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Dept. of Interdisciplinary Studies


Dept. of Interdisciplinary Studies

IS2261
Accounting for Engineers
Resource Person for the lecture
IS2261- Accounting for Engineers

• Asanka Senevirathne
• Bsc(Sp)Acc & Biz Finance 1st Class (Hons)
MBA(Merit),MAAT,CASL FINAL,CBF, Reading for Phd

3
Uni of Colombo SL.
• Lecturer in Accountancy & Business Finance
• Faculty of Humanities and Social Sciences
• The Open University of Sri Lanka
• P.O.Box No: 21, Nawala, Nugegoda
• TP+ 94 (0)71 860 7498/ (0) 11 288 1255
• Email :
wasen@ou.ac.lk/lecturerousl@gmail.com/asankaous 5/27/20
18
l/lecturerwusl@gmail.com

DEPARTMENT OF INTERDISCIPLINARY STUDIES


CHAPTER

BOOKS OF PRIME
ENTRY
Accounting Process
Transaction

Double Entry

Primary Book Ledger


Balance is taken to

Trail Balance

Financial Statements
• The every transaction & event is recorded in the
primary books & ledger accounts.

• Ledger
This is emphasis on a book or books which has accounts. In accounting
process, one entry is recorded in the ledger & the other entry is recorded
in the primary books and after end of the period the balance of the
every primary book is moved to the ledger account. Therefore there
are two ways which are recorded in the ledger

The Functions of the Ledger


This is the first stage of book keeping.
This helps to summarize the transactions.
This helps to prepare financial statements.
• Primary Books
Every transaction is recorded in the primary book according to the
date. This is the primary entry of the accounting process. After end
of the period the balance of every primary book is moved to the
ledger accounts. The document sources are used to record the
transactions.

The Functions of the Primary Books


Helps to prepare the ledger
Able to summarize lots of similar transactions
Able to record the transactions according to the time period
Transaction Primary Book Source of
Document

1. Records Cash Receipts & Cash Cash Book Receipt &


Payments Voucher
2. Petty cash payment Petty cash Book Petty cash
Voucher
3.Goods purchase for credit Purchase Book Purchase Invoice

4.Return outwards Return outwards Debit Note


Book
5.Goods sell for credit Sales Book Sales Invoice

6.Return inwards Return inwards Credit Note


Book
7.Opening & Closing entries, Common Journal Journal Voucher
Corrections, Adjustments & Other
Cash Book
• Record transactions
Cash receipts & cash payment from the business and the bank account.
• Dual Functions of Cash Book
• Acts as a primary book
• Acts as a ledger account
• Classification of Cash Book
• Single column cash book – Record only Cash receipts & Cash Payment,
directly coming to the business
• Double column cash book - Record only Cash receipts & Cash Payment,
directly coming to the business & to the bank
• Triple column cash book - Record only Cash receipts & Cash Payment,
directly coming to the business & to the bank & Discounts.

 Double Entry of Cash Book

Cash Receipts Cash Payments

Cash Account - Debit Other Account - Debit


Other Account - Credit Cash Account - Credit
Discounts
This is emphasis on the reduction amount of the marked price at the economical
transaction between two parties. This is used to encourage the purchase and encourage
the early settlement of the business.

Trade Discount Cash Discount

Allowed Received Allowed Received


Discount Discount Discount Discount

• Trade Discount
This is emphasis on the reduction amount of the marked price in the both situations,
purchase on cash & purchase on credit. Trade discount is not recorded in the books.
Therefore the total spent amount is debit & credit to the relevant accounts & not
separately showing the discount.

• Cash Discount
This is emphasis on the reduction amount when settle the creditors & receive money
from debtors. Cash discount is recorded in the ledger. In cash book, it shows as only
the memory record (just for reminding).
 Allowed Cash Discount – This is the given discount to the trade debtors when they are
settling their accounts on time. This is an expense. Therefore allowed cash discount
account is debit. Discount reduces the debtor value. Therefore it is credited to debtor
A/C.

Allowed Cash Discount Debit

Debtor’s Account Credit

 Received Cash Discount – This is emphasis on the received discount when settling the
trade creditors within the given period of time. This is an income. Therefore received
cash discount account is credit. Discount reduces the creditor’s value. Therefore it is
debited to creditor A/C.

Creditor’s Account Debit

Received Cash Discount Credit


Petty Cash Book
The business has lots of transactions, both large & small amount. If all transactions are recorded in
cash book, it will be more complex and unable to maintain internal control in the business.
Therefore the separate book is maintained to record small amount of transactions. This is called as
petty cash book & this system is called petty cash imprest system.

