ACC101 FINANCIAL ACCOUNTING

Week 2, Lecture

 Is

concerned with recording, classification and

organization of all business transactions.

Every

transaction has a two-fold effect entry records that two-fold effect entry bookkeeping requires that there

Double Double

must always be a debit entry and a credit entry when recording financial transactions

A debit entry indicates

A credit entry indicates

An increase in assets

A decrease in an asset

An increase in expenses
A decrease in liability A decrease in revenue A decrease in capital

A decrease in expenses
An increase in liability An increase in revenue An increase in capital

Shown on the left hand side of an account

Shown on the right hand side of an account

 Role

Whenever a business transaction takes place, it is usual for the transaction to be recorded on a document these are termed as source documents

Examples

Sales order Purchases order Invoices credit/debit notes Remittance advices Cheque stubs(counterfoil) Petty cash vouchers Goods received notes

order a customer writes out an order or signs an order for goods or services he wishes to buy. Purchases order a business makes as order from another business for the purchase of goods or services. Credit note a document relating to returned goods or refunds when a customer has been overcharged. It can be regarded as a negative invoice Debit note might be issued instead of raising an invoice to adjust an invoice
Sales

More commonly, a debit note is issued to a supplier as a means of formally requesting a credit note

advice a letter sent by a customer to a supplier, to inform the supplier that their invoice has been paid. Cheque stubs a businesss record of payments it has made Petty cash vouchers a claim for reimbursement out of petty cash Goods received notes (GRN) filled in to record a receipt of goods, most commonly in a warehouse. Often the accounts department will require sight of the relevant GRN before paying a supplier
Remittance

 Relates

to a sales order or purchases order.

Issued when business sells goods or services on credit Receives when a business buys goods or services on credit

Contents

of an invoice

Name and address of the seller and the buyer Date of the sale Description of goods/services Quantity and unit price Details of trade discount Total amount (including any taxes) Sometimes, the date by which payment is due and other terms of sale

 Are

books in which we first record

transactions. They are sometimes called

books of original entry.

The

main books of prime entry are:

Sales day book Sales returns day book Purchases day book

Purchases returns day book

Cash book Petty cash book

 Definition

Method by which a business records financial transactions

For every debit there is an equal, corresponding credit

Every

transaction has two effects the dual

Purchased a car for 1,000

effect
Example

You own a car worth 1,000 You have 1,000 less cash

Debit

Fixed Assets car

 An

increase in an expense or an asset is a

debit
An

increase in income or an increase in a

liability is a credit
A A

decrease in an asset is a credit decrease in a liability is a debit

 Receipts

Dr Cash Cr Sales or other concerned account

Dr Purchases / expenses or other concerned account Cr Cash

Payments

Example

cash sales 1,200

Dr Cash Cr Sales

 Selling

on credit

Debit customers account Credit sales account

Buying

on credit

Debit purchases account Credit suppliers account

Examples

Sold goods on credit to Fiona for 2,000 Bought goods on credit from Kada Ltd for 5,500

 Nominal

ledger (General Ledger) an accounting record which summarises the financial affairs of a business. It contains details of assets, liabilities, income and expenditure

Examples

Motor vehicle ( fixed asset) Total debtors (current asset) Bank overdraft (liability)

Ledger for customers personal accounts Purchases Ledger for suppliers personal accounts
Sales

 Record

in the Books of Original Entry

Cash book, purchases day book, sales day book,

purchases return day book, sales return day book and general journal (the journal)

Transfer

to the Ledger Accounts

Assets, liabilities, capital, revenue and expenses accounts

Balance

the Ledger Accounts where

necessary
Extract

a trial balance

 Identify

the books of original entry and record the following transactions in the appropriate accounts The following transactions relates to Mr. Jockey for the month of May 2011.

May 1
3 Ltd 7 10 15 17 20 30 31

Started business with a capital of 5,000 in a business bank account.

Bought fixtures & fittings for cash from Store Fitments for 2000. Purchased goods on credit from Abel 650. Sold goods on credit to Bruce 700 Paid rent by cheque 200 Bruce paid 300 in part settlement of his account. Paid delivery expenses by cheque 50 Drew a cheque for personal expenses 200 Drew a cheque for assistants wages 300

 The

books of original entries relevant to the

transactions are:

Cash book Sales day book Purchases day book

Identify

the debits and credits for all the

transactions

Date
May 1 May 3 May 7 May 10 May 15

Account to be debited
Bank 5,000 Fixtures & fittings 2,000 Purchases 650 Bruce (Debtor) 700 Rent 200

Account to be credited
Capital 5,000 Cash 2,000 Abel (Creditor) 650 Sales 700 Bank 200

May 17 May 20
May 30 May 31

Cash 300 Delivery expenses 50

Drawings 200 Wages 300

Bruce (Debtor) 300 Bank 50

Bank 200 Bank 300

Capital Account May 1 Cash 5,000

Cash & Bank Account May 1 May 17 Capital Bruce 5,000 May 3 300 May 15 Fixtures & fittings Rent 2,000 200

May 20
May 30 May 31

Delivery expenses
Drawings Wages

50
200 300

Furniture and fittings Account May 3 Cash 2,000 May

Purchases Account May 7 Abel 650 May

Creditors Account (Abel) May May 7 Purchases 650

Sales Account May May 10 Bruce (debtor) 700

Debtors Account(Bruce) May1 0 Sales 700 May 17 Cash 300

Rent Account May 20 Bank 200

Delivery expenses Account May 20 50 May

Drawings Account May 30 Bank 200 May

Wages Account May 31 Bank 300 May

Mr. Jockey Trial Balance as at 31 May 2011 Accounts Debit 2,550 2,000 650 650 700 400 200 50 200 300 6,350 6,350 Credit

Capital
Cash and bank Furniture and fittings Purchases Creditors Sales Debtors Rent Delivery expenses Drawings Wages Total

5,000

 Business Accounting

1 by Frank Wood and

Alan Sangster, 10th Edition

Chapters 2, 4, 5 &6

ACCA Paper

1.1 Preparing Financial

Statements (ACCA old version of books used for 2004/2005 examinations)

Chapters 4 & 5