using this incorrect figure, e.g. Credit sales of $87 to Kay was recorded in the Sales Account and Kay's account as $78.

Errors Revealed by the Trial Balance

Errors which are revealed by the Trial Balance are those errors which cause the Trial Balance totals to be in disagreement. 1. Errors in Calculation: If there is any miscalculation of the Trial Balance totals or the net account balances, the Trial Balance will not balance, e.g. There was an error in the calculation of the cash balance, causing the Trial Balance totals not to balance too. 2. Errors in Omission of One Entry: Omission of either the debit or credit entry of a transaction will cause the totals of the Trial Balance not to agree, e.g. A cheque $500 received for commission was debited to the Bank Account only.

3. Posting to the Wrong Side of An Account: Entry into the wrong side of an account will cause one side of the ledger to be more than the other, e.g. A cheque of $800 paid to creditor, K. Wang was credited instead of debited to his account. 4. Errors in Amount: If the debit entry of a transaction differs in amount with the credit entry, the Trial Balance will not balance, e.g. Cash $134 received from Caine was debited to the Cash Account as $134 and credited to the account of Caine as $143.

Summary

An account has a debit balance when its debit total exceeds its credit total. An account has a credit balance when its credit total exceeds its debit total. Asset, expenses and drawings accounts have debit balances. Liability, capital and revenue accounts have credit balances. A Trial Balance is a list of debit and credit balances extracted from the accounts in the ledger at a particular date. The Trial Balance is prepared for the purpose of checking the arithmetical accuracy of the entries made in the ledger. The total debit balances will equal the total credit balances in the Trial Balance if the double-entry principles of recording have been strictly adhered to. Errors that effect the agreement of the Trial Balance totals are wrong calculation of balances, omission of either a debit or credit entry of a transaction, entry on the wrong side of an account, and errors in amount. Errors that do not affect the agreement of the Trial Balance totals are complete omission of entries of a transaction, errors of commission, errors in principle, compensating errors, and errors in original entry. Asset and liability accounts are balanced and their balances brought down to the next accounting period.

Personal accounts record transactions with persons who have dealings with the business, e.g. debtors and creditors accounts.

Accounting concepts and conventions

In drawing up accounting statements, whether they are external "financial accounts" or internally-focused "management accounts", a clear objective has to be that the accounts fairly reflect the true "substance" of the business and the results of its operation. The theory of accounting has, therefore, developed the concept of a "true and fair view". The true and fair view is applied in ensuring and assessing whether accounts do indeed portray accurately the business' activities. To support the application of the "true and fair view", accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently. Accounting Conventions The most commonly encountered convention is the "historical cost convention". This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost. Under the "historical cost convention", therefore, no account is taken of changing prices in the economy. The other conventions you will encounter in a set of accounts can be summarised as follows: Monetary measurement

Accountants do not account for items unless they can be quantified in monetary terms. Items that are not accounted for (unless someone is prepared to pay something for them) include things like workforce skill, morale, market leadership, brand recognition, quality of management etc. This convention seeks to ensure that private transactions and matters relating to the owners of a business are segregated from transactions that relate to the business. With this convention, accounts recognise transactions (and any profits arising from them) at the point of sale or transfer of legal ownership - rather than just when cash actually changes hands. For example, a company that makes a sale to a customer can recognise that sale when the transaction is legal - at the point of contract. The actual payment due from the customer may not arise until several weeks (or months) later - if the customer has been granted some credit terms.

Separate Entity

Realisation

Materiality

An important convention. As we can see from the application of accounting standards and accounting policies, the preparation of accounts involves a high degree of judgement. Where decisions are

required about the appropriateness of a particular accounting judgement, the "materiality" convention suggests that this should only be an issue if the judgement is "significant" or "material" to a user of the accounts. The concept of "materiality" is an important issue for auditors of financial accounts. Accounting Concepts Four important accounting concepts underpin the preparation of any set of accounts: Going Concern Consistency Accountants assume, unless there is evidence to the contrary, that a company is not going broke. This has important implications for the valuation of assets and liabilities. Transactions and valuation methods are treated the same way from year to year, or period to period. Users of accounts can, therefore, make more meaningful comparisons of financial performance from year to year. Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change. Profits are not recognised until a sale has been completed. In addition, a cautious view is taken for future problems and costs of the business (the are "provided for" in the accounts" as soon as their is a reasonable chance that such costs will be incurred in the future.