The Main Differences of Cash Book and Petty Cash Book


In petty cash book has the analytical columns of expenditure
All transactions are expenditures except only on receipt from main cashier

• Petty Cash Imprest & Petty Cash Imprest System


Petty cash imprest is emphasis on the fixed cash amount which is given to petty cashier for
spending the petty cash expenses by the main cashier. The fixed amount depends on the petty
cash transactions. It is decided by the main cashier of the business.
Petty cash imprest system is the process of reimburse of petty cash expenses in the same amount
by the main cashier.

• The Factors of Deciding the Petty Cash Imprest


The volume of transactions in the main cash book
The value of transactions in the main cash book
The volume of transactions in the petty cash book
The value of transactions in the petty cash book
The time period of exchanging cash between main cashier & petty cashier
Purchase Journal

 This is a primary book.


 This is recorded on the purchased goods for credit. The goods is emphasis on expect to
sell again. As the example, a grocery shop purchased, sugar, rice & milk powder are
recorded in the purchase journal. But if it purchased furniture is not recorded in the
purchase journal because it purchases not for selling.
 Purchase is an expense. Therefore it is debit to purchase account. It is credited to the
creditors account because the liability is created.

Purchase Account Dr.

Creditor’s Account Cr.

 At the end of the period, the total amount is taken to the purchase account at the ledger.
Purchase Return Journal / Return Out-Ward Journal

 This is a primary book.


 This is recorded on the returned purchased goods for credit.
 Returning the purchase goods causes to reduce the expense of purchase. Therefore this
has a credit balance. At the end of the period, the total amount is taken to the purchase
return account at the ledger as a credit balance. This causes to reduce the creditors’ value.
Therefore it is debited to creditor’s account.

Creditor’s Account Dr.

Purchase Return Account CR.


Sales Journal

 This is a primary book.


 This is recorded on the sold goods for credit. The goods is emphasis on expect to sell in
the business operations. As the example, a grocery shop sold, sugar, rice & milk powder
are recorded in the sales journal. But if it sold furniture is not recorded in the sales journal
because it is external thing from the business operation.
 Sales are an income. Therefore at the end of the period, the total amount is taken to the
sales account at the ledger as a credit balance. It is debited to the debtor’s account
because the asset is created.

Debtor’s Account Dr.

Sales Account Cr.


 This is a primary book.
 This is recorded on the returned sold goods for credit.
 Returning the sold goods causes to reduce the sales income. Therefore at the end of the
period, the total amount is taken to the sales return account at the ledger as a debit
balance. This causes to reduce the debtors’ value. Therefore it is credited to debtor’s
account.

Sales Return Account Dr.

Debtor’s Account CR.


General Journal
• This is a primary book.
• The other primary books are recorded transactions which are
inherent of each book. But for general journal is recorded any
other transaction except that. There are five transactions can
mainly be identified,
 Opening Entries
 Entries for Fixed Assets
 Entries for Correction of Errors
 Adjustment Entries
 Closing Entries

• The document source is the Journal vouchers. Recording in the


general journal is called as the journalizing.
• Revisit the Basic of Accounting

• Accounting Entity
A person, an institute, a business organization (profit & nonprofit
organizations, a nation or a government is called as an accounting
entity.
• Definition of Accounting
Accounting is the process of assembling, recording, classification,
summarizing, analyzing, interpretation & communication of
financial information to the internal & external users (Stakeholders)
for decision making on an accounting entity.
• The Purpose (Objectives) of Accounting
Providing the accounting information to the stakeholders (internal &
external) through financial statements
Accounting Functions

1)Assembling & Recording


2)Classification
3)Summarizing
4)Analyzing, Interpretation &
Communication
Assembling & Recording
• Assembling
• This is emphasis on collecting the source documents of day
today transactions. The source documents are used to prove
that the transaction happened.
• Recording
• This is emphasis on recording the transactions according to
accounting rules & regulations & principles. There are seven
books which are used to record the transactions. The following
diagram shows that.

