Pages From BPP CIMA C2 COURSE NOTE 2012 New Syllabus

7/27/2019 Pages From BPP CIMA C2 COURSE NOTE 2012 New Syllabus

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Fundamentals of Financial

Accounting

Certificate Level Paper C2

Course Notes

INFA21


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2

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C2Fundamentals of Financial AccountingStudy Programme

Page

Introduction to the paper and the course................................................................................................................. 41 The nature and objective of accounting (Study text chapter 1) ...................................................................... 92 An introduction to final accounts (Study text chapter 2) .............................................................................. 153 Sources, records and the books of prime entry (Study text chapter 3)......................................................... 274 Ledger accounting and double entry (Study text chapter 4) ......................................................................... 415 From trial balance to financial statements (Study text chapter 5)................................................................. 576 Preparing accounts: concepts and conventions (Study text chapter 6)........................................................ 77

Checkpoint 1 (including Course Test 1) Additional Study Guidance 91

7 Tangible non-current assets (Study text chapter 8)...................................................................................... 978 Intangible non-current assets (Study text chapter 9) .................................................................................. 1299 Cost of goods sold and inventories (Study text chapter 11) ....................................................................... 135

10 Accounting for sales tax (Study text chapter 14) ........................................................................................ 169


11 Accruals and prepayments (Study text chapter 7)...................................................................................... 17712 Bad debts and allowance for receivables (Study text chapter 10).............................................................. 19513 Bank reconciliations (Study text chapter 12) .............................................................................................. 21514 Accounting for payroll (Study text chapter 15)............................................................................................ 227


15 Control accounts (Study text chapter 13) ................................................................................................... 23916 Correction of errors (Study text chapter 16) ............................................................................................... 25917 Preparation of sole traders accounts (Study text chapter 17).................................................................... 273

18 Limited liability companies(Study text chapter 18) .................................................................................... 28519 Incomplete records (Study text chapter 19)................................................................................................ 309


20 Interpreting company accounts (Study text chapter 25) ............................................................................. 32921 Manufacturing accounts (Study text chapter 21) ........................................................................................ 34122 Statements of cash flows(Study text chapter 24) ...................................................................................... 35523 Income and expenditure accounts (Study text chapter 20) ........................................................................ 37524 The regulatory system (Study text chapter 22)........................................................................................... 38925 Internal and external audit (Study text chapter 23)..................................................................................... 399


26 Answers to lecture examples...................................................................................................................... 415

Prepare for and book your CBA!

You should plan to sit your CBA within the next couple of weeks while the knowledge from this course is still fresh in your

mind. In preparation use the Learning Media P&R Kit and i-Pass to test yourself on as many questions as you can,

revising from the Course Notes and Passcards any areas of the syllabus that cause you problems.

Contact your local BPP centre as early as you can to book your CBA and good luck!


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INTRODUCTION

4 INFA21

Introduction to Paper C2 Fundamentals of Financial

Accounting

Overall aim of the syllabusThe main objective of this paper is the preparation of financial statements for single entities. These statements

are constructed within a conceptual and regulatory framework requiring an understanding of the various valuation

alternatives, the role of legislation and of accounting standards. Being able to apply accounting techniques and

systems enables the preparation of accounts for different types of operations and for specific transactions. There

is an introduction to measuring financial performance with the calculation of basic ratios. The need to understand

and apply necessary controls for accounting systems, looking at internal control and the nature of errors and

fraud, is also covered.

The syllabus

The broad syllabus headings and their relative weightings are:

Topic Study weighting

A Conceptual and regulatory framework 20%

B Accounting systems 20%

C Preparation of accounts for single entities 45%

D Control of accounting systems 15%

Links with other papers

Fundamentals of Financial Accounting provides the underpinning knowledge for all the financial accounting

issues and problems you will face both in your studies but also within the workplace. It is the first stage before

completing papers F1 and F2, and is assumed knowledge for both these papers.

Assessment methods and format of the paper

This paper is tested by computer-based assessment. It is a two hour assessment comprising 50 questions each

with one or more parts. The pass mark is 50%.

Objective test questions are used. The most common type being multiple choice, but there are a variety of other

objective question types that can be used. These include true/false questions, labelling diagrams and numericentry.