Prudence

Matching (or Income should be properly "matched" with the expenses of a given "Accruals") accounting period. Key Characteristics of Accounting Information There is general agreement that, before it can be regarded as useful in satisfying the needs of various user groups, accounting information should satisfy the following criteria: Criteria Understandability What it means for the preparation of accounting information This implies the expression, with clarity, of accounting information in such a way that it will be understandable to users - who are generally assumed to have a reasonable knowledge of business and economic activities This implies that, to be useful, accounting information must assist a user to form, confirm or maybe revise a view - usually in the context of making a decision (e.g. should I invest, should I lend money to this business? Should I work for this business?) This implies consistent treatment of similar items and application of accounting policies

Relevance

Consistency

Comparability

This implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability. This implies that the accounting information that is presented is truthful, accurate, complete (nothing significant missed out) and capable of being verified (e.g. by a potential investor). This implies that accounting information is prepared and reported in a "neutral" way. In other words, it is not biased towards a particular user group or vested interest

Reliability

Objectivity

Accounting is called the language of business that which communicates the financial condition and performance of a business to interested users, also referred to as stakeholders.

In order to become effective in carrying out the accounting procedure, as well as in communicating the financial information of the business, there is a widely accepted set of rules, concepts and principles that governs the application of the accounting procedures, and it is referred to as the Generally Accepted Accounting Principles or GAAP.

In this article, you will learn and familiarize yourself with the accounting principles and accounting concepts relevant in performing the accounting procedures. It is relevant to understand it because you need to abide by these concepts and principles every time you analyze record, summarize, report and interpret financial transactions of a business.

Guidelines on Basic Accounting Principles and Concepts

GAAP is the framework, rules and guidelines of the financial accounting profession with a purpose of standardizing the accounting concepts, principles and procedures. Here are the basic accounting principles and concepts under this framework:

1. Business Entity

A business is considered a separate entity from the owner(s) and should be treated separately. Any personal transactions of its owner should not be recorded in the business accounting book, vice versa. Unless the owners personal transaction involves adding and/or withdrawing resources from the business.

2. Going Concern
It assumes that an entity will continue to operate indefinitely. In this basis, assets are recorded based on their original cost and not on market value. Assets are assumed to be used for an indefinite period of time and not intended to be sold immediately.

3. Monetary Unit
The business financial transactions recorded and reported should be in monetary unit, such as US Dollar, Canadian Dollar, Euro, etc. Thus, any non-financial or nonmonetary information that cannot be measured in a monetary unit are not recorded in the accounting books, but instead, a memorandum will be used.

4. Historical Cost
All business resources acquired should be valued and recorded based on the actual cash equivalent or original cost of acquisition, not the prevailing market value or future value. Exception to the rule is when the business is in the process of closure and liquidation.

5. Matching
This principle requires that revenue recorded, in a given accounting period, should have an equivalent expense recorded, in order to show the true profit of the business.

6. Accounting Period
This principle entails a business to complete the whole accounting process of a business over a specific operating time period. It may be monthly, quarterly or annually. For annual accounting period, it may follow a Calendar or Fiscal Year.

7. Conservatism
This principle states that given two options in the valuation of business transactions, the amount recorded should be the lower rather than the higher value.

8. Consistency
This principle ensures consistency in the accounting procedures used by the business entity from one accounting period to the next. It allows fair comparison of financial information between two accounting periods.

9. Materiality

Ideally, business transactions that may affect the decision of a user of financial information are considered important or material, thus, must be reported properly. This principle allows errors or violations of accounting valuation involving immaterial and small amount of recorded business transaction.

10. Objectivity
This principle requires recorded business transactions should have some form of impartial supporting evidence or documentation. Also, it entails that bookkeeping and financial recording should be performed with independence, thats free of bias and prejudice.

