1
Principles of Accounts
CSEC Ms Fergusson
2
ST.MARY’SCOLLEGE CSECREVISIONNOTES
TABLEOFCONTENTS
PAGE INTRODUCTION TO ACCOUNTING
3
ACCOUNTING CONCEPTS AND CONVENTIONS
4
INTRODUCTION TO THE BALANCE SHEET
5
SIMPLE VERTICAL FORMAT OF A CLASSIFIED BALANCE SHEET
9
ACCOUNTING CYCLE
10
JOURNALS
12
LEDGERS
17
TRIAL BALANCE
22
CORRECTION OF ERRORS
23
ADJUSTING ENTRIES
24
FINAL A/CS OF SOLE TRADERS
28
CONTROL SYSTEMS
30
BANK RECONCILIATION STATEMENT
32
CONTROL A/CS
35
SUSPENSE A/CS & CORRECTION OF ERRORS
38
FINAL A/C FORMATS
43
RATIO ANALYSIS
63
2
ST.MARY’SCOLLEGE CSECREVISIONNOTES
TABLEOFCONTENTS
PAGE INTRODUCTION TO ACCOUNTING
3
ACCOUNTING CONCEPTS AND CONVENTIONS
4
INTRODUCTION TO THE BALANCE SHEET
5
SIMPLE VERTICAL FORMAT OF A CLASSIFIED BALANCE SHEET
9
ACCOUNTING CYCLE
10
JOURNALS
12
LEDGERS
17
TRIAL BALANCE
22
CORRECTION OF ERRORS
23
ADJUSTING ENTRIES
24
FINAL A/CS OF SOLE TRADERS
28
CONTROL SYSTEMS
30
BANK RECONCILIATION STATEMENT
32
CONTROL A/CS
35
SUSPENSE A/CS & CORRECTION OF ERRORS
38
FINAL A/C FORMATS
43
RATIO ANALYSIS
63
3
INTRODUCTION TO ACCOUNTING
:
Definition of accounting o
Accounting is the process of classifying, sum marizing, recording, int erpreting and communicating financial information.
The purpose of accounting o
Identifying: Establishing the essential characteristics or features of. Classifying and summarizing: sorting out data in a useful order. o To Classify Classify - to arrange or place items into categories or groups. To Summarize – To create a short description that gives the main facts in a condensed form. o Measuring: placing a value; assigning numbers; determining the size Recording: make an official note of in writing, printing, or such. Interpreting: explain the meaning of something in clear, understandable terms. Communicating / Reporting: Presenting data to stakeholders like internal management and external users.
The purpose of accounting is to provide information about financial situation of an organization, so that informed decisions can be made.
Difference between accounting and bookkeeping o
o
Definition of Bookkeeping – Bookkeeping is the recording of the accounting of a business.
Bookkeeping consists of entering transactions into the journals, making adjustments, maintaining precise and accurate records, and preparing reports that keep management up to date on the financial condition of their company.
Bookkeeping is, therefore, a part of accounting, the part concerned with recording information and preparing accounts. Accounting accounts. Accounting involves interpreting the information recorded by the bookkeeper, and preparing reports in a way that management can use for decision making.
Accountants are responsible for the design and management of the financial systems that bookkeepers use.
They prepare monthly financial statements and tax returns at year end. Accountants may also prepare budgets for management and loan proposals for bankers; They may also perform cost analysis for the company’s products or services.
:
The Users of Accounting Information: need to know profitability & liquidity of business, resources and liabilities Internal Users o o o
Owners of the Business – need to know profitability & liquidity of business; money in and out; financial resources Management: - need to know profitability & liquidity of business - decision-making Employees / Trade Unions – Collective bargaining…negotiations for better wages etc.
External Users o o o
Potential Investors – general public and financial institutions e.g. unit trust – risk and return of investment The Bank and other financial institutions – need to know credit rating – risk of non-repayment of loans Suppliers – credit sales :
The various forms of business organizations are:
Sole Trader: 1 owner Partnership: 2 – 20 owners / partners Limited Liability Companies o Private Limited Companies: 2 – 50 owners / shareholders o Public Limited Companies: 7 – unlimited owners / shareholders Cooperative Societies (purpose is furthering the economic welfare of its members): open membership Non-Profit Organizations
4
Accounting Concepts and Conventions Accounting Concepts and Conventions are the accounting rules that are followed when r ecording transactions in the books.
The Cost Concept
. d e d r o c e r e b o t S e T r P a E s C n o N i O t c C a s G n N a I r T t N w U o O h C e t C a A t s t a h t s e l u r e h T
. s y e t a a h t h w e t S z e r a r l N i d u i O r s m I a s i T d a s N n o n E a t t i V s d h t N t e s i a O h u w t C t s l s d a G e o e N l h d I u t T r e e r N e m a h U t g s O e n m C r i t e t C a n i A e u r s o a e l h c c i T a m i s
The Money Measurement Concept
states that assets are valued and shown in the accounts at their cost price (the amount asset is purchased for). states that only transactions that can be measured in monetary terms should be recorded in the books.
The Going Concern Concept
states that the business is assumed to be in operation in the foreseeable future.
The Business Entity Concept
states that the items recorded in the business’ books are transactions that affect the business (business transactions). The owner (s)’ private transactions are kept separate from business transactions.
The Realization Concept (Revenue Recognition Concept)
states that revenue is realized/recognized/earned and recorded as revenue when the goods or services are passed to the customers and a liability is incurred. It is NOT based on when cash has been received.
The Accrual Concept (Matching Concept)
states that the expenses incurred or used up in an accounting period must be matched to the revenues earned in that period, and therefore, recorded in the accounting period incurred.
The Dual Aspect Concept
states that there are two aspects of accounting, and both aspects are always equal to each other. Assets must always equal Capital plus Li abilities (Accounting Equation). “Double entry” is the method of recording the transactions for the dual aspect concept.
Materiality
Prudence / Conservatism
Consistency
states that only relevant information, which has the ability to influence decisions, is reported. Small amounts are not considered material and may either not be reported, or do not have to follow accounting concepts. states that, in times of uncertainty, the figure that understates profit should be reported, rather than the figure that overstates profit. Expenses should be overstated rather than understated, and revenue should be understated rather than overstated. states that the same method should be used for the accounting treatment of similar items, and the same method should be used from year to year. If the method is changed, the change should be disclosed.
5
INTRODUCTION TO THE BALANCE SHEET
:
ALICE: Assets, Liabilities, Income, Capital, and Expenses.
A – Assets L – Liabilities I – income / Revenues C – Capital / Owner’s Equity E – Expenses
•
Assets
Assets are economic resources owned by a business that are used in its daily operations to generate profit and benefit the business. Simply, they are a company’s resources i.e. things the company owns. •
Liabilities
Liabilities are economic resources borrowed by a business from a person or organization. They are the debts of the business i.e. amounts the business owes. •
Income
Income / revenues are amounts earned during the accounting period from the daily operations of the business. Simply, they are what the business earns for providing goods and services. •
Capital / Owner’s Equity
Capital is the economic resources that were contributed by the owner(s) of the business to the business, either to start the business or to continue its operations. •
Expenses
Expenses are the costs incurred by a business in its daily operations in earning income.In other words, they are the cost of assets used by the business to generate revenues.
A company’s financial position The financial position of a company is measured by: 1. Assets (what it owns) 2. Liabilities (what it owes to others) 3. Capital / Owner’s Equity N.B. Every business transaction will have an effect on a company’s financial position.
6
INTRODUCTION TO THE BALANCE SHEET :
Definition of Balance Sheet •
•
The Balance sheet is a financial statement that is produced in order to show the financial position of the enterprise shows It is produced in order to show the assets of a business in relation to its liabilities and capital at a particular point in time.