Financial Management

F2

Financial Operations (F1)

Fundamentals of Financial

Accounting (C2)


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INTRODUCTION

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Learning Phase Aims

Achieving CIMA's Learning Outcomes

A Conceptual and regulatory framework (20%)

1(a) Explain the need for accounting records Chapter 1

1(b) Identify user groups and the characteristics of financial statements Chapters 1 & 2

1(c) Distinguish between financial and management accounts Chapter 1

1(d) Identify the underlying assumptions, policies and changes in accounting estimates Chapter 6

1(e) Explain capital and revenue, cash and profit, income and expenditure, assets and

liabilities

Chapters 2, 5 &

7

1(f) Distinguish between tangible and intangible assets Chapters 7 and

8

1(g) Explain the historical cost convention Chapter 6

1(h) Identify alternative methods of valuing assets and their impact on profit measures and

statement of financial position values

Chapter 7

2(a) Explain the influence of legislation on published accounting information for

organisations

Chapters 1 & 18

2(b) Explain the role of accounting standards in preparing financial statements Chapter 6 & 24

2(c) Explain approaches to creating accounting standards Chapter 6 & 24

B Accounting systems (20%)

1(a) Explain the principles of double-entry bookkeeping Chapter 4

1(b) Prepare cash and bank accounts, and bank reconciliation statements Chapters 3 & 13

1(c) Prepare petty cash statements under an imprest system Chapter 3

1(d) Prepare accounts for sales and purchases, including personal accounts and control

accounts

Chapters 3 & 15

1(e) Prepare nominal ledger accounts, journal entries and a trial balance Chapters 4 & 5

1(f) Prepare accounts for indirect taxes Chapter 10

1(g) Prepare accounts for payroll Chapter 14

1(h) Prepare a non-current asset register Chapter 7

2(a) Explain the need for accounting codes Chapter 5

2(b) Illustrate the use of simple coding systems Chapter 5


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INTRODUCTION

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C Preparation of accounts for single entities (45%)

1(a) Prepare accounts using accruals and prepayments Chapter 11

1(b) Prepare accounts for bad debts and allowances for receivables Chapter 121(c) Prepare accounts using different methods of calculating depreciation and for

impairment values

Chapter 7

1(d) Prepare accounts for inventories Chapter 9

1(e) Prepare manufacturing accounts Chapter 21

1(f) Prepare income and expenditure accounts Chapter 23

1(g) Prepare accounts from incomplete records Chapter 19

1(h) Prepare accounts for the issue and redemption of shares and debentures Chapter 18

2(a) Prepare financial statements from trial balance Chapter 5

2(b) Prepare a statement of cash flows Chapter 22

3(a) Calculate basic ratios Chapter 20

D Control of accounting systems (15%)

1(a) Identify the requirements for external audit and the basic processes undertaken Chapter 25

1(b) Explain the meaning of fair presentation Chapter 25

1(c) Distinguish between internal and external audit Chapter 25

2(a) Explain the purpose and basic procedures of internal audit Chapter 25

2(b) Explain the need for financial controls Chapters 1 & 25

2(c) Explain the purpose of audit checks and audit trails Chapter 25

3(a) Explain the nature of accounting errors Chapter 16

3(b) Prepare accounting entries for the correction of errors Chapter 16

4(a) Explain the nature of fraud Chapter 25

4(b) Explain the basic methods of fraud prevention and detection Chapter 25


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INTRODUCTION

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Certificate in Business Accounting

On successful completion of all five of the Certificate level computer based assessments (or those for which you

have not been granted exemptions) you will be awarded the CIMA Certificate in Business Accounting.

The Certificate is considered by CIMA to be a qualification in its own right for those who do not wish to qualify

fully as a management accountant but who require a broad grounding in basic management accounting and

financial accounting issues. However, it is also the principal entry requirement for students aiming to attain the

Chartered Management Accountant qualification.

The knowledge content of the Certificate ensures that you understand:

the fundamental underlying concepts of management accounting (FMA);

the regulatory framework for financial accounting and reporting (FFA);

quantitative statistical methods used in management accounting (FBM);

the economic environment in which organisations operate (FBE); and

how formal business relationships between organisations are established (FBLW).

The Certificate in Business Accounting clearly demonstrates to an employer that you have a thorough knowledge

of the basics of business accounting, and is a milestone in your career development!