11. Accrual
This principle requires that revenue should be recorded in the period it is earned, regardless of the time the cash is received. The same is true for expense. Expense should be recognized and recorded at the time it is incurred, regardless of the time that cash is paid.

NATURE & PURPOSE OF FINANCIAL ACCOUNTING

Purpose

The main purpose of a financial accounting system is to provide managers, investors and other interested parties with timely information that can be used to make sound business decisions. Most firms purchase accounting programs to speed up accounting tasks, minimizing errors in the process. No more pencils and pads -- a computerized accounting system is very efficient, with the ability to compile reports in speeds impossible with the manual method. No more waiting for days to get reports -- computerized systems compile statements and reports with a push of a button.

Nature

A financial accounting system follows the same rules and principles as the manual accounting method -- the only change is related to the mechanics of the process. The nature of both manual and computerized systems is the same -- both gather information and compile it into useful reports. The difference is that using software, certain processes are automatically performed, such as posting journal entries in the general ledger and creating reports. The idea is to increase efficiency, while maintaining a central control over financial activities.

Accounting equation

The basic accounting equation is the foundation for the double-entry bookkeeping system. For each transaction, the total debits equal the total credits.
[1]

In a corporation, capital represents the stockholders' equity.

Books of original Entries

As we know books of original entries are the books in which we first record the transactions. These Specialized journals or day books are part of books of original entries. Thus, we have separate books for each kind of transaction. For example sale of goods will be recorded in sales journal or sales day book

The Terms day book and Journal

Most of the people find themselves confused while reading the terms journal and day book. Both Journal and Day book are the same thing. We can use either term.

Types of specialized journal

Sales Journal or Sales day book - For recording credit sales Purchase journal or purchase day book - For recording purchases on credit Sales return journal or sale return day book - For recording sales return Purchase return journal or purchase return day book - For recording purchases return Cash receipts journal - For recording all kind of cash receipts Cash payments journal - For recording all kind of cash payments

BOOKS OF ORIGINAL ENTRY

The use of Books of Original Entry promotes the division of the ledger which assists management in data analysis. They make it easier to retrieve information on debtors and creditors, saves time and eliminates many details from the ledger. The following table shows a list of the books of original entry as well as the source document (s) which form the basis of the recording in the books.

Book

of Entry

Original Transactions Recorded

Source Document Used

Sales day book Purchases day book Cash book

Credit sales of inventory (stock)

Sales invoices

Credit purchases of inventory (stock) Purchases invoices All cash and bank transactions, forBank deposit and withdrawal

example, cash sales, receipts from debtors (accounts receivables), payments to creditors Return Inwards Journal Goods returned by customers Return Outwards Goods returned to suppliers Journal Petty Cash Book General Journal Cash transactions of small value

slips, cheques debit and credit card receipts

Credit note sent Credit note received

Petty cash vouchers, cash bills

All transactions which cannot beBills, receipts, vouchers, recorded in any other book of cancelled cheques. original entry

CASH AND CREDIT TRANSACTIONS

Cash transactions occur when payment is received or made when the transaction takes place. This includes the use of credit cards and debit cards. A credit transaction is one where payment is to be made some time in the future, after the transaction. It is important to distinguish between these two types of transactions since the accounting treatment differs as well as the impact on the balance sheet.

(Activity 3.1) Robert is the owner of an Auto Part shop located in Papine, Kingston. He purchases 500 carburetors from Massey Marketing at $35 each, together with 100 shock absorbers at $10 each and 75 disc pads at $25 each. The goods were delivered one week after the order was placed. On checking the order Robert discovers that the disc pads were the wrong brand and he returns them to Massey Marketing. On checking, Massey Marketing did not have the correct brand in stock and so Robert was forced to purchase the disc pads for cash at Car Tech Limited. Answer the following questions which are based on the scenario above: Identify the document Robert receives from Massey Marketing with his order. Name the document Massey Marketing would issue to Robert after he returns the disc pads. (Activity 3.1 contd) What document would Robert receive from Car Tech Ltd when he purchases the correct brand of disc pads? Name the prime entry books in Roberts business where the above transactions would be recorded.