The major components of the Balance Sheet The financial position of a company is measured by: 1. Assets (what it owns) 2. Liabilities (what it owes to others) 3. Capital / Owner’s Equity Assets, Liabilities and Capital are, therefore, Balance Sheet accounts •
Assets
Assets are economic resources owned by a business that are used in its daily operations to generate profit and benefit the business. There are two types of assets: Fixed Assets: assets used to carry on the business and generate profit. They are not purchased for resale but intended to be retained permanently for the purpose of carrying on the business e.g. Land and Buildings, Fixtures and Fillings, Machinery etc.
o
Current Assets: assets consisting of cash and other assets that would be consumed or easily converted into cash within one year.
o
•
Liabilities
Liabilities are economic resources borrowed by a business from a person or organization. They are the debts of the business (the m oney owed by the business). There are two types of liabilities: o
o
•
Long Term Liabilities: These are any debts or obligations owed by the business that are due more than one year from the current date e.g. Mortgages, Bank Loans etc. Current Liabilities: These are any debts or obligations owed by the business that are due within one year from the current date e.g. Creditors (suppliers, short term loans), bank overdrafts etc.
Capital / Owner’s Equity
Capital is the economic resources that were contributed by the owner(s) of the business to the business, either to start the business or to continue its operations.
Capital is considered a special kind of liability. It is a loan by the owner to the business and is, therefore, money owed by the business to the owner. N.B. For accounting purposes, a business is regarded as being a separate entity from its owner(s). (the business entity concept)
7
INTRODUCTION TO THE BALANCE SHEET :
The Accounting Equation (also called the balance sheet equation.) •
•
•
The Accounting Equation is the basic equation of double entry accounting that reflects the relationship between a company's assets, liabilities, and equity. It shows how assets were financed: either by borrowing money from someone (liability) or by paying your own money (ownership equity). It is expressed as:
Assets = Liabilities + Capital The double entry system is a method used to record each transaction twice in the books as every transaction affects two items.
Additional Information : o
The expanded accounting equation includes two components of Closing Capital: Revenue and Expenses
Revenue – Expenses = the business’ Profit or Loss
If Revenues > Expenses, there is a Profit If Revenues < Expenses, there is a loss
The owner of the business also has the option to withdraw capital from the business for personal use: Drawings
The expanded accounting equation is, therefore: Assets = Liabilities + Capital + Revenues – Expenses – Drawings o o o
Revenues increase Capital / Owner’s Equity Expenses decrease Capital / Owner’s Equity Drawings decrease Capital / Owner’s Equity
: o
An elaborate form of the Accounting equation is presented in a Balance Sheet, which lists all assets, liabilities, and equity, as well as totals to ensure that it balances.
The Format of a simple Balance Sheet (Horizontal) Balance Sheet as at $ Assets
X
$ Capital
X
Liabilities
X
XX
XX
Balance Sheet as at $
$
Fixed Assets
X
Capital
X
Current Assets
X
Long Term Liabilities
X
Current Liabilities
X
XX
XX
8
INTRODUCTION TO THE BALANCE SHEET
The assets and liabilities should be arranged in balance sheet in some specific order. Arrangement of assets and liabilities in the balance sheet is called 'Marshalling of assets and liabilities'. There are two systems of arrangement of assets and liabilities in the balance sheet: (a) Order of Liquidity. (b) Order of Permanence.
The Balance Sheet – Order of Permanence: PERMANENCE is the condition, quality or state of being lasting or fixed, primarily judged by durability and useful life. ORDER OF PERMANENCE is where fixed assets are entered in the balance sheet in descending order of permanence (i.e. land first, then buildings, then equipment etc).
Balance Sheet as at $
$
Fixed Assets
X
Capital
X
Current Assets
X
Long Term Liabilities
X
Current Liabilities
X
XX
XX
The Balance Sheet – Order of Liquidity: LIQUIDITY refers to the ability to quickly and easily convert assets into cash without incurring a significant loss ORDER OF LIQUIDITY is when items on a balance sheet are listed in descending order of liquidity. After cash, the other current assets are listed in order of liquidity or nearness to cash (i.e. Accounts Receivable first, then Inventory…).
Balance Sheet as at $
$
Current Assets
X
Current Liabilities
X
Fixed Assets
X
Long Term Liabilities
X
Capital
X
XX
XX
N.B. The most permanent assets are the least liquid.
:
FIXED ASSETS
CURRENT ASSETS
Order of Permanence
Order of Liquidity
Order of Permanence
Order of Liquidity
Land Buildings Machinery Equipment Motor Vehicles
Motor Vehicles Equipment Machinery Buildings Land
Land Buildings Machinery Equipment Motor Vehicles
Motor Vehicles Equipment Machinery Buildings Land
LONG TERM LIAB. Order of Permanence Mortgage Bank Loan due in over a year
Order of Liquidity Bank Loan due in over a year Mortgage
CURRENT LIAB. Order of Permanence
Order of Liquidity
Creditors
Bank Overdraft
Bank Overdraft
Creditors
9
VERTICAL FORMAT OF A SIMPLE BALANCE SHEET OF A SOLE TRADER
Owner’s Name Balance Sheet as at _________ $
$
$
FIXED ASSETS:
Land & Buildings Plant & Machinery Fixtures & Fittings Motor Vehicles
X X X X X
CURRENT ASSETS:
Stock Debtors Bank * Cash Total Current Assets
X X X X X
LESS: CURRENT LIABILITIES
Bank Loan (1yr or less) Creditors Bank overdraft * Total Current Liabilities
X X X (X)
WORKING CAPITAL
X
XX FINANCED BY: CAPITAL:
Opening Capital Add: Net Profit OR Less: Net Loss Less: Drawings Closing Capital
X X OR (X) X (X) X
LONG-TERM LIABILITIES
Mortgage Bank Loan (more than 1 year) Total Long Term Liabilities
X X X XX
10
Principles of Accounts
ACCOUNTING CYCLE Ms Fergusson
11
The accounting cycle is a series of steps for recording each transaction in the accounting process, which are repeated every accounting period.
NB. Journalizing and posting to ledgers are done through out the period, whereas the rest of the cycle is done at the end of a period.
Categories of Accounts
Types of Accounts
A
Assets
Personal Accounts – Debtors and Creditors
L
Liabilities
Real Accounts – Assets & Liabilities
I
Income / revenue
Nominal Accounts – Revenue and Expenses
C
Capital
E
Expenses
12
Transaction
Journal
ALL CASH / CHEQUE TRANSACTIONS Capital: investment by owner
Cash Book
Receipt from Loans and repayment of Loans
Cash Book
Purchase / Sale of Fixed Assets for cash or cheque
Cash Book
Purchase of Stock with cash or cheque (Cash Purchases)
Cash Book
Sale of Stock for cash or cheque (Cash Sales)
Cash Book
Payment of expenses e.g. rent, salaries, insurance, interest on loan, etc.
Cash Book
Payment of creditors (suppliers) the amount owed to them
Cash Book
Receipt of income/revenue e.g. interest received, rent received, etc.