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INTRODUCTION

8 INFA21


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INFA21 9

Syllabus Guide Learning Outcomes

Having studied this chapter you will be able to:

Explain the need for accounting records Identify user groups and the characteristics of financial statements Distinguish between financial and management accounts Explain the influence of legislation on published accounting information for organisations Explain the need for financial controlsChapter Context

This chapter introduces the subject of accounting and provides an understanding of why we prepare financial accounting

information. It is basic information which will be required throughout your financial accounting training with CIMA.

Questions in this area will focus on the users of financial statements and their needs as well as the different

characteristics of the three types of business entity.

The nature and objective

of accounting


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1: THE NATURE AND OBJECTIVE OF ACCOUNTING

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Overview

Users of financialinformation

The nature and objective ofaccounting

CompaniesSole trader Partnership

Types of business

Concept of separate entity

BookkeepingManagementAccounting

FinancialAccounting

Terminology


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INFA21 11

1. Introduction1.1 This chapter is designed to enable you to explain the need for the preparation of financial

information and describe the needs of different users of financial information.

Accounting a definition

1.2 'The provision of financial information (i.e. accounting for what has happened) concerning

the results of a business for a period of time'.

1.3 The main objective of accounting is to provide useful information to investors.

2. Users of financial information

Lecture Example 1Why do the following individuals require financial information about a business?

Solution

(a) Managers

(b) Owners/shareholders

(c) Providers of finance

(d) HM Revenue & Customs

(e) Suppliers

(f) Financial analysts

(g) Government


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12 INFA21

3. Terminology3.1 Bookkeeping is the recording of monetary transactions in a business. All businesses need

to keep financial records to keep their business running smoothly and these records must be

complete, accurate and valid to produce the necessary financial information.

3.2 Financial accounting is concerned with providing financial information to external users.This information has to be prepared in accordance with generally accepted accounting

principles which include accounting standards and legal requirements.

3.3 Management accounting is primarily concerned with providing financial information to helpmanagers in running the business. Since it is for internal use it does not have to adhere to

accounting standards.

4. Types of business4.1 Businesses fall into three main categories:

(a) Sole trader

(b) Partnership

(c) Companies

5.

The concept of separate identity5.1 It is a fundamental concept that a business is considered to have a separate identity from its

owner.

5.2 Personal transactions of the owner should never be mixed with business transactions.5.3 When considering a limited company this distinction is laid down in law separate legal

entity.

5.4 In preparing accounts, any type of business is treated as a separate identity from itsowner(s).


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6. Chapter summaryThe Nature and Objective of Accounting

The financial information of an organisation is used by a range of different users who may

be either internal or external. They will each be using the information to make decisions andthe information they require will depend upon what decisions they are taking.

Financial accounting and management accounting have different primary users.

There are three main types of businesses, sole trader, partnerships and companies.

While it is important to treat the business as separate from the owners (separate identity

concept), only a company is a separate legal entity.


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14 INFA21

Overview

BookkeepingManagementAccounting

FinancialAccounting

Terminology

END OF CHAPTER

Users of financialinformation

The nature and objective ofaccounting

CompaniesSole trader Partnership

Types of business

Managers

Owners/Shareholders

Providers of finance

HM Revenue & Customs

Suppliers

Financial analysts

Government

Concept of separate entity

'An individual sets up business on

their own'

All the risks and rewards areborne by the sole trader

'More than one individual enter into

business together'

Risks and rewards aresharedbetween the partners

'A separate legal entity from the owners'

The company bears the risks and

rewards

The owners have limited liability

A business is a separate entity from its owner

Personal transactions must be recorded separately (drawings)

The recording ofmonetary

transactions in abusiness.

The provision offinancial informationto external users. Ithas to be preparedin accordance withGAAP.

The provision offinancial informationto help managers inrunning the

business.


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INFA21 15



Identify user groups and the characteristics of financial statements

Explain capital and revenue, cash and profit, income and expenditure, assets and liabilities

Chapter Context

This chapter introduces you to financial statements. Whilst you will not have to prepare financial statements at this levelyou will be tested on their main features. Higher level exams will require the preparation of financial statements so it isimportant to understand this topic both for Certificate level and also for your future studies.

An introduction tofinal accounts


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2: AN INTRODUCTION TO FINAL ACCOUNTS

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Overview


Statement of financialposition

Income statement

Assets Liabilities Capital

Tradingaccount

Expenses

CurrentNon-current


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INFA21 17

1 Introduction

1.1 This chapter is designed to enable you to prepare and present financial statements.

2 The statement of financial position2.1 An individual could prepare a list of everything they own and everything they owe.