Feedback

(a)

The document received would be a Sales Invoice

(b) Credit Note Cash Bill Purchases Journal, Return Outwards Journal, Cash Book

Debit Cards These are issued by commercial banks to customers allowing them to access their accounts using automatic banking machines (ABMs). I am sure you have seen commercials for debit cards. In Trinidad and Tobago they are referred to as LINXcards. The customers account is immediately debited at the point of sale and the sellers account is credited. This type of payment has become more popular to avoid a large amount of cash on the premises. The receipts from debit cards are used to make records in the cash book.

Credit Cards

Credit cards allow customers to charge their purchases of goods and services instead of paying cash. When the credit card is presented to the seller, it must be verified to ensure the sale does not exceed the approved amount. The use of computers allows the sellers account to be credited with the amount. A percentage of the sale price is charged by commercial banks for all credit card transactions. Popular credit card companies include VISA, Master Card and American Express.

SOURCE DOCUMENTS
A source document records the essential elements of any transaction; the date, name and address of the names of the parties involved and the value of the transaction. They form the basis for the accounting records that are kept by the business. These documents are retained for future verification. Let us now examine a very common document that is used in most transactions, an Invoice. Invoice An invoice is a document sent to credit customers giving a detailed description of the items, unit price and the terms and conditions of the transaction. The order number, as well as the name and address of the customer, are also printed on the invoice. Sometimes the invoice would also alert customers of interest charges when there are overdue balances. An invoice is made in triplicate and the copies are used by different departments to keep their own records. Sales invoices are used to record transactions in the Sales Journal. The Purchases Invoice is sent by

vendors and is used to make records in the Purchases Journal. Both the buyer and the seller receive copies of the invoice and use them to make records.

INVOICE THE PLANT EMPORIUM Orange Valley Road San Juan Customer Name Address

Invoice No: 45678 Date Order No.

Telephone

Fax: Unit Price

Qty

Description

Total

Total Payment: Terms and Conditions E&OE

Credit Note This is a document sent to a buyer when there is a reduction in the amount charged on an invoice. This may occur when goods are returned or when there is an error in pricing. Goods would normally be returned if they are faulty or damaged in some way. Debit Note If errors occur when an invoice is being prepared the document which is sent to customers to change the amount charged on the original invoice is a debit note. It is sometimes referred to as a supplementary invoice. Errors may occur if additional goods were sent to the customer or there was an error on the original invoice.

Discounts

A discount is a reduction in the price of an item. In accounting there are two types of discounts; cash discounts and trade discounts. Cash discounts are given as incentives to customers to make payments on their account within a specified period of time. Trade discounts reduce the catalogue price of an item and are intended to encourage trade. Although they are shown on the sellers invoice, trade discounts are not recorded in the ledger of the buyer or seller.

(Activity 3.2) Grey Singh received an order from Jim Young, a credit customer with the following details on September 30 2007: 6x20 inch planter @ $18.00 each 12kgs Fertilizer @12.50 per kg 20 bottles of Liquid Grow @ $18.50 The following terms and conditions applied: Trade discount 10% 5% 7 days 2% 30 days E&OE You are required to prepare the invoice to be sent to Jim Young. Explain the meaning of the terms and conditions outlined.

Feedback

INVOICE

GREY SINGH Orange Valley Road San Juan

Invoice No: 1245 Date 30/09/07 Order No. 005

Customer Name Jim Young

Address Railway Road Sea View Fax: 989 Description 2007

Telephone: 640 8767 Qty 12 kgs 6 20

Fertilizer 20 Planters - green Bottles Liquid Grow

Unit Price $12.50 $18.00 $18.50

Total $150.00 $108.00 $370.00 $628.00 $62.80 $565.20

Payment: Terms & Conditions

Less 10% Trade discount Total 5% 7 days E&OE 2% 30 days Carriage Paid

The Terms of payment suggest a cash discount of 5% if the total of $565.20 is paid within 7 days after receipt of the invoice. If the total due is paid within 30 days, Mr. Young is entitled to a 2% discount. E&OE stands for errors and omissions excepted. It allows the seller the right to alter the invoice even after it has been sent to the buyer if any errors or omissions are discovered.