Cash Book
Receipt of cash/cheque from debtors (customers) the amount owed by them
Cash Book
Drawings: money withdrawn from business for personal use
Cash Book
Discounts Received and Discounts Allowed
Cash Book
CREDIT TRANSACTIONS INVOLVING STOCK AND FIXED ASSETS Purchase of Stock on credit (Credit Purchases) Sale of Stock on credit (Credit Sales) Sales Returns / Returns Inwards Purchases Returns / Returns Outwards Purchase / Sale of Fixed Assets on credit
Purchases Journal Sales Journal Ret. Inwards Journal Ret. Outwards Journal General Journal
TRANSACTIONS ENTERED IN THE GENERAL JOURNAL Transactions that are entered in the cash book are also entered in the GJ Capital: investment by owner
General Journal
Purchase / Sale of Fixed Assets for cash or cheque
General Journal
Payment of expenses e.g. rent, salaries, insurance, and... Discounts Allowed Carriage Inwards and Outwards Receipt of income/revenue e.g. interest received, rent received, and... Discounts Received
General Journal General Journal General Journal General Journal General Journal
Payment of creditors (suppliers) the amount owed to them
General Journal
Drawings: money withdrawn from business for personal use
General Journal
Non Cash Transactions are entered in the GJ Adjusting Entries Provision for Depreciation Bad Debts written off Provision for Bad Debts Prepayments and Accruals
General Journal General Journal General Journal General Journal
OTHER ENTRIES OF THE BUSINESS Opening Entries (list of opening balances of assets, liabilities and capital a/cs)
General Journal
Correction of Errors
General Journal
Closing Entries (list of closing balances of assets, liabilities and capital a/cs)
General Journal
13
Name of the Business Sales Journal Date Year dt dt dt End of mth
Details
Invoice #
Debtor e.g. John Smith Debtor e.g. Jane Doe Debtor Transfer to Sales account
Folio
Amount $
SL # SL SL GL
X X X XX
Folio
Amount $
PL # PL PL GL
X X X XX
Folio
Amount $
SL # SL GL
X X XX
Folio
Amount $
PL # PL GL
X X XX
Purchases Journal Date Year dt dt dt End of mth
Details
Invoice #
Creditor e.g. Will Browne Creditor e.g. Alice Williams Creditor Transfer to Purchases account
Returns Inwards Journal Date Year dt dt End of mth
Details
Invoice #
Debtor e.g. John Smith Debtor e.g. Jane Doe Transfer to Returns inwards account
Returns Outwards Journal Date Year dt dt End of mth
Details
Invoice #
Creditor e.g. Will Browne Creditor e.g. Alice Williams Transfer to Returns outwards account
Cash Book Date
Details
Year dt dt dt dt dt dt *dt *dt
Balance b/d Capital Sales Debtor Interest received Loan Bank Cash
Folio
GL GL SL GL GL GL GL
Discount Allowed
Cash
Bank
Date
Details
$
$ X
$ X X
Year dt dt dt dt *dt *dt dt dt
Purchases Motor Vehicle Creditor Drawings Cash Bank Interest on Loan Balance c/d
X X X X X X
dt
Balance b/d
X
XX X
X XX X
Folio
Discount Received
Cash
Bank
$
$
$ X X X
GL GL PL GL GL GL GL
X X
X X X X XX
X XX
X
The Journal Date Year dt
Details Account debited e.g. Motor Vehicle Account credited e.g. Bank Account Narrative (description of transaction) e.g. to record the purchase of Motor Vehicle
Folio GL GL
DR $ X
CR $ X
14
The General Journal is the journal used to record opening entries, closing entries, adjusting entries and correction of errors.
Opening Journal (opening balances for assets, liabilities and capital accounts) At the beginning of an accounting period, there is one journal entry which shows all the opening balance of assets, liabilities and capital called an opening journal entry. Because all assets have debit balance, so these are debited in opening journal entry and all liabilities have credit balance, so these are credited in opening journal entry. Capital is credited.
Itisbasedonaccountingequation The balances can be taken from the balance sheet of previous year. To creating the opening journal entry make a list of all Assets on debit side, all Liabilities and Capital on credit side.
The Journal Date Year dt
Details
Folio
Land and Buildings Plant and machinery Motor Vehicles Stock (Inventory) Debtors Bank Cash Mortgage Bank Loan Creditors Accrued Expenses Provision for Depreciation: Motor Vehicles To record assets, liabilities and capital of business at beginning of period
GL GL GL GL GL GL GL GL GL GL GL GL
DR
CR
$ X X X X X X X
$
X X X X X XX
XX
DR
CR
$ X
$
Correction of errors, Adjusting entries, etc.
The Journal Date Year dt
Details Account debited e.g. Motor Vehicle Account credited e.g. Bank Account Narrative (description of transaction) e.g. to record the purchase of Motor Vehicle
Folio GL GL
X
15
PettyCashBook Receipts
Folio
$ X
Date
Details
2011 CB
Total
Motor Expenses
Travel Expenses
Postage
Cleaning
Sundry Expenses
$
$
$
$
$
$
Jan 3
Cash
Jan 7
Postage
Jan 10
Motor Exp.
X
Jan 14
R. King
X
Jan 19
Travel Exp.
X
Jan 25
Sundry exp.
X
Jan 26
Cleaning
X
Jan 31
Balance c/d
X
Feb 1
Balance b/d
X
Feb 1
Cash
X
CB
Ledger Accounts
$
X X PL
X
X X
X X
Ledger Folio
X X
X
X
X
X
X
X X
PettyCashBook Receipts
Folio
$ X
Date
Details
2011 CB
Total
Motor Expenses
Travel Expenses
Postage
Cleaning
Sundry Expenses
$
$
$
$
$
$
Jan 3
Cash
Jan 7
Postage
Jan 10
Motor Exp.
X
Jan 14
R. King
X
Jan 19
Travel Exp.
X
Jan 25
Sundry exp.
X
Jan 26
Cleaning
X
X
CB
Jan 31
Cash
Jan 31
Balance c/d
XX
Ledger Accounts
$
X X PL
X
X X
X X
Ledger Folio
X X
X
X
X
X
X
X XX
Feb 1
X
Balance b/d
16
PettyCashBook Receipts
Folio
$ 300
Date
Details
2011 CB
Total
Motor Expenses
Travel Expenses
Postage
Cleaning
Sundry Expenses
$
$
$
$
$
$
Jan 3
Cash
Jan 7
Postage
Jan 10
Motor Exp.
20
Jan 14
R. King
30
Jan 19
Travel Exp.
15
Jan 25
Sundry exp.
12
Jan 26
Cleaning
5
Jan 31
Balance c/d
Feb 1
Balance b/d
Feb 1
Cash
300
$
20 PL
30
15 12 14 20
15
5
14
12
30
204 300
204 96
Ledger Accounts
5
14 96
Ledger Folio
CB
PettyCashBook Receipts
Folio
$ 300
Date
Details
2011 CB
Jan 3
Cash
Total
Motor Expenses
Travel Expenses
Postage
Cleaning
Sundry Expenses
$
$
$
$
$
$
Ledger Folio
Ledger Accounts
$
16
PettyCashBook Receipts
Folio
$
Date
Details
2011
300
CB
Total
Motor Expenses
Travel Expenses
Postage
Cleaning
Sundry Expenses
$
$
$
$
$
$
Jan 3
Cash
Jan 7
Postage
Jan 10
Motor Exp.
20
Jan 14
R. King
30
Jan 19
Travel Exp.
15
Jan 25
Sundry exp.
12
Jan 26
Cleaning
5
Balance c/d
Feb 1
Balance b/d
Feb 1
Cash
Ledger Accounts
$
5 20 PL
30
15 12
14
14
96
Jan 31
Ledger Folio
20
15
5
14
12
30
204
300
300
204 96
CB
PettyCashBook Receipts
Folio
$
Date
Details
2011
300
CB
Total
Motor Expenses
Travel Expenses
Postage
Cleaning
Sundry Expenses
$
$
$
$
$
$
Jan 3
Cash
Jan 7
Postage
Jan 10
Motor Exp.
20
Jan 14
R. King
30
Jan 19
Travel Exp.
15
Jan 25
Sundry exp.
12
Jan 26
Cleaning
5
396
Jan 31
Cash
Jan 31
Balance c/d
$
20 PL
30
15 12
14
14 20
15
5
14
12
30
300
CB
396
Feb 1
300
Ledger Accounts
5
96 96
Ledger Folio
Balance b/d
17
A T-ACCOUNT is an individual record of business transactions that result in increases and decreases in the specific asset, liability, or capital item. An account consists of three parts: - The Title/Name of the account - The left side (known as debit / Dr ) - The right side (known as credit / Cr )
Name of account e.g. Capital Date
•
•
Details
Folio
Dr$
Date
Details
Folio
Cr$
Increases and decreases in assets, liabilities and capital are posted in the form of debits and credits. Debit and credit, therefore, indicate on which side of a T account numbers will be recorded. For some types of accounts debit means an increase in the account balance, while for others debit means a decrease in the account balance, as seen below: Category of Account
Entry to Increase
Entry to Decrease
17
A T-ACCOUNT is an individual record of business transactions that result in increases and decreases in the specific asset, liability, or capital item. An account consists of three parts: - The Title/Name of the account - The left side (known as debit / Dr ) - The right side (known as credit / Cr )
Name of account e.g. Capital Date
•
•
Details
Folio
Dr$
Date
Details
Folio
Cr$
Increases and decreases in assets, liabilities and capital are posted in the form of debits and credits. Debit and credit, therefore, indicate on which side of a T account numbers will be recorded. For some types of accounts debit means an increase in the account balance, while for others debit means a decrease in the account balance, as seen below: Category of Account
Entry to Increase
Entry to Decrease
Debit Credit Credit Credit Debit
Credit Debit Debit Debit Credit
Assets Liabilities Income / revenue Capital Expenses
LEDGERS are books of final entry containing the T-accounts of the business in which transactions are posted in the form of debit and credits.