Lecture Example 1

Make a list of the typical things a person may own or owe. Include values where appropriate.

Solution

Own Owe

2.2 For a business, this list is formalised as a STATEMENT OF FINANCIAL POSITION.(a) Anasset is a resource controlled by the enterprise as a result of past events and from

which future economic benefits are expected to flow to the enterprise.

(b) A liability is a present obligation of the enterprise arising from past events, thesettlement of which is expected to result in an outflow of resources embodyingeconomic benefits.


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18 INFA21

Proforma statement of financial position sole trader

2.3 Statement of financial position as at 31 December 20X1:

$ $ $ASSETS

Non-current assetsLand and buildings 100,000Office equipment 50,000Motor vehicles 30,000Furniture and fixtures 20,000

200,000Current assets

Inventories 50,000Trade receivables 30,000Less: allowance for doubtful debts (2,000)

28,000Prepayments 5,000Cash in hand and at bank 7,000

90,000Total assets 290,000

$ $CAPITAL AND LIABILITIESCapital

Capital 170,000Profit 45,000

Less: drawings (25,000)190,000

Non-current liabilitiesBank loans 40,000

Current liabilitiesBank overdraft 16,000Trade payables 40,000Accruals 4,000

60,000Total capital and liabilities 290,000

Key features

2.4 (a) Always date a statement of financial position.

(b) Non-current assets assets held and used in the business over the long-term (i.e.more than one year).

(c) Current assets not non-current assets! Conventionally listed in increasing order ofliquidity (i.e. closeness of assets to cash).


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INFA21 19

(d) Capital what the business owes the proprietor/owner. In this case the sole traderowns all of the business, i.e. its total net worth.

CAPITAL = ASSETS LIABILITIES= NET ASSETS

The equation can be re-written to follow the Statement of financial position format:ASSETS = CAPITAL + LIABILITIES

(e) Don't include a caption (item heading) if there isnt a value for it.

The statement of financial position is a snapshot of the business at one point in time.

3 Profit

Example

3.1 Suppose the business buys three books for $10 each. Then it sells them for $15 each:

$Sales 45 IncomeCost of sales (30) ExpenditureGross profit 15

Profit is the excess of total income over total expenditure.

NOTE:The business may have other expenses such as rent, telephone bills, etc. to take offbefore the true profit is shown.

Purpose

3.2 Income statement summarises all those trading activities over a period of time.

Think of it as a DVD!


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20 INFA21

Proforma income statement sole trader

3.3 Income statement for the year ended 31 December 20X1:

$ $Sales 200,000

Less: Cost of salesOpening inventories 40,000Purchases 110,000Carriage inwards 20,000

170,000Closing inventories (50,000)

(120,000)Gross profit 80,000Sundry income 5,000Discounts receivable 3,000

88,000Less: Expenses

Rent 11,000Carriage outwards 4,000Telephone 1,000Electricity 2,000Wages and salaries 9,000Depreciation 7,000Bad and doubtful debts 3,000Motor expenses 5,000Discounts allowable 1,000

(43,000)Net profit 45,000

Key features

3.4 (a) Headed it up with theperiodfor which the income and expenses are being included.

The top part records the trading activities (buying and selling) of the business tocalculate the gross profit as follows:

$Sales 200Cost of sales

(120)

Gross profit 80

(b) Sundry income includes items like bank account interest.

(c) Do not include nil value captions.


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4 Financial statements

4.1 Comprise:

(a) Statement of financial position shows the assets and liabilities of the business at

a point in time.(b) Income statement shows the trading activities of the business over a period oftime.

4.2 The accounting period is the period for which the income statement was prepared. It isusually a year.

A typical set of financial accounts, then, will have:

(a) Statement of financial position at start of the year.(b) Statement of financial position at end of the year.(c) Income statement for the intervening year.

5 Chapter summary

An Introduction to Final Accounts

The statement of financial position is a list of the things a business owns (assets), items thebusiness owes (liabilities) and what the business owes to the owner (capital).

The income statement can be separated into the trading account and a list of the remainingincome and expenditure.

The trading account identifies the gross profit as sales less cost of sales. Cost of sales isidentified as opening inventory plus purchases less closing inventory.

A statement of financial position shows the financial position of a business at one point intime a picture.