RECORDING TRANSACTIONS

Specialized Journals for Stock As we discussed in an earlier Study Guide, a Journal is a daily record of business in chronological order. The Sales, Purchases and Return Journals, also called books of original entry or day books, record transactions dealing only with stock (inventories). The Sales journal record only credit sales of stock and the Purchases Journal records credit purchases of stock. The Returns Journals records goods previously bought or sold on credit that have been returned to suppliers or by customers. Cash sales and purchases of goods are not recorded here, neither the purchase nor sale of fixed assets. These are recorded in the Cash book and the General Journal, respectively. The layout of the journal is shown below. Illustration: Format of Journal Dat Details e Folio A

mount

Invoice

Date on the

Any business involved in a large amounts of credit transactions would find it advantageous to use specialized journals. Managers can quickly get totals regarding credit sales and purchases. The Purchases and Return Inwards Journal record increases in stock whilst the Sales and Return Outwards Journals records decreases in stock.

Example Demonstrating the recording of transactions in Books of Original Entry J. Flowers is the sole owner of The Plant Emporium. Her records show the following transactions for the month of June 2006. June 01 Sold goods on credit to Green Leaf $110, R. Fig $689 and S. Tato $725 June 05 Received Invoices from T. Tin $1 750 and S. Steel $1 105 June 10 Bought goods on credit from Planters Place $1875 June 13 S. Tato returned $125 worth of goods June 18 Sold goods on credit to R. Fig with a list price of $1800, allowing a 2.5% Trade discount June 20 Returned goods to T. Tin $250 Record the above transactions in the appropriate books of original entry.

Feedback to Example

JOURNAL Date 06/01/06 Details Folio Amount ($) 110.00 689.00 725.00 1800 (45) 1 755.00 3279.00

06/18/06

Green Leaf SL R. Figg SL S. Tato SL R. Figg SL Less 2% trade discount Total Credited to the Sales A/C PURCHASES JOURNAL

Date 06/05 06/10 06/30

Details T. Tin S. Steel Planters Place Total Debited to Purchases A/C

Folio Amount PL PL PL GL

Amount 1 750.00 1 105.00 1 875.00 4 730.00

RETURN OUTWARDS JOURNAL Date 06/20 Details T. Tin Total Credited to Return Outwards a/c RETURN INWARDS JOURNAL Date 06/13 Details S. Tato Total Debited to Return Inward a/c Folio Amount Amount 125 125 Folio PL Amount Amount 250 250

(Activity 3.3) Now that you are familiar with the recording procedures of the day books you are to enter up the sales, purchases, and returns day books from the following details for the month of May 2006. May 1 $1 620 May 3 May 4 May 8 May 9 May 10 discount May 15 May 18 May 24 May 28 May 30 Sold goods on credit to L. Long $800, S. Short $1250 and B. Stone Bought goods on credit from S. Lewis $730, J. Makoy $950 S. Short returned goods to us $370 Bought goods on credit from A. Ladi $840, B. Ready $1750 Returned faulty goods to B. Ready $500 Sold goods on credit to Tovadis Limited $1 290 less 10% trade Credit purchases from S. Lewis $510, J. Makoy $ 450 Returned goods to J. Makoy $190 Credit sales to L. Long $2 700, B. Stone $970 B. Stone returns some of the goods purchased on May 24, $180 Tovadis Limited returned goods with a list price of $200

Record the above transactions and determine the amount to be transferred to the Sales a/c, Purchases a/c, Return Inwards and Return Outwards a/cs. Feedback Total Total Total Total credit sales $8 501 credit purchases $5 230 return inwards $730 return outwards $690

The General Journal We just learnt that the specialized journals are used to record transactions dealing with credit sales and purchases of stock. Other transactions that are unable to fit into those categories, such as the credit purchase or sale of fixed assets, are recorded in the General Journal. Although the format is essentially the same as that of the specialized journals, the general journal further analyses the transactions into debit and credit, indicating which account is to be debited and which account is to be credited. The format of the General Journal is shown below. GENERAL JOURNAL Date Details Folio A/C A/C Credited Debited

Journalising is the process of recording entries in the Journal. As with the specialized journals, transactions are recorded in chronological order. The accounts involved are identified and the account to be debited is written first. Indented on the second line is the account to be credited. A special feature of the general journal is the narration, which follows every journal entry. The narration briefly explains the transaction recorded.