Ledgers
T-Accounts
Sales Ledger
Debtor a/cs (personal accounts) e.g. John Smith
Purchases Ledger
Creditor a/cs (personal accounts) e.g. Alice Williams
General Ledger
Real a/cs: assets, liabilities and capital e.g. Motor Vehicles, Stock, Loans etc. Nominal a/cs: income and expense a/cs e.g. Rent, Discount Allowed, Interest received
Account Debtor a/cs (personal accounts) e.g. John Smith Creditor a/cs (personal accounts) e.g. Alice Williams
Ledger Sales Ledger Purchases Ledger
Sales , Purchases, Returns Inwards, Returns Outwards a/cs
General Ledger
Fixed Asset a/cs (real accounts) e.g. Buildings, Motor Vehicles etc.
General Ledger
Cash and Bank separate a/cs
General Ledger
Liability a/cs e.g. Mortgage
General Ledger
Capital a/c and Drawings a/c
General Ledger
Revenue a/cs and Expense a/cs (nominal accounts) e.g. rent , salaries, etc
General Ledger
DOUBLEENTRYrequires that for each transaction, the amount entered into the accounting records is entered in at least two different accounts, with one account being debited and the other credited. All debit amounts equal all credit amounts provided the double-entry accounting was properly followed.
18
Name of the Business Sales Ledger Debtor a/c e.g John Smith Date Year dt
Details Sales
Folio
Dr$
SJ
X
Date Year dt dt dt
Details Returns Inwards Cash/Bank Discounts Allowed
Folio
Cr$
RIJ CB CB
X X X
Folio
Cr$
RIJ CB CB
X X X
Folio
Cr$
RIJ CB CB
X X X
Folio
Cr$
Debtor a/c e.g Jane Doe Date Year dt
Details Sales
Folio
Dr$
SJ
X
Date Year dt dt dt
Details Returns Inwards Cash/Bank Discounts Allowed
Debtor a/c Date Year dt
Details Sales
Folio
Dr$
SJ
X
Date Year dt dt dt
Details Returns Inwards Cash/Bank Discounts Allowed
Name of the Business Purchases Ledger Creditor a/c e.g Will Brown Date Year dt dt dt
Details Returns Outwards Cash/Bank Discounts Received
Folio
Dr$
ROJ CB CB
X X X
Date Year dt
Details Purchases
PJ
Creditor a/c e.g Alice Williams Date Year dt dt dt
Details Returns Outwards Cash/Bank Discounts Received
Folio
Dr$
ROJ CB CB
X X X
Date Year dt
Details Purchases
Folio
Cr$
PJ
Creditor a/c Date Year dt dt dt
Details Returns Outwards Cash/Bank Discounts Received
Folio
Dr$
ROJ CB CB
X X X
Date Year dt
Details Purchases
Folio PJ
Cr$
19
Name of the Business General Ledger Sales a/c Date
Details
Folio
Dr$
Date Year dt dt
Details
Folio
Cr$
CB
X
SJ
X
Details
Folio
Cr$
Details
Folio
Cr$
Details
Folio
Cr$
Total Return Outwards for the month
ROJ
X
Details
Folio
Cr$
Details
Folio
Cr$
CB
X
Folio
Cr$
CB
X
Details
Folio
Cr$
Details
Folio
Cr$
CB
X
Cash / Bank Total credit Sales for the month
Purchases a/c Date Year dt dt
Details
Folio
Dr$
Cash/Bank Total credit Purchases for the month
CB
X
PJ
X
Date
Returns Inwards a/c Date Year dt
Details Total Return Inwards for the month
Folio
Dr$
RIJ
X
Date
Returns Outwards a/c Date
Details
Folio
Dr$
Date Year dt
Motor Vehicles a/c Date Year dt
Details Bank
Folio
Dr$
CB
X
Date
Capital a/c Date
Details
Folio
Dr$
Date Year dt
Bank
Bank Loan a/c Date
Details
Folio
Dr$
Date Year dt
Details Bank
Rent a/c Date Year dt
Details Cash / Bank
Folio
Dr$
CB
X
Date
Commissions received a/c Date
Details
Folio
Dr$
Date Year dt
Cash / Bank
20
An account balance is the difference between the debit and credit amounts. Bank account Date 2010 March 1 March 13 March 25
Details Balance b/d Sales Loan
Folio
Dr$
CB GJ
12 500 2 000 1 000
Date 2010 March 14 March 20 March 27 March 28
Details Purchases Equipment Drawings Rent
Folio CB GJ GJ GJ
Cr$ 1 300 1 000 200 2 000
Simple steps: 1. Skip a line, draw total lines across from each other on the debit and credit sides, as seen below: Bank account Date 2010 March 1 March 13 March 25
Details Balance b/d Sales Loan
Folio
Dr$
CB GJ
12 500 2 000 1 000
Date 2010 March 14 March 20 March 27 March 28
Details Purchases Equipment Drawings Rent
Folio CB GJ GJ GJ
Cr$ 1 300 1 000 200 2 000
2. Total the side with the larger amount and enter the amount in both total boxes, as seen below: Bank account Date 2010 March 1 March 13 March 25
Details Balance b/d Sales Loan
Folio
Dr$
CB GJ
12 500 2 000 1 000
Date 2010 March 14 March 20 March 27 March 28
Details Purchases Equipment Drawings Rent
Folio CB GJ GJ GJ
15 500
Cr$ 1 300 1 000 200 2 000 15 500
3. On the side with the smaller amount, enter the date (last day of the month), Balance c/d and the difference between the debit and credit amounts (account balance), as seen below: 4. On the opposite side after the totals, enter the date (first of the following month), Balance b/d and the account balance. Bank account Date 2010 March 1 March 13 March 25
Details Balance b/d Sales Loan
Folio
Dr$
CB GJ
12 500 2 000 1 000
15 500 April 1
Balance b/d
Date 2010 March 14 March 20 March 27 March 28 March 31
Details Purchases Equipment Drawings Rent Balance c/d
Folio
Cr$
CB GJ GJ GJ
1 300 1 000 200 2 000 10 000 15 500
10 000
5. Account balances are entered in the Balance Sheet to show the financial position of the business.
21
Nominal accounts are temporary accounts, which are closed off at the end of a period. The steps are the same as Real and Personal accounts, except that Nominal a/c balances are NOT carried forward to following period but are transferred to the Trading a/c or the Profit & Loss a/c as follows: Nominal account
Transfer to:
Sales Purchases Returns Inwards / Outwards Expenses Revenue
Trading a/c Trading a/c Trading a/c Profit & Loss a/c Profit & Loss a/c
Name of Business The Journal Date 2010 March 31 March 31
March 31
March 31
Details
Folio
Sales Trading a/c
DR $ X
CR $ X
Trading a/c Purchases a/c
X
Profit and Loss a/c Expense a/c e.g. Rent
X
Revenue a/c e.g. Commissions Received Profit and Loss a/c
X
X X X
Sales a/c Date 2010
Details
Folio
March 31 Transfer to Trading a/c
GJ
Dr$
Date 2010 March 13 March 31
24 000
Details
Folio
Bank Total Credit Sales for the month of March
CB
2 000
SJ
22 000
24 000
Cr$
24 000
Purchases a/c Date 2010 March 14 March 31
Details
Folio
Dr$
Bank Total Credit Purchases for the month of March
CB
1 300
PJ
22 000
Date 2010
Details
Folio
Cr$
March 31
Transfer to Trading a/c
GJ
24 000
24 000
24 000
Expense a/c e.g. Rent a/c Date 2010 March 14 March 25
Details
Folio
Bank Cash
CB CB
Dr$ 300 600 900
Date 2010
Details
Folio
March 31
Transfer to P&L a/c
GJ
Cr$
900 900
Revenue a/c e.g. Commissions Received Date 2010 March 31
Details
Folio
Transfer to P&L a/c
GJ
Dr$ 1 000 1 000
Date 2010 March 13
Details Bank
Folio CB
Cr$ 1 000 1 000
22
The Trial Balance is a list of all the debit and credit account balances for a period.