The income statement summarises the transactions for a period of time a DVD.


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22 INFA21

Overview


Statement of financialposition

Income statement

Assets Liabilities Capital

Tradingaccount

Expenses

CurrentNon-current

Shows the income and expenses fora business overa period of time,usually a year

Shows the assets and liabilities ofthe business at a oint in time

Sales XCost of Sales

Opening Inventory X

Purchases XClosing Inventory (X)

(X)Gross Profit X

things weown

things weowe

What thebusiness owesthe owner

Used in thebusiness formore than oneyear

Listed in order ofincreasing liquidity(ie closeness ofassets to cash)


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Chapter 2: Questions


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2: QUESTIONS

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2.1 The following are all current assets; trade receivables, inventories, prepaid expenses and bank deposit

account.

If they are placed in order of increasing liquidity, their order will be:

A inventories, trade receivables, prepaid expenses, bank deposit account

B trade receivables, bank deposit account, prepaid expenses, inventoriesC bank deposit account, prepaid expenses, trade receivables, inventories

D prepaid expenses, bank deposit account, trade receivables, inventories


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INFA21 25

Chapter 2: Answers


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2: ANSWERS

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2.1 A

END OF CHAPTER


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INFA21 27



Prepare cash and bank accounts, and bank reconciliation statements

Prepare petty cash statements under an imprest system

Prepare accounts for sales and purchases, including personal accounts and control accounts

Chapter Context

This chapter gives you an understanding of books of prime entry and memorandum legers and forms the basis forunderstanding future chapters although books of prime entry are also a regular exam question in their own right.

Sources, records and the

books of prime entry


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3: SOURCES, RECORDS AND THE BOOKS OF PRIME ENTRY

28 INFA21

Overview

Memorandum ledgers

Sources, records and

the books of prime entry

Books of prime entry

Cash book Sales day book Purchase daybook

Journal bookPetty cash book

Imprest system


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1 Introduction

1.1 This chapter is designed to enable you to describe methods of maintaining records offinancial transactions and demonstrate how these are prepared.

Issue

1.2 Number and variety of transactions:

Ultimately these must be summarised in financial statements.

1.3 A business needs accounting records to achieve the following:

Summarised

Assorted transactions

Categorised

FINANCIAL STATEMENTS


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30 INFA21

2 Books of prime entry

2.1 Step 1:(a) Categorise the transactions.(b) Done by listingby type inbooks of prime entry.

Main books of original entry

Cash book

2.2 (a) Receipts and payments into and out of the bank.

(b) For exam purposes often assumed to be two books, one for receipts, one forpayments.

Cash book (receipts)

2.3 Example

Date Narrative Total

$

Capital

$

Cash sales

$

Receivables

$

2.1.X6 F. Bloggs 4,000 4,000

5.1.X6 J. Spalding 200 200

6.1.X6 J. Smith 500 500

4,700 4,000 500 200

total cashreceived

type of receipt

Cash book (payments)

2.4 Example

Date Narrative Total$

Cash

Purchases$

Van$

Rent$

Payables$

Petty

Cash$

Drawings$

6.1.X6 Manley & Co. 350 350

6.1.X6 Petty Cash 50 50

8.1.X6 Digby Co 1,000 1,000

1,400 1,000 350 50

total cashpayment

type ofpayment


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INFA21 31

Sales day book

2.5 Lists all sales made on credit, i.e. each individual invoice raised.

2.6 Example

Date Customer $

3.1.X6 J. Spalding 200

5.1.X6 G. McGregor 400

TOTAL 600

Purchase day book

2.7 Lists all purchases made on credit, i.e. each individual invoice received.

2.8 Example

Date Supplier $

1.1.X6 Tewson Co 400

4.1.X6 Manley and Co 350

TOTAL 750

Petty cash book

2.9 (a) Records the movement ofphysical cash (kept on the premises) in and out of the pettycash tin.

(b) Used for small incidental expenses.

2.10 Example

Receipts Payments


$


$

Stationery

$

Travel

$

6.1.X6 Chequecashed

50 7.1.X6 CityStationers

10 10

8.1.X6 F. Bloggs

Metro fare

2 2

12 10 2


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32 INFA21

Controlling petty cash the imprest system

An imprest system acts as an accounting control by having a set amount of petty cash.