Example Demonstrate the use of the General Journal in recording varying transactions. May 16 2006 The Plant Emporium purchased, on credit, machinery costing $17 890, from Mackal Limited. May 20 2006, the Cashier received a voucher for $1150 to pay the insurance for the owners personal car. May 30th 2006, the owner invested a further $21000 into the business from her private savings. Before these are recorded in the journal, the accounts involved are identified. Then, using double entry rules of entry they are recorded in the general journal. Date May 16 06 Machinery Mackal Limited Fixed asset purchases on credit May 20 06 Drawings Cash Cash paid for personal insurance Bank Details Folio GL GL A/C A/C Credited Debited 17 800 17 800

GL GL owners GL

1 150 1 150

May 30 06

21 000 21 000

Capital Additional investment owner

by

The following transactions are usually recorded in the General Journal: 1. Opening entries this is a list of assets and liabilities used to begin a new accounting period. (See the example below). The purchase and sale of fixed assets on credit. Correction of errors.* Closing entries.* Writing off uncollectible debts (bad debts).* Depreciating fixed assets.* *These topics are to be dealt with in a subsequent study guide.

2. 3. 4. 5. 6.

The following shows the opening entries of R. Bull at February 01 2006 Date 02/0 1 Details (Account Titles) Motor Vehicles Furniture Building Cash in hand Bank Stock on hand Debtor: R. Syms Creditor: Beltronics Limited Bank Loan Capital Being Assets, Liabilities and Capital as at Feb. 01.06 You should note that the columns are totalled. (Activity 3.4) J. Hermanson began his second year of trading as a sole trader on June 01 2006 with the following balances: Cash $1650; Bank $8200, Debtors: W. Wilde $750, Plant and Machinery $97000; Office Equipment $34000; Stock $4370; Creditor: S. Sweete $1450. Journalise the above opening entries. Folio Debit $ 35 000 60 000 120 000 1 200 35 490 14 500 8 210 Credit $

26 100 40 000 208 300 274400 274400

Feedback Date Details (Account Titles) Folio Debit $ Credit $

1/6/06 Plant and Machinery Office Equipment Stock Cash in hand Bank Debtor: W. Wilde Creditor: S.Sweete Capital Being Assets, Liabilities and Capital as at Feb. 01.06

97 34 4 1 8

000 000 370 650 200 750 1 450 144 520

145 970

145 970

The Cash Book I am sure you will agree that cash is the lifeblood of any business. Therefore, care should be taken when recording transactions relating to cash or bank. The Cash book is a unique book of original entry. Although it is a journal, it also acts as an account for Cash and Bank. This is the only book of original entry that is balanced and the double entry is completed in the ledger. The cash book records the receipts and payments of cash and bank. Discounts received and allowed are also recorded in the cashbook for convenience. The format of the Cash book is also unique, in that the accounts for cash and bank stand side by side along with the discount column. All receipts are debited and payments credited. The illustration below shows the basic format of a three-column cash book, (which includes the discount columns). A two column cash book is one without the discount column. THE CASH BOOK Dat e Details (RECEIPTS) DEBIT SIDE F Cash Bank Dis Date Details All (PAYMENTS) CREDIT SIDE F Cash Bank Dis Rec

Recording Entries in the Cash Book When a document is received, the first analysis is to determine where it should be recorded. Any document relating to cash or bank, such as, cheque vouchers, cash bills and receipts are used to make records in the cash book. Again it is done in chronological order and the name of the account in the ledger is written in the details column. If the transaction involves the bank then the amount is written in the bank column. If it is a cash transaction, then the amount is written in the cash column. Any discount received or allowed is placed in the discount column. (Activity 3.5) List at least five source documents that can be used to make entries in a three column cash book.

