WHAT IS ACCOUNTING?

Accounting has been defined as a PROCESS of collecting, recording, classifying, summarizing,

presenting, analyzing, reporting and communicating information on financial transactions to
users to assist them in making economic decisions.

To Users of
Accounting
Report and Information
Collect Record Classify Summarise Present Analyse Coomunicate to enable
Decision
Making

STAGE 1 – COLLECTION OF DATA

On a daily basis, people transact at various levels and at various scales. In most cases, the
volume of personal transactions is low and therefore as we transact there is no need to document
the event. However, for bigger companies with more transactions that is more complex, there is
need to document transactions as early as is feasible. Thus as transactions occur the data is
collected and documented in source documents. There are different source documents for the
different classes of transactions:

Invoices Credit note

Credit note Debit note
Debit note
Receipts Invoices
Receipts Sales Returns Purchases Returns
Cash Transactions Credit Transactions
STAGE 2 – RECORDING OF DATA
The collected data is then posted from the source document and recorded in Journals. Journals
can be likened to a diary which simply records the events that have occurred. There are five
journals:

Nature of Transaction Journal

Credit Sales Sales Journal
Sales Returns Sales Returns Journal
Credit Purchases Purchases Journal
Purchase Returns Purchase Returns Journal
Other credit transactions not involving stock General Journal

Example 1

Enter the following transaction in the sales journal of T Ltd for the month ending 30 March
2015.

March $
2015
2 Sold on credit to P Jones 400
15 Sold on credit to J Kat 120
16 Bought on credit from S Bell 165
17 Bought on credit from T Rodd 318
19 J Kat returned goods worth 20
24 Sold to P Jones 360
Bought from T Rodd 64
27 Returned goods to T Rodd worth 80

Solution 1

T Ltd
Sales Journal for the month ended 31 March 2015
Date Description Amount
March $
2015
2 P. Jones 400
15 J. Kat 120
24 P. Jones 360
30 Transfer to Sales Account in General Ledger 880
 T Ltd
Sales Returns Journal for the month ended 31 March 2015
Date Description Amount
March $
2015
19 J. Kat 20
30 Transfer to Sales Returns Account in General Ledger 20

T Ltd
Purchases Journal for the month ended 31 March 2015
Date Description Amount
March $
2015
16 S. Bell 165
17 T. Rodd 318
24 T. Rodd 64
30 Transfer to Purchases Account in General Ledger 547

T Ltd
Purchases Journal for the month ended 31 March 2015
Date Description Amount
March $
2015
27 T. Rodd 80
30 Transfer to Purchases Returns Account in General 80
Ledger

STAGE 3 – CLASSIFYING OF DATA

The recorded data is then posted from the journal and classified in ledgers. Ledgers are referred
to as “T” accounts because of their layout. They are classified based on the nature of the
transaction:
 credit sales
Sales Invoice

Sales Journal

Ledger
Sales Ledger (Debit Debtor's Account) General Ledger (Credit Sales Account)

credit purchases
Purchases Invoice

Purchases Journal

Ledger
General Ledger (Debit Purchases Account) Purchases Ledger (Credit Creditor's Account)
 purchases returns
Debit Note

Purchases Retruns Journal

LedgerGeneral Ledger (CreditPurchases Returns

Purchases Ledger (Debit Creditors' Account)
Account)

Sales Returns
Credit Note

Sales Returns Journal

Ledger
General Ledger (Debit Sales Returns Account) Sales Ledger (Credit Debtor's Account)