Type of Account
Balance in Trial Balance
Personal and Real accounts Nominal accounts
Balance c/d Transfer to Trading or P&L a/c
The account balances for a period are entered in the Trial Balance as follows:
Category of Account
Account Balances
Assets Liabilities Income / revenue Capital Expenses
Debit Credit Credit Credit Debit
Trial Balance as at ___________________ Dr $ Asset accounts Liability accounts Income accounts Capital account Expense accounts
Cr $
X X X X X XX
XX
Trial Balance as at ___________________ Dr $
Cash Bank * Stock (Opening Stock) Bank Loan Debtors Creditors Sales Purchases Returns Inwards Returns Outwards Rent Carriage Inwards Carriage Outwards Commissions received Wages and Salaries Interest Received Discounts Allowed Discounts Received Interest on Loan Motor Vehicles Equipment Bank Overdraft * Capital Drawings
Cr $
X X X X X X X X X X X X X X X X X X X X X X X X XX
XX
All debit amounts equal all credit amounts provided the double-entry accounting was properly followed.
23
There are two main classifications: Errors NOT affecting / revealed by the Trial Balance 1. 2.
Errors of Commission (correct amount, wrong personal account) Errors of Principle (correct amount, wrong type / category of account)
3.
Errors of Original entry (incorrect amount entered in the journal / book of original entry)
4. 5.
Errors of Omission (no entry made in the books for transaction) Compensating Errors (incorrect amount entered in double entry to ledger accounts cancelling out error)
6.
Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each a/c
Errors affecting / revealed by the Trial Balance Errors of transposition in half of the double entry (resulting in overstatement or understatement of amts). Errors caused by entries on the wrong side of one half of the double entry. Errors caused by the omission of one half of the double entry. Errors of calculation (miscalculation of the account balances) Errors made in the Trial Balance.
• • • • •
Suspense Account (Errors affecting / revealed by the Trial Balance) A temporary account called a suspense account has to be opened in the general ledger with the difference to make the Trial Balance totals agree with each other. It is opened with a balance, on the side of the a/c that the Trial Balance is less, as seen below: General Ledger Suspense account Date
Details
Dr$
Difference in trial balance (DR side of TB less)
Date
X
Details
Cr$
Difference in trial balance (CR side of TB less)
X
A credit balance in the Suspense account is a Current Liability in the Balance Sheet. A debit balance in the suspense account is a Current Asset in the Balance Sheet.
N.B. When errors are discovered, they must be corrected through journal entries (separately), which are then posted to the ledger accounts affected by the error, including the suspense account.
Name of business st
Statement of corrected Net Profit for the year ended 31 March 2007 $ Net Profit per accounts Add: Expenses amount overstated Income / Revenue amount understated / omitted
$ X
X X X
Less: Income / Revenue amount overstated Expenses amount understated / omitted
X X (X)
Corrected Net Profit for the year
XX
24
Adjusting en tries are ent ries made at the end of an acco unting period pe riod to all ocate reve nue and expenses t o the period in which they belong, as required by the Matching / Accruals Concept. Expenses to be transferred to the Profit and Loss account is the expensesincurred expenses incurred in the period, whether they have been paid or not. Revenue to be transferred to the Profit and Loss account is the revenueearned revenue earned in the period, whether it has been received or not. TYPES OF ADJUSTING ENTRIES: 1. 2. 3. 4.
Accruals – Accrued Expenses and Accrued Revenue Prepayments – Prepaid Expenses and Prepaid Revenue Provision Provision for Depreciation Bad Debts and Provision Provision for Bad Debts
Accruals and Prepayments 1.
Accruals and Prepayments Prepayments adjust revenue and expense expense amounts in the theTrial Trial Balance as follows: Profit and Loss Amount S E S N E P X E E U N E V E R
Trial balance
Notes to accounts
Expense Transferred Transferred to P&L a/c
=
Expense paid
+ Accrued Expense
Expense Transferred Transferred to P&L a/c
=
Expense paid
- Prepaid Expense
Revenue Transferred to P&L a/c
=
Revenue received
+ Accrued Expense
Revenue Transferred to P&L a/c
=
Revenue received
- Prepaid Expense
ADD ACCRUALS LESS PREPAYMENTS
2.
Accruals and Prepayments are included in the Balance Sheet as follows: CURRENT ASSETS
CURRENT LIABILITIES
Prepaid Expenses
Accrued Expenses
Accrued Rev enue
Prepaid Re venue
Bad Debts Profit and Loss a/c
Expense (amount written written off) off)
Provision for Bad Debts Profit and Loss a/c
Increase in Provision for Bad Debts (Expense) Decrease in Provision for Bad Debts (Revenue)
Balance Sheet
Total Provision for Bad Debts (Current Assets: Debtors less Provision) Provision)
Depreciation Profit and Loss a/c
Annual Depreciation D epreciation (Expense)
Balance Sheet
Accumulate d Deprecia tion (Fixed As sets less De preciation)
25
ACCRUALS AND PREPAYMENTS
Expenses (Rent, Salaries, Insurance, etc.) The Journal Date Year dt
End of yr
End of yr
End of yr
Details
Folio
DR $ X
Expense a/c Cash / Bank a/c To record payment of expense during the year
GL CB
Expense a/c Accrued Expe nse a/c To record expense incurred but still owing at the end of period
GL GL
X
Prepaid Expense a/c Expense a/c To record expense not incurred but paid in advance
GL GL
X
Profit & Loss a/c Expense a/c To close off Expense a/c and transfer to Profit & Loss a/c
CR $ X
X
X
X GL
X
Revenue (Interest received, commissions received, rent received, etc.) The Journal Date Year dt
Details Cash / Bank a/c Revenue a/c To record revenue received during the year
End of yr Accrued Rev enue a/c Revenue a/c To record revenue earned but still owing at the end of period End of yr
End of yr
Folio CB GL
DR $ X
CR $ X
GL GL
X
Revenue a/c Prepaid Revenue a/c To record revenue not earned but received in advance
GL GL
X
Revenue a/c Profit & Loss a/c To close off Revenue a/c and transfer to Profit & Loss a/c
GL
X
X
X
X
NB. Accrued Expenses / Revenue and Prepaid Expenses / Revenue accounts are not opened for CSEC. The Accruals and Prepayments are recorded as c/d and b/d figures that are recorded in the Balance sheet as Current assets or Current liabilities.
26
Bad Debts and Provision for Bad Debts The Journal Date Year dt
End of yr
End of yr
End of yr
End of yr
Details
Folio
Bad Debts a/c Debtors a/c To write off Bad debts and reduce Debtor amount Profit & Loss a/c Bad Debts a/c To close off Bad Debts a/c and transfer to Profit & Loss a/c
Profit & Loss a/c Provision for Bad for Bad Debts a/c To create a Provision for Bad debts a/c and transfer to P& L a/c as an expense. Profit & Loss a/c Provision for Bad for Bad Debts a/c To transfer an increase in Provision for Bad debts to P& L a/c as an expense. Provision for Bad for Bad Debts a/c Profit and Loss a/c To transfer a decrease in Provision for Bad debts to P& L a/c as revenue.
GL SL
DR $ X
CR $ X
X GL
X
X GL
X
X GL
X
X GL
X
NB. Bad Debts is treated as an expense account. It is, therefore, debited when a debt is written off. At the end of the perio d, the amount of Bad Debts is transferred to the P & L account like all expenses. Bad Debts is NOT recorded in the Balance Sheet. Provision for Bad Debts is a contra asset account as it reduces Debtors in the Balance Sheet. It, therefore, has a credit balance. Changes in the provision are recorded in the P & L a/c. Increases in provision for Bad Debts are treated as expenses in the P&L a/c while decreases are revenue in the P&L a/c. Total Provision for Bad Debts is entered in the Balance Sheet and reduces Debtors in Current Assets.