Feedback Your answer should include: Receipts, Cash bills, Payment vouchers, Deposit slips, Cash register slips, cheque counterfoil. Contra Entries Since both cash and bank accounts are in the cash book, it is possible to complete the double entry in the cash book if the transaction involves both accounts. When this happens it is described as a contra entry. These occur when cash is deposited into the bank or cash is withdrawn from the bank for use in the office.

BALANCING THE CASH BOOK

The Cash Book is balanced to determine the amount of cash in hand and bank. To balance the Cash Book means making both sides equal. The columns for Cash and Bank on both sides of the cash book are totaled. The difference (balance) is determined and added to the side with the smaller amount. The cash column will always carry a debit balance; this means that the debit side will always be greater than the credit side, since it is not possible to overspend cash. A credit balance (also called an overdraft) on the bank account signifies that the account has been overdrawn, that is, cheques were written in excess of the amount in the bank. Sometimes this is done with the permission of the bank. If no permission is given then any cheques presented for payment would not be honored by the bank for payment. Now that you have some idea about recording transactions in the cash book go through the following example, which demonstrate recording of transactions in a three column cash book.

Example Record the following transactions of Seren Dippity, a retailer, in his three column cash book for the month of April 2006. $ April 01 Cash at bank 1 800 03 Cash sales 1 490 08 Paid cash for cleaning 124 10 Received a cheque from B. Calm 1 500 15 Purchases paid by cheque 1 380 17 Paid rent by cheque 750 19 Received a cheque from S. Leep to settle his account of $700 less 5% discount 21 Paid cash into bank 1 200 24 Received $900 cash from P. Paine to settle his account of $950 26 Paid D. Serene by cheque to settle an account of $840 less 5% discount. Balance the cash book and bring down the balance at the end of the

month.

Feedback to the example THE CASH BOOK Date Details (RECEIPTS) 4/1 Balance b/f 4/3 Sales 4/10 B. Calm 4/19 S. Leep 4/21 Cash 4/24 P. Paine 5/1 Balance b/d F Cash Bank Dis AllDate Details (PAYMENTS) 1800 4/8 Cleaning 4/15 Purchases 1500 4/17 Rent 665 354/21 Bank 1200 4/26 S. Serene 504/30 Balance c/d 85 2237 F Cash 124 1380 750 C 1200 1066 2390 798 2237 5165 42 42 Bank Dis Rec

1490 sl sl C 900 2390 1066

5165

(Activity 3.6) Write up the three column cash book of S. Sui from the following details and balance the cash book at the end of the month. Aug. 01 bank Aug. 02 Aug. 03 Aug. 05 Aug. 07 $135 discount Aug. 09 Aug. 11 Aug. 15 discount Aug. 18 Aug. 20 Aug. 25 Started business with $1800 cash in hand and $16 000 in the Paid rent by cheque $300 Paid utilities by cheque $1 240 Cash sale $4 300 Received a cheque from debtor C. Lebrity $3400 after allowing Cash sales paid directly into bank $2 980 Paid cash into bank $4 000 Paid account at Vendor Ltd the amount owing $2 900 received 5% Mr. Sui withdrew $1500 from the bank for personal use Paid for motor repairs by cash $850 Withdrew $500 from the bank for office use

Feedback CASH BOOK Date Details F (RECEIPTS) 1/8 Balance b/f 5/8 Sales 7/8 C. Lebrity 9/8 Sales 11/8 Cash C 25/8 Bank C Cash Bank Dis AllDate Details F (PAYMENTS) 16000 2/8 Rent 3/8 Utilities 3400 13511/8 Bank C 2980 15/8 Vendor Ltd 4000 18/8 Drawings 20/8 Motor repairs 25/8 Cash C 31/8 Balance c/d 135 20085 Cash Bank Dis Rec 300 1240 2755 1500 850 1750 500 20085 145 145

1800 4300

4000

500

6600 26380 5/1 Balance b/d 1750

6600 26380

The Petty Cash Book

Small cash payments and receipts can be omitted from the Cash Book to avoid overcrowding. When this is done, a Petty Cash Book is used. The format of the PCB facilitates the analysis of transactions so that certain types of transactions can be posted in aggregate to the ledger. The debit side of the PCB represents receipts whilst the credit side, which represents payments, is divided into several analysis columns. (See example below). PETTY CASH BOOK Receip ts Date Particulars Voucher Office Total Traveling Postage Stationery No. Expenses

