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FUNDAMENTALS OF ACCOUNTING I

The Book- Keeping Process& Double entry

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Chapter Objectives• Identify the various types of business records

• Appreciate the accounting cycle

• Explain the double entry system

• Record transactions in the various books of original entry

• Draw sales, purchases and ledger entries

• Draw a basic cashbook.

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Introduction

• Financial information is recorded in a systematic order.

• The process follows the procedural rules of double entry records, which form the accounting system.

• Business accounting requires the books of accounts to be maintained in a systematic manner.

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Accounting cycle

•The process of accounting involves records drawn at successive stages and typically involves four levels.

Transaction documents

Journals(daybooks)

Ledgers

Trial balance

Financial statements

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Transaction documents•These are records used to capture and store information about business events. •The recording of transactions accurately is vital because usually transactions are too many to be memorized. •transaction documents can be used as defense in case of differences in the future.•E.g. cash receipts, invoices, goods received notes, salary slip, cheque. •Transaction documents capture the following information:

– Date of transaction– Details of transaction– Type of transaction– Reference number– Beneficiary of transactions– Mode of payment– Execution officer– Authorization officer

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Journals•These are books of original entry in which transactions are captured on a day to day basis.• They are day books a.k.a books of prime entry. and they capture transactions directly from the transaction documents. •There are four main types as discussed below: Sales journal, purchase journal, general journal, cashbook1) Sales Journal•A book of original entry which records credit sales as they are made. Ideally a sales journal should be recorded and summarized on a daily basis.

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Format of sales journal Sales Day Book

Date Invoice Number Details Folio Amount

         

         

         

         

         

Folio: A key or page reference. Book keeping involves a lot of cross referencing and therefore, a key or page is very useful in this respect.

Note: The sales daybook summarizes total credit sales for a given day (period) through the sequence of the invoice numbers.

However, it doesn’t summarize the sales and payments by individual credit customers and this is captured in a separate record, the sales ledger.

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Example 2.2 (Fundamentals of Accounting by D. Wang’ombe)

•ABC ltd made the following sales on credit as follows.– On 1/1/04 Invoice no. 251 sales to Macharia KShs 5,000,000

– On 2/1/04 Invoice no. 252 sales to Akinyi KShs 2, 000,000

– On 3/1/04 Invoice no. 254 sales to Mutua KShs 1,000,000

– On 3/1/04 Invoice no. 253 sales to Abdi KShs 2, 500,000

– On 5/1/04 Invoice no. 255 sales to Macharia KShs 3,000,000.

– On 6/1/04 Invoice no. 256 sales to Abdi KShs 4,000,000

•Required: Draw the sales day book.

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2) Purchases Journal

•This is a book of original entry where credit purchases are recorded as they are made.

•It records the summary on a daily basis

•Format of purchase journal

Purchases Day Book

Date Invoice Number Details Folio Amount

         

         

         

         

         

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Example 2.3 (Fundamentals of Accounting by D. Wang’ombe)•ABC bought goods on credit as follows:– Invoice no. 005 purchases from Bamburi Ltd. KShs 5, 000, 000 on

1/1/2011– Invoice no. 201 purchases from mumias Ltd. KShs 10, 000,000 on

2/1/ 2011– Invoice number 352 purchases from Athi River Miners Ltd. KShs

4,000,000 on 3/1/2011– Invoice number 020 purchases from Bamburi Ltd. KShs 2,000,000

on 4/4/2011– Invoice number 221 purchases from Unga Group Ltd KShs

2,000,000 on 5/ 1/2011•Required: Draw the purchases day book

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3) General Journal (journal proper)

•records all other transactions not included in the sales or purchases journal.

4) Cashbook

•This is the accounting book which documents both cash receipts and payments.

•Its objective is to record cash transactions on a daily basis.

•It contains all the transactions that relate to various cash transactions

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Ledgers

•A ledger is a register having number of pages which are sequentially numbered and each page allocated to a specific account.

•A collection of books of account.

•Account is a record of a business event that forms part of the accounting system.

•An account has two sides:– Debit: Left hand side

– Credit: Right hand side

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• When account receives benefit is debited while if it gives out a benefit is credited.

• Thus credit account that receives and debit the account that gives.

• Accounts may be classified as follows.– Personal account-accounts of persons – Real accounts-accounts of item, land,building,mv– Nominal accounts-accounts of income, expense,

• Ledgers may be classified as follows– Sales ledger: register of individual a/cs of credit customers– Purchase ledger-register of individual a/cs of credit suppliers– General ledger/Nominal ledger-register of all other a/cs not

captured in purchase and sales ledger.

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Format of account

Double entry rule

•The rule is: For each and every debit there should be a corresponding credit entry, and for each credit there should be a corresponding debit entry.

•Each transaction has a duel aspect. Double entry helps in proving the accuracy of book keeping.

•This implies that each and every transaction is recorded twice. One on the debit side (left) and the other on the credit side (right).

Dr

Name of Account Cr

Date Details F Amount Date Details F Amount

               

               

               

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Basic double entry rules of accounts

Accounts To record Entry in the account

Assets An increase Debit

  A decrease Credit

Liabilities An increase Credit

  A decrease Debit

Capital An increase Credit

  A decrease Debit

Revenue An increase Credit

Expenses An increase Debit

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Accounting for Sales, Purchases, Incomes & Expenses Sales•Sales are divided into cash sales and credit sales•When a cash sale is made, – Debit- cash at bank/in hand– Credit- sales account

•When a credit sale is made, – Debit- trade accounts receivable accounts (an asset)– Credit –sales a/c

•For both credit and cash sales, a sales account is credited.

04/19/23 MIS Notes 16

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Purchases

•They can either be cash or on credit

•For cash purchases Debit- purchases a/c

Credit –cash at bank/in hand

•For credit purchases Debit- purchases a/c

Credit-trade a/cs payable

•Both cash and credit purchases are posted in the purchases a/c

•NOTE: no entry is made in the stock a/c

04/19/23 MIS Notes 17

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Income•This includes other income besides that generated from trading (sales).•E.g. rent received , bank interest, discount received•Entries to be made when a firm receives such income– Debit cash in bank /hand a/c– Credit particular income a/c

•(Each income should have its own a/c)•Essentially, income increases the value of capital & that’s why we credit incomes a/c just like we credit the capital a/c.

04/19/23 MIS Notes 18

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Expenses

•Amounts paid for services rendered other than for purchases.

•E.g. postage & stationery, salaries &wages, rent, electricity & telephone bills, motor vehicles, running expenses

•When a firm pays for an expense; – Debit- expense a/c

– Credit- cash/bank a/c

•Each expense will have its own a/c

•Expenses are debited because they reduce capital.

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Return Inwards/Sale Returns

These are goods (from previous sales) that have been returned by customers due to various reasons e.g. The goods are of a wrong size, colour, or model, the goods are damaged, the goods are of poor quality e.t.c

•Effect: The asset of stock is increased by goods returned hence a debit is needed.

•Open returns inwards accounts and debit it.

•Credit trade account receivables account if it was a credit sale or credit cash a/c if it was a cash sale since the amount is refunded.

04/19/23 MIS Notes 20

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Returns Outwards/Purchases Returns•These are goods returned to suppliers due to the same reasons given above•If purchases made were cash purchases:

• Debit- cash at bank /in hand (cash refunded by the supplier)• Credit- returns outwards amount

For credit purchases• Debit-trade accounts payable to reduce the liability• Credit –return outwards account.

04/19/23 MIS Notes 21

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