Depreciation The Journal Date Year End of yr
Details Profit & Loss a/c Provision for Depreciatio for Depreciation n a/c To transfer annual depreciation to P& L a/c as an expense.
Folio
GL
DR $ X
CR $ X
NB. Provision for Depreciation is a contra asset account as it reduces the value of Fixed Assets in the Balance Sheet. It, therefore, has a credit balance. Annual Depreciation is t ransferred to the P&L a/c at the en d of a period as an exp ense. Total / Accumulated Depreciation is entered in the Balance Sheet and reduces the relevant Fixed Asset to record the Net Book Value of the Asset.
CONTRA ASSET accounts have BOTH a P&L figure AND a Bal c/d figure (Balance Sheet) at the end of a period.
27
Accruals and Prepayments Expense a/c e.g. Rent a/c Date
Details
Folio
Dr$
Year Opening dt
Prepaid Expense b/d Cash / Bank
Closing
Accrued Expense c/d
X
Prepaid Expense b/d
XX X
Opening
CB
X X
Date Year Opening
Details
Folio
Cr$
GJ
X X
End of yr
Accrued Expense b/d Transfer to P & L a/c
Closing
Prepaid Expense c/d
X
Accrued Expense b/d
XX X
Opening
Revenue a/c e.g. Commissions Received a/c Date Year Opening
Details
Folio
Dr$
Date
Details
GJ
X X
Year Opening dt
Prepaid Revenue b/d Cash / Bank
Folio
Cr$
CB
X X
End of yr
Accrued Revenue b/d Transfer to P & L a/c
Closing
Prepaid Revenue c/d
X
Closing
Accrued Revenue c/d
X
Opening
Prepaid Revenue b/d
XX X
Opening
Accrued Revenue b/d
XX X
Bad Debts Bad Debts a/c Date
Details
Folio
Dr$
Year Dt
Date
Details
Folio
Cr$
Year Debtor
X
End of yr
Transfer to P & L a/c (expense)
X
XX
XX
Provision for Bad Debts Provision for Bad Debts a/c Date
Details
Folio
Dr$
Date
X
End of yr
P & L a/c
Beginning
Year End of yr
Details
Folio
Cr$
Year Balance c/d
End of yr
Balance c/d
End of yr
P & L a/c
End of yr
Balance c/d
(revenue)
(expense)
X XX
End of yr
Balance b/d P & L a/c (expense)
X
Beginning
Balance b/d
X X X XX X
X XX
XX Beginning
Balance b/d
X
Depreciation Provision for Depreciation Date
Details
Folio
Dr$
Date
X
End of yr
P & L a/c
Beginning
Balance b/d
Year End of yr
Details
Folio
Cr$
Year Balance c/d
(expense)
End of yr
Balance c/d
X XX
End of yr
P & L a/c
End of yr
Balance c/d
X
Beginning
Balance b/d
X X X XX X
28
Owner’s Name Trading & Profit & Loss A/c for the _______ ended _________ $
$
Sales Less: Sales Returns Net Sales LESS: COST OF GOODS SOLD: Opening Stock Purchases Less: Purchases Returns Add: Carriage In Net Purchases Cost of Goods Available for sale Less: Closing Stock
X X X (X) X X X X (X)
Cost of Goods Sold
(X)
GROSS PROFIT (or GROSS LOSS) **Add: Rent Received Interest received Discount received Decrease in Provision for bad debts
$ X (X)
X or (X) X X X X X
**Less: Expenses Wages/salaries Utilities Increase in provision for bad debts Depreciation Bad debts expense Carriage Outwards Discount allowed
X X X X X X X
Total expenses NET PROFIT (or NET LOSS)
(X) X or (X)
**These are a few examples, however the list can be exhaustive in reality
NB. This is an Income Statement for a sole trader. For other types of businesses with more than one owner, an Appropriation a/c is prepared to share out the net profit amongst the owners and calculate profit retained in business. For Manufacturing Businesses, a Manufacturing a/c is prepared before the Trading & Profit & Loss a/c For Non profit organizations, an Income and Expenditure a/c is prepared instead of a Trading and Profit and Loss a/c.
29
Owner’s Name Balance Sheet as at _________ FIXED ASSETS: Land & Buildings Plant & Machinery Fixtures & Fittings Motor Vehicles
COST $ X X X X X
ACC DEP. $ (X) (X) (X) (X) (X)
NBV $ X X X X X
CURRENT ASSETS: Stock Debtors Less: provision for bad debts Net debtors Prepaid expenses Revenues owing Bank Cash Total Current Assets
X X (X) X X X X X X
LESS: CURRENT LIABILITIES Creditors Accrued expenses Advanced revenues Bank overdraft Total Current Liabilities WORKING CAPITAL
X X X X (X) X XX
FINANCED BY: Opening Capital Add: Net Profit OR Less: Net Loss Less: Drawings Closing Capital
X X OR (X) X (X) X
LONG-TERM LIABILITIES Mortgage Bank Loan
X X X XX
NB. This is a Classified Balance Sheet for a sole trader. For other types of businesses there may be other items like proposed dividends, current a/c (partnership) etc.
30
Principles of Accounts
CONTROL SYSTEMS Ms Fergusson
31
St. Mary’s College Principles of Accounts
Control Systems Control Systems are the procedures designed and established to check, record, regulate, supervise, and safeguard assets, and ensure that the figures in the financial statements can be relied upon to be accurate, by reducing the incidence of unintentional errors and intentional irregularities. The need for Control Systems in Accounting. -
Control systems are needed to protect the organization’s assets and ensure the preparation of reliable and timely financial statements.
THE THREE COMMON CONTROL SYSTEMS ARE: 1.
Bank Reconciliation Statements
2.
Control Accounts
3.
Suspense Accounts
Bank Reconciliation Statement A Bank Reconciliation Statement is a statement prepared to reconcile the difference between the balances in the bank column of the cash book and the bank statement on any given date.
Control Accounts Control Accounts are general ledger accounts whose balances reflects the total of balances of related subsidiary ledger accounts. Debtors /Accounts Receivable and Creditors / Accounts Payable are the most commonly used control accounts, and their balances serve as a crosscheck (control) of the accuracy of the associated subsidiary records (personal accounts).
Suspense Accounts A suspense account is an account in the general ledger in which amounts are tempor arily recorded until the correct entry could be determined. When the proper account / amount is determined, the amount will be moved from the suspense acc. Suspense accounts are used when accounting for errors to ‘balance” the trial balances until the bookkeeper finds the errors and finishes recording the transactions.
32
St. Mary’s College Lesson Notes
: SET INDUCTION: The Cash Book and the Bank Statement
BANK ACCOUNT
BUSINESS
Cash Book
BANK
The business records all the bank account’s cheque and cash transactions in the Cash Book.
Bank Statement
The bank records all the bank account’s cheque and cash transactions in a Bank Statement, which is sent to the business periodically.
The Cash Book: • •
The Cash Book is the business’ record of the business’ bank account. It consists of information regarding the bank account’s cash and cheque receipts and payments and the balance at the end of the period, as prepared by the business.
The Bank Statement • •
•
The Bank Statement is the bank’s record of the business’ bank account. It is a summary that consists of information regarding the bank account’s cash and cheque receipts and payments and the balance at the end of the period, as prepared by the bank. A Bank Statement is produced by the bank monthly, quarterly or annually and sent to the business.
Main accounting difference between the Cash Book and the Bank Statement:
Receipts / Deposits
Payments / Withdrawals
CASH BOOK – business’ record
DR
CR
BANK STATEMENT – bank’s record
CR
DR
St. Mary’s College Lesson Notes
33
between the Cash Book balance and the Bank Statement balance at the end of a specific period. •
•
There are usually timing differences between when the transaction information is recorded / entered in the banks systems and when it is recorded in the business’ cash book. Therefore, there is sometimes a difference / discrepancy between the cash book (bank column) account balance and the bank statement account balance at the end of the specific period.
for the differences between the Cash Book balance and the Bank Statement balance:
Entries recorded in the Bank Statement but not in the Cash Book •
Direct Deposits - Dividends received - Credit transfers – receipts from debtors made into the bank account directly through the bank.