2.11 (a) Pre-set limit, say $50.(b) Voucher filled in when money is taken out to pay expenses.

(c) At any time, vouchers + cash = pre-set limit.(d) At the end of the week/month, the petty cash book is filled in from the vouchers.(e) The amount needed to bring the balance back up to the preset limit = money spent.

Journal book

2.12 Certain transactions do not fit in the main books, e.g.

(a) Period end adjustments(b) Correction of errors

The journal book lists these sundry transactions.

3 Memorandum ledgers

Types of memorandum ledgers

3.1 There are two such ledgers kept by the business:

(a) Receivables (or sales) ledger.(b) Payables (or purchase) ledger.

Purpose of memorandum ledgers

3.2 These ledgers are kept so that the business can see at a glance how much is:

(a) Owed by individual customers (debtors/receivables).(b) Owed to individual suppliers (creditors/payables).

Use of the day books for this analysis would be too time consuming.

Writing up memorandum ledgers

3.3 The entries in the ledgers are made from original invoices and credit notes . Each time an

invoice or credit note is entered into a day book it is also entered into an individual customeror supplier account.

The memorandum ledgers therefore contain the same information as the day books justarranged by customer rather than date of transaction.


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INFA21 33

Receivables (sales) ledger

3.4 Example

J. Spalding

Date Narrative $ Date Narrative $

3.1.X6

8.1.X6

Invoice 1032

Invoice 1101

Balance b/d

200

400

600400

5.1.X6 Cash received

Balance c/d

200

400600

G. McGregor


5.1.X614.1.X6

Invoice 1033Invoice 1129

Balance b/d

400300

700700

Balance c/d 700700

Payables (purchase) ledger

3.5 Example

Tewson Ltd


Balance c/d 400400

1.1.X6 Invoice A112

Balance b/d

400400400

Manley & Co.


6.1.X6 Cash paidBalance c/d

350200

550

4.1.X616.1.X6

Invoice 063Invoice 097

Balance b/d

350200

550200


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34 INFA21

4 Chapter summary

Sources, Records and the Books of Prime Entry

Business transactions can be categorised into either cash, credit, period end or correction

of errors. Each type of transaction is input into the accounting system by use of a book ofprime entry.

The main books of prime entry are cash book, sales day book, purchase day book, pettycash book and journal.

Memorandum ledgers are not books of prime entry. They are a detailed breakdown ofcredit transactions, either purchases or sales, and show how much is owed to a supplier orfrom a customer.


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INFA21 35

Overview

Imprest system

Memorandum ledgers

Sources, records and

the books of prime entry

Books of prime entry

Receivables (sales) ledger: amount owed by a particular customer

Payables (purchase) ledger:

amount owed to a particular supplier

'Categorise similar transactions together'

Cash book Sales day book Purchase daybook

Journal bookPetty cash book

Cash receiptsinto the bank

Cashpayments fromthe bank

Credit sales Credit purchases Small cash transactionsmade via the petty cash tin

Correction of errorsand period endadjustments


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36 INFA21


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INFA21 37

Chapter 3: Questions


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3: QUESTIONS

38 INFA21

3.1 The following are books of prime entry:

True False

Sales Day Book

Cash book

Sales ledger

Journal

3.2 Which of the following is the best description of the function of books of prime entry in a standard double

entry bookkeeping system?

A Books of prime entry are used to record cash transactions

B Books of prime entry are used to list similar transactions with the totals being posted to the

nominal ledger

C Books of prime entry record amounts owed to/from individual suppliers and customers

D Books of prime entry are used to summarise credit transactions


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Chapter 3: Answers


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3: ANSWERS

40 INFA21

3.1 True False

Sales day book

Cash book

Sales ledger

Journal

3.2 B

END OF CHAPTER


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Explain the principles of double-entry bookkeeping

Prepare nominal ledger accounts, journal entries and a trial balance

Chapter Context

This chapter gives you a good grounding in ledgers and double entry which are the basis of financial accounting. Your

understanding of double entry will be crucial to passing the exam and achieving success in your higher level studies.Whilst an individual question may not ask you to produce a double entry it will be fundamental to getting the correctanswer. For example, a question may ask you to derive the income statement expense for electricity where amountsneed to be accrued at the year end. You will only get this right if you understand the double entry for recordingexpenses and accruals. A question could ask you to describe a transaction and ask you to identify the correct doubleentry to record this.