The PCB operates with an Imprest System. This means that the Petty Cashier is given a float (imprest) at the beginning of a period from which funds are disbursed. Requests for payment are written on vouchers which briefly explain the purpose of the payment and indicate the amount. At the end of the period (week or month) the total cash paid is then reimbursed by the main cashier. This is referred to as restoring the imprest. This means that the petty cashier is given the exact amount she has disbursed. The totals of the analysis columns are then posted to the general ledger. Small sums received in the office are also recorded in the petty cash book on the receipt side, although generally there is no analysis. These small receipts would reduce the amount to be reimbursed.

Example: To determine the amount to restore the imprest The imprest of a business is $1000 per week. At the end of a week the petty cashier disbursed funds for the following: car wash $50, Stationery $145, received for telephone calls $15, cleaning $175, Coffee and Tea $230. Determine the amount to be reimbursed by the cashier Solution: Imprest at the start of the week Total expenses * Balance of cash remaining Cash required to restore imprest Cash at the start of the following week 1000

585 415 585

1000

*The total sum disbursed = 50+145+175+230=600 less 15 (received) =$585 to restore imprest.

(Activity 3.7) Enter the following transactions in a petty cash book, having analysis columns for postages and stationery, traveling expenses, cleaning and miscellaneous. June 1 June 3 Received imprest from the cashier Bought postage stamps 600 100

V1

June June June June June June June June June

5 9 10 12 14 17 20 23 30

Stationery Taxi fare Office Cleaning Snacks for meeting Paid for weekly newspaper Office cleaning Taxi fare Copy paper Bulbs for the office

V2 V3 V4 V5 V6 V7 V8 V9 V10

80 40 72 100 20 40 20 30 16

Total the analysis columns and restore the imprest to the original amount. Voucher numbers are consecutive.

Feedback Receip ts $600 Date 1/6 3/6 5/6 9/6 10/6 12/6 14/6 17/6 20/6 23/6 30/6 Particulars Restore Imprest Postage stamps Stationery Taxi fare Cleaning Refreshment Newspaper Cleaning Taxi fare Copy paper Bulbs PETTY CASH BOOK Voucher Postage& Cleaning Misc. Total Traveling No. Stationery Expenses Expenses

1 2 3 4 5 6 7 8 9 10

100 80 40 72 100 20 40 20 30 16 518 40

100 80 72 100 20 40 20 30 60 210 112 16 136

30/6 600 82 518 1/7 1/7

Balance c/d Balance b/d Cash (restored imprest)

82 600

GL

GL

GL

GL

KEY POINTS

Books of Original Entry are useful in eliminating bulky details from the ledger. Credit transactions occur when payment is made some time in the future, whereas a cash transaction is where payment is immediate. Source documents record the essential elements of any transaction and are kept for future reference. Sales and Purchases Invoices, receipts, bills, debit notes and credit notes are examples of source documents used to make records in books of original entries. Trade discounts are reductions in the catalogue price of goods and are not recorded in the books whereas cash discounts are given as incentive for prompt payment and recorded in the cash book. The Sales, Purchases, Return Inwards and Return Outwards journals are used to record the credit stock transactions. The General Journal records unusual and onetime transactions and is unique in the way each transaction is analyzed and recorded. All non-credit transactions involving cash or bank are recorded in the cash book. This would include credit and debit card transactions. The Petty Cash Book is an analysis book that records all small cash transactions such as the purchase of postage stamps and gas for office car.

CONCLUSION

As a business grows, the number of transactions increases and it becomes necessary to separate the transactions and record in different journals. The format of the journals, with the exception of the cash book, is very similar and recording in all the journals is done from original source documents. This Study Guide would have enabled you to develop the skills needed to record transactions in the books of original entries, total the books and determine total credit sales and purchases. You should also be able to record transactions in the cash book and balance the cash book. You should now be able to complete the end test and the tutor marked assignment.