•
Standing Orders and Direct Payments - These are payments made by the bank from the bank account on behalf of the business - E.g. Insurance payments
•
Bank Charges (service charges on the bank account taken directly from the account by the bank)
•
Interest Received (interest on the bank account deposited directly into the account by the bank)
•
Dishonoured / Returned cheques - bounced cheques that were deposited and have been returned to the bank as dishonored. - The business was not notified as yet because it takes a few days (timing difference)
Entries recorded in the Cash Book but not in the Bank Statement These occur because of a time lag between the recording of the receipt or payment in the cash book and the recording in the bank: •
Unpresented / Outstanding Cheques - These are cheques issued by the business as payment to persons / businesses that have not been presented to the bank for payment yet. NB The payee has 6 months to present / “cash” a cheque. - The business has it recorded in the cash book as a payment made but the bank has not because they have not “cashed” the cheque as yet .
•
Unrecorded deposits - These are mainly cheque deposits to be made in the bank account that have been recorded in the cash book but not by the bank as they have not received the deposits as yet. - The business records the cheques as having been received / deposited on one day, while the bank records the deposit on another day when the cheques are brought in from the business.
Errors in the Cash Book and in the Bank Statement
The most common types of errors are the overstatements and the understatements of receipts and payments due to errors in the amounts and receipts being entered as payments and vice versa.
34
St. Mary’s College Lesson Notes :
It is necessary to reconcile the cash book balance and the bank statement balance at the end of each period to ensure that both are correct.
Bank reconciliation is the process of comparing and matching figures from the cash book against those shown on a bank statement: • • •
1.
to locate the reasons for the discrepancies, adjust cash book with those items which must be included and clarify and support any remaining difference between adjusted cash book balance and bank statement balance.
Compare the Bank Statement and the Bank column of the Cash Book. Check for: -
2.
Entries made in the Bank Statement but not the Cash Book. Entries made in the Cash Book but not the Bank Statement. Incorrect amounts. Entries made on the incorrect side of the Cash Book.
Prepare a Revised Cash Book to update the CB with entries made in the Bank Statement but not the CB. -
Start with the Cash Book balance at the end of the period / month in question. Enter all the items that appear in the Bank Statement but not the Cash Book e.g. Bank Charges, Int. Rec… Correct any errors made in the Cash Book. Balance / Close off the Revised cash Book.
Revised Cash Book (Bank Column) Date
Details
Dr$
Balance b/d Interest received Credit Transfer (debtor personal a/c) Other Receipts not entered in CB Receipts understated Payments overstated
X X X X X X
Date
Details
Cr$
Bank Charges Standing Order e.g. Insurance Dishonoured chqs (debtor personal a/c) Other Payments not entered in CB Receipts overstated Payments understated Balance c/d
XX Balance b/d
3.
X X X X X X X XX
X
Prepare a Bank Reconciliation Statement, which deals with items recorded in the Cash Book but not in the Bank Statement. There are two methods: - Method 1: Start with the Revised Cash Book closing bal. Add Unpresented chqs and Less Unrecorded deposits.
Bank Reconciliation Statement Revised Cash Book Balance Add: Unpresented cheques Less: Unrecorded deposits Bank Statement Balance
$ X X X (X) XX
- Method 2: Start with the Bank Statement balance. Add Unrecorded deposits and Less Unpresented cheques.
Bank Reconciliation Statement
Less: Unpresented cheques
$ X X X (X)
Revised Cash Book Balance
XX
Bank Statement Balance Add: Unrecorded deposits
- For both methods, correct errors by adding or subtracting amounts.
35
St. Mary’s College Principles of Accounts
A control account is a summary account in the general ledger that shows the totals of transaction amounts entered in a subsidiary ledger such as sales or purchases ledger during the month. Its balance reflects the aggregate balance of the related subsidiary ledger accounts and is, therefore, used to control the subsidiary ledgers and verify that entries have been made. They provide totals of debtors and creditors quickly when a trial balance is being prepared. Control accounts are an important system of control on the reliability of ledger accounts. They indicate that errors may have occurred in the ledgers they control. Ledger
Accounts
Control Account
Sales Ledger
debtors’ personal accounts
Sales Ledger Control Account (totals of items in the sales ledger)
Purchases Ledger
creditors’ personal accounts
Purchases Ledger Control Account (totals of items in the purchases ledger)
The purpose of Control Accounts The reasons for having control accounts are as follows: 1.
To check on the accuracy
They provide a check on the accuracy of entries made in the personal accounts in the sales ledger and purchase ledger. It is very easy to make a mistake in posting entries, because there might be hundreds of entries to make. Figures might get transposed while some entries might be omitted altogether, so that an invoice or a payment transaction does not appear in a personal account as it should. It is possible to identify the fact that errors have been made by comparing: The total balance on the debtors account with the total of individual balances on the personal accounts in the sales ledger. The total balance on the creditors account with the total of individual balances on the personal accounts in the purchase ledger. •
•
2.
To locate errors
By using the control account, a comparison with the individual balances in the sales or purchase ledger can be made for every w eek or day of the m onth, and the error found much more quickly than if accounts did not exist. 3.
To provide debtors and creditors balances more quickly for producing a Trial balance or B Sheet.
A single balance on a control account is obviously simpler and quicker than many individual balances in the sales or purchase ledger. This means also that the number of accounts in the double entry bookkeeping system can be kept down to a manageable size.
36
St. Mary’s College Principles of Accounts
CONTROL ACCOUNTS Ledger
Accounts
Control Account
Sales Ledger
debtors’ personal accounts
Sales Ledger Control Account (totals of items in the sales ledger)
Purchases Ledger
creditors’ personal accounts
Purchases Ledger Control Account (totals of items in the purchases ledger)
The Sales Ledger Control Account The sales ledger control account is also known as the Debtors Control Account and the Total Debtors Account. It comprises the totals of all accounts of a similar nature related to debtors. All items that appear in a debtor’s account are also recorded in the debtors control account. The total of each type of transaction related to debtors is entered on the relevant side of the control account. Items / types of transactions related to debtors include: • • • • • • • •
Total opening balances of all debtors for the period Total credit sales for the period Total sales returns for the period Total cash received and cheques received from debtors for the period. Total Discounts Allowed for the period Total Bad Debts written off for the period Dishonoured / Returned cheques from debtors for the period Total closing balances of all debtors for the period
The Purchases Ledger Control Account The purchases ledger control account is also known as the Creditors Control Account and the Total Creditors Account. It comprises the totals of all accounts of a similar nature related to creditors. All items that appear in a creditor’s account are also recorded in the Creditors Control Account. The total of each type of transaction related to creditors is entered on the relevant side of the control account. Items / Types of transactions related to creditors include: • • • • • •
Total Opening balances of all creditors for the period Total Credit Purchases for the period Total Purchases Returns for the period Cash payments and cheque payments to creditors for the period Total Discounts received for the period Total closing balances of all creditors for the period
Contra entries (appear in both Control Accounts) A contra entry is an item that offsets, cancels or partially reduces another item. There maybe situations where a firm is both a supplier and a customer (creditor and debtor). Two separate accounts are kept to record the relevant transactions. Instead of making a payment by cheque for the full amount owed to him as a creditor, his accounts can be settled by “setting off” the amount owed to him by the company and the amount owed by him to the company. A contra entry which is recorded in the personal accounts in the Sales and Purchases Ledger needs to be reflected in both Control accounts to ensure that they balance with the sum of the balances in the ledger accounts. The amount that is set off in the accounts would be the smaller amount.
37 CONTROL ACCOUNTS - FORMAT
Items Opening and Closing Balances:
Source
Notes
Sales Ledger Control Account
Sales Ledger
A credit balance may be caused by overpayment or return of goods already paid for by debtor. Credit balances must NOT be deducted from debit balances, but shown separately on the credit side of the control account.