Ledger accounting and

double entry


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4: LEDGER ACCOUNTING AND DOUBLE ENTRY

42 INFA21

Overview

Ledger accountingand double entry

Double entry

Debit Credit

Balancing off

Ledger accounts


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INFA21 43

1 Introduction

1.1 This chapter is designed to enable you to explain the principles of double entry and applythese principles to the preparation of accounting records within the nominal/general ledger.

1.2 Following on from the previous chapter where transactions were categorisedin books ofprime entry, the next step is to summarise the information in a format nearer to that of thefinal financial statements.

The nominal ledger

1.3 (a) Each item in the statement of financial position or income statement will have an'account' (which might be a page in a book or a record on a computer).

(b) All the accounts are collected together in the nominalledger.

(c) The books of prime entry are totalled up and two entries will be made in these

accounts with each of these totals this is called Double Entry.

The dual effect

1.4 The method used stems from the fact that every transaction affects two things e.g.

(a) A sole trader pays $6,000 in the business bank account:

Cash increases by $6,000Capital increases by $6,000

(b) A sole trader purchases goods on credit for $400:

Purchases increase by $400Trade payables increase by $400

2 Ledger account (T-Accounts)

2.1 Debit Capital Credit

$ $

DEBITS CREDITS

We make two entries from each total extracted from the books of prime entry, and call oneDebit (DR), and the other one Credit (CR).

TOTAL DEBITS = TOTAL CREDITS


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Principles of double entry bookkeeping

2.2 The cash account is a good starting point:

DR CASH CR

$ $CASH IN = DEBIT CASH OUT = CREDIT

General rules

2.3 Debits Creditsincrease increase

Expenses LiabilitiesAssets Income

Drawings Capital

decrease decrease

Liabilities Assets

DEAD CLIC

Lecture Example 1

Required

What is the double entry for each of the following?

Explain each entry in terms of the general rules above.

Transaction Debit Credit

(a) Sales for cash

(b) Sales on credit

(c) Purchase for cash


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Transaction Debit Credit

(d) Purchase on credit

(e) Pay electricity bill

(f) Receive cash from a customer

(g) Pay cash to a supplier

(h) Borrow money from the bank


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3 Flow of information

3.1 Totals from books of original entry are posted to the nominal ledger using double entry.

3.2

Lecture Example 2 Question longer than would be required in an exam

Douglas had the following transactions during January:

(1) Introduced $5,000 cash as capital

(2) Purchased goods on credit from Richard, worth $2,000(3) Paid rent for one month, $500(4) Paid electricity for one month, $200(5) Purchased car for cash, $1,000(6) Sold half of the goods on credit to Tish for $1,750(7) Drew $300 for his own expenses(8) Sold goods for cash, $2,100

Required

(a) Post transactions (1) to (8) to the relevant ledger accounts


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Solution

Cash$ $

Capital$ $

Purchases$ $

Trade payables

$ $

Rent

$ $


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Electricity$ $

Car

$ $

Trade receivables$ $

Sales$ $

Drawings

$ $


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4 Balancing off the accounts

4.1 Required steps

(a) Add up the debit and credit sides separately.

(b) Fill in the higher of the two totals on both sides.

(c) Literally 'balance' the account. Work out what number we need and on which side tomake the two sides equal. This is balance c/d.

(d) Complete the 'double entry' balance b/d on opposite side.

Lecture example 3

The next step towards producing a set of accounts is to balance off every account.

Required

Consider the following cash account as an example:

Solution

DR Cash CR$ $

2/1 Sales 500 1/1 Purchases 30010/1 Sales 500 25/1 Telephone 50

Lecture example 4

Douglas

Refer to lecture example 2

Required

Balance off the ledger accounts for Douglas

Solution

Complete in the solution space for lecture example 2


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5 Chapter summary

Ledger Accounting and Double Entry

An organisation will make two entries for each transaction it puts into its financial records.

One transaction will be a debit and one will be a credit. Debits are shown on the left handside of a 'T' account, while credits will be shown on the right hand side.

At the end of a period it is possible to calculate the balance on each account by balancingoff. This process is where you add up the debit and credit sides of an account, fill in thehigher of the two balances on both sides and literally balance the account by inserting therequired figure; you complete the double entry by b/d the calculated figure.

Documents

Pages From BPP CIMA C2 COURSE NOTE 2012 New Syllabus