Transaction Book Source of Document


Goods purchase for credit Purchase Book Purchase Invoice
Goods sell for credit Sales Book Sales Invoice
Return inwards Return inwards Book Credit Note
Return outwards Return outwards Book Debit Note
Cash receipts & payments Cash Book Receipt & Voucher
Petty cash payment Petty cash Book Petty cash Voucher
Opening & Closing entries, Corrections, Common Journal Journal Voucher
Adjustments & Other
2. Classification
Main Classification Sub Classification Examples

Assets Current Assets Stock, Debtors, & Receivable


bills
Non-Current Assets Land, Building, Equipment

Liabilities Current Liabilities Creditors. Bank OD, Payable bills

Non-Current Liabilities Mortgage & Bank Loans

Equity Equity Capital & Drawings

Income Capital Income Machinery sales, Revaluation


Profit
Operational Income Sales, Received commission

Expenditure Capital Expenditure Purchase fixed assets

Revenue Expenditure Purchase goods, paid salary &


bills
• Summarizing
This is emphasis on summarizing accounting information. There are three
ways can be identified,
Control Accounts
Trial Balance
Financial Statements

• Analyzing, Interpretation & Communication

Analyzing - This is emphasis on well understanding the financial


information.
Interpretation - This is emphasis on decision making by using the
accounting information by managers.
Communication - This is emphasis on providing accounting information
to internal & external users (Stakeholders).
Book Keeping, Accounting & Accountancy

• Book Keeping
This is the primary stage of accounting. This is emphasis on entering
the transactions & events to the accounting books according to
accounting rules, regulations & principles. The book keeping activities
includes observation, identification, monetary, recording, classification
& summarizing. Book keepers involve in book keeping.
• Accounting
This is emphasis on preparing the financial statements & providing to
the stakeholders. This is the secondary stage at the accounting process
• Accountancy
This is emphasis on the philosophical side of accounting. This is based
on the accounting rules, regulations, principles & practices in
accounting.
Stakeholders & Accounting Environment

Economic & Political Env.

Public Customers

Technical Env Legal Env

Busi
ness

Financial Gov
Owners
org
Managers

Employees

Competitors Creditors
Investors

Social & Cultural Env.


Vocational & Professional Env.
Changes & Trends in Accounting
• Using in computers & software in accounting process for
manual accounting process

• Considering the inflation effects to the financial statements

• Social Responsibility Accounting - Considering the social


responsibility in accounting process E.g. Contribution in
community & Natural assets

• Environmental Accounting - The environmental favorable &


unfavorable effects are disclosed in financial statements

• Human Resources Accounting – Evaluating the technical &


professional skills of the human resources & disclosing it in
the financial environment
Accounting Information
• The information which can be measured in monetary terms is
called as accounting information. (Money Measurement
Concept).

E.g. - Paid salaries Rs.3, 000


Sales Rs.400, 000
The Characteristics of Accounting Information
• Accuracy
• Verifiability
• Up to date/Timeliness
• Reliability
• Relevance
• Consistency
• Comparability
• Understandability/Simplicity
• Business Transactions
This is emphasis on the economic activities which are changed
the assets & liabilities of the business. This is the input of the
accounting process.
E.g. - Paid bills Rs.12000
Purchased goods Rs.130000

Input Process Output

Transactions Assembling & Recording Accounting


Information
Events Classification

Summarizing

Analyzing, Interpretation
& Communication
Activity 01
Accounting Information
1) Starting a business by investing Rs.80000
2) The value of land & building is Rs.120000
3) The value of motor vehicle is Rs.600000
4) The total salary amount is paid to the workers Rs.200000
5) The monthly sales income of the business is Rs.300000

Non-Accounting Information
1) The company has 10 buildings
2) 100 workers are working at the company
3) The company follows the methods of reduce environment
pollution
4) The owner of the business is an artist
5) The company is 10km far to the airport
5 Major Classification
1. Assets
The characteristics of assets are having a legal ownership, an
economical value & useful resources of internal & external
parties of the business.

2. Equity
This is emphasis on everything which belongs to the owner of
the business. This is a liability of the business because according
to business entity concept, the owner & the business are two
parties.
3. Liabilities
This is emphasis on everything which is liable to pay to the
external parties of the business.

• The Similarities of Equity & Liability


• Both of them give the resources to the business.
• Both of them have the interested to the business.
• Both of them belong to liability accounts of the business.

The Difference between of Equity & Liability


Equity Liability
1 Obligation of the internal party of the Obligation of the external party of the
business business
2 The Profit/Loss is the return. The Interest is the return.
3 Participates in management the business. Dose not Participate in management the
business.
4 Secondly released when close the business. Firstly released when close the business.
4. Income - This is emphasis on earnings of the business

5. Expenditure
This is emphasis on resource consumption of a business. On the
other words, the dedicated value of goods & services for earning
an income.
Difference between Capital & Revenue Expenditure
Capital Expenditure Revenue Expenditure

1 Spends for acquiring the long term Spends for daily to continue the operations
benefits. of the business.

2 Not Spends for continuing in daily business Spends for continuing in daily business
operation. operation.

3 Reduces parts by parts from the income Reduces whole expenditure from the
statement. income statement.

4 Helps to generate income at long term. Helps to generate income at short term.
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