Purchases Ledger Control Account
Purchases Ledger
A debit balance may be caused by overpayment or return of goods already paid for to creditor. Debit balances must NOT be deducted from credit balances, but shown separately on the debit side of the control account.
Credit Sales Credit Purchases
Sales Journal Purchases Journal
Discounts Allowed / Discounts Received
Cash Book
Sales Returns Purchases returns
Sales Returns Journal Purchases Returns Journal
Cash / Cheque received and paid
Cash Book
Bad Debts written off
General Journal
Refunds from suppliers / to customers Dishonoured cheques
Cash Book Cash Book
Contra Entries
General Journal
A Contra Entry in a control account is when the smaller amount is offset against the larger amount.
The Sales Ledger Control Account
Date Details
Dr$ Date
Cr$
Balance b/d (total debtors’ debit bals from previous period)
X
Balance b/d (if any) (total debtors’ credit bals from previous period)
X
Credit Sales
X
Sales Returns
X
Refunds to debtors/customers Dishonoured cheques
X X
Cash/Cheques received from debtors Discount allowed
X X
Interest on overdue accounts
Bad Debts written off
X X
Balance c/d (if any)
Contra Entries / set offs Balance c/d
X
Balance b/d
X
Balance b/d (if any)
The Purchases Ledger Control Account
Date Details
Dr$ Date
Cr$
Balance b/d (if any) (total creditors’ debit bals from previous period)
X
Balance b/d (total creditors’ credit bals from previous period)
X
Purchases Returns
X
Credit purchases
X
Cash/Cheques paid to creditors/suppliers Discount received
X X
Refunds from suppliers/creditors
X X
Contra Entries / set offs
X
Balance c/d (if any)
Balance c/d
X
Balance b/d (if any)
X Balance b/d
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St. Mary’s College Principles of Accounts
Suspense accounts and Correction of Errors TYPES OF ERRORS There are two main classifications of errors: 1. Errors that affect the Trial Balance (errors revealed by the Trial Balance) 2. Errors that DO NOT affect the Trial balance (errors not revealed by the Trial Balance)
Errors that affect the Trial balance Certain errors cause the Trial Balance totals to be unequal i.e. not balance. These include: Errors of transposition in half of the double entry (resulting in overstatement or understatement of amounts). Errors caused by entries on the wrong side of one half of the double entry. Errors caused by the omission of one half of the double entry. Errors of calculation (miscalculation of the account balances) Errors made in the Trial Balance. • • • • •
Examples: A cash payment of $450 is entered in t he Cash Book as $540. This is an error of transposition resulting in an overstatement of $90 on the CR side of the CB and, therefore, the TB. (A transposition error happens when you reverse two digits in a number or leave a zero off the end of a number)
Cash sales of $1000 were entered correctly in the CB but incorrectly in the Sales account as a Debit. This would result in the Trial balance Debit balance being more by $2000!!!!!
Errors that do not affect the Trial Balance •
•
•
Errors of Commission (correct amount, wrong personal account) Errors of Principle (correct amount, wrong type / category of account) Errors of Original entry (incorrect amount entered in the journal / book of original entry)
•
Errors of Omission (no entry made in the books for transaction) Compensating Errors (incorrect amount entered in double entry to ledger accounts cancelling out error)
•
Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each a/c
•
Examples:
Errors of Commission (correct amount, wrong personal account) e.g. Goods sold to M. Smith on credit is entered in N. Smith’s account in error. Errors of Principle (correct amount, wrong type / category of account) e.g. Motor expenses ( expense) were entered in the Motor vehicles’ account (asset) in error.
Errors of Original Entry (incorrect amount entered in the journal / book of original entry) e.g. Goods purchased from T. Tall for $475 was entered in the Purchases Journal as $457 in error. As a result, the incorrect amount of $457 was posted to the ledger accounts: T . Tall and Purchases.
Errors of Omission (no entry made in the books for transaction) e.g. Rent received of $1200 was never entered in the cash book, and therefore the accounts. Compensating Errors (incorrect amounts entered in each ledger account (double entry), cancelling out error) e.g. Goods sold to J. Bond for $200 was entered correctly in the Sales Journal, but posted to the ledger accounts as $300 (DR: J. Bond CR: Sales). Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each account) e.g. $800 Rent paid in cash was entered incorrectly as DR: Cash CR: Rent
N.B. When errors are discovered, they must be corrected through journal entries, which are then posted to the ledger accounts affected by the error.
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St. Mary’s College Principles of Accounts
There are certain errors that are not revealed by the Trial Balance, as the debit and credit totals are not affected by the error so they are equal. These errors are:
•
Errors of Commission (correct amount, wrong personal account)
•
Errors of Principle (correct amount, wrong type / category of account)
•
Errors of Original entry (incorrect amount entered in the journal / book of original entry) Errors of Omission (no entry made in the books for transaction)
•
Compensating Errors (incorrect amount entered in double entry to ledger accounts cancelling out error)
•
Errors of Complete reversal of entries (correct amts entered in the wrong sides (DR/CR) of each a/c
•
When these errors are discovered, correcting the errors require double entry journal entries which will be posted to the accounts affected by errors.
CorrectionofErrorsNOTaffectingtheTrialBalance Errors of Commission (correct amount, wrong personal account) Correcting the error requires journal entries to be posted to: • •
The account incorrectly posted to - DR if the account was credited / CR if the account was debited The correct account – post to the correct account
Errors of Principle (correct amount, wrong type / category of account) Correcting the error requires journal entries to be posted to: • •
The account incorrectly posted to - DR if the account was credited / CR if the account was debited The correct account – post to the correct account
Errors of Original Entry (incorrect amount entered in the journal / book of original entry) 1. 2. 3.
Identify whether the correct incorrect amount entered was overstated or understated. Calculate the amount by which the entry was understated or overstated i.e. the difference. Prepare the journal entry to correct the error: If the amount was understated: DR: the account debited CR: the account credited With the difference calculated to increase the amount to the correct amount If the amount was overstated: DR: the account credited CR: the account debited With the difference calculated to decrease the amount to the correct amount
Errors of Omission (no entry made in the books for transaction) Correcting the error requires journal entries to be posted to the relevant accounts in the double entry. Compensating Errors (incorrect amounts entered in each ledger account (double entry), cancelling out error) Correcting these errors require the same steps as correcting Errors of Original entry. Errors of Complete reversal of entries (correct amounts entered in the wrong sides (DR/CR) of each account) The journal entry to correct the error: DR: the account credited CR: the account debited With twice the amount of the error (to cancel the error / remove from incorrect side and post to correct side)
NB.Theremustbeadoubleentrytocorrecttheerrors.
40
St. Mary’s College Principles of Accounts
When the Trial Balance totals are not equal, the errors affecting the Trial Balance may not immediately be found and corrected.
A temporary account called a suspense account has to be opened in the general ledger w ith the difference to make the Trial Balance totals agree with each other.
A suspense account should only be opened when all attempts to find the error(s) have been unsuccessful and the final accounts are needed urgently.
Suspense Account A Suspense account is a temporary ‘holding’ account in the General ledger that is opened to place the difference in the trial balance to make it balance when the causes of the difference cannot immediately be found and corrected. How to open a Suspense Account A suspense a/c is opened with a balance, on the side of the a/c that the Trial Balance is less. The Suspense Account will, therefore, have a credit balance when the credit total in the Trial Balance is less and a debit balance when the debit total is less. General Ledger Suspense account Date
Details Difference in trial balance (DR side of TB less)
Dr$ X
Date
Details
Cr$
Details
Cr$
Suspense account Date
Details
Dr$
Date
Difference in trial balance (CR side of TB less)
X
Example: S. James st
Trial Balance as at 31 December 2009
Totals (sum of all balances)
DR $
CR $
100 000
99 960
Suspense a/c
40 100 000
100 000
Suspense account Date
Details
Dr$
Date 31 Dec
Details
Cr$
Difference in Trial Balance
40
The Suspense Account and the Balance Sheet
AcreditbalanceintheSuspenseaccountisaCurrentLiabilityintheBalanceSheet. AdebitbalanceinthesuspenseaccountisaCurrentAssetintheBalanceSheet.
