Process Financial Transactions And Extract Reports

RIFT VALLEY UNIVERSITY
ACCOUNTS AND BUDGET SUPPORT
LEVEL III
Learning Guide #01

Unit of Competence:Process Financial Transactions and
Extract InterimReports
Module Title: Process Financial Transactions and
Extract InterimReports
LG Code: EIS ACB3 M01 LO1-LO8
TTLM Code: EIS ACB3 TTLM 0919v1
LEARNING OUTCOMES:
LO1: Check and verify supporting documentation
LO2: Prepare and process banking and petty cash documents
LO3: Prepare and process invoices for payment to creditors and for debtors
LO4: Prepare journals and batch monetary items
LO5: Post journals to ledger
LO6: Enter data into system
LO7: Prepare deposit facility and lodge flows
LO8: Extract a trial balance and interim reports
Rift Valley University Training, Teaching and Learning Materials
Process Financial Transactions and Extract InterimReports Page 2
At the end of this module the trainer will be able to
 Check And Verify Supporting Documentation
 The Source Document In An Accounting Transaction
 Prepare And Process Banking And Petty Cash Documents
 Petty Cash
 Replenishment Of Petty Cash
 Cash Short And Over
 Bank Reconciliation
 Features Or Characteristics Of Bank Reconciliation Statement
 Bank Reconciliation Process
 Prepare And Process Invoices For Payment To Creditors And ForDebtors
 Invoice
 Voucher
 Prepare Journals And Batch Monetary Items
 Journal
 Sub-Division Of Journal
 Advantages Of Using Journal
 Journalizing
 Post Journals To Ledger
 Ledger
 Sub-Division Of Ledger
 Distinction Between Journal And Ledger
 Posting
 Rules Regarding Posting
 Enter Data Into System
 Introduction To Data And Data Collection
 Data Versus Information
 Importance Of Data
 What Is Data Collection?
 Data Collection General Rules
 Key Issues About Measures Of Data Collection
 Sources Of Data
 Prepare Deposit Facility And Lodge Flows
Deposits & Its Types
 Term Deposit Facility Resource Center
 Operation Results
 Term Deposit Facility Operations
 Extracting A Trial Balance And Interim Reports
 Trial Balance
 Features Of Trail Balances
 Limitations Of Trail Balance
 Methods Of Preparing Trail Balance
 Balance Sheet
 Classification Of Assets And Liabilities
 Assets
 Liabilities
 Profit And Loss Account (Unadjusted Income Statement)
 Important Points In Profit And Loss Account
 Rectification Of Errors
 Classification Of Errors
 Location Of Errors
 Rectification Of Errors
LO1. Check and verify supporting documentation
Objectives
After going through this lesson, you will be able to-
 Identify and check relevant Information recorded from documents
 Examine supporting documentation to establish accuracy and completeness and to ensure
authorization by appropriate personnel
The Source Document in an Accounting Transaction
Source Documents
The source document is the original record of a transaction. During an audit, source documents
are used as evidence that a particular business transaction occurred.
A source document describes all the basic facts of the transaction such as the amount of the
Daybook Source documents
transaction, to which the transaction was made, the purpose of the transaction, and the date of the
transaction.
Sales daybook Sales invoice
A source document is the original record containing the details to substantiate a transaction
entered in an accounting system.
Purchases daybook Purchases invoice
The source document should be recorded in the appropriate accounting journal as soon as
possible after the transaction. After recording, all source documents should be filed away in
Returns inwards daybook Credit notes
some sort of system where they can be retrieved if and when they are needed.
Once a transaction has been journalized, the source document should be filed and made
Returns outwards daybook Debit notes
retrievable so that transactions can be verified should the need arise at a later date.
Cashbook Cheque counterfoils, paying in slips, till rolls, etc.
All the daybooks are constructed on the basis of transfers from original source documents. These
are items of business use that contain financial data related to business transactions. The main
source documents a firm is likely to use are as follows:
The journal Everything else not covered by above
 Purchase invoice: Received by the firm from suppliers when buying goods on credit
 Sales invoice: Sent by the firm when selling goods on credit
 Debit notes: Received by the firm from suppliers when goods purchased are returned to
the original supplier
 Credit notes: Sent by the firm to customers who have returned the goods
 Cheque counterfoils: From the cheque book to show cheques paid out
 Paying slip; Evidence of money paid into bank accounts
 Till rolls: Evidence of cash being received
 Petty cash vouchers: Slips to indicate small amounts of cash being paid
 Bank statements: A summary of the bank account from the banks point of view.
Source documents should be retained for future reference. For instance, auditors will review a
portion of a company‟s transactions and will need to examine the pertinent source documents.
A business enterprise generally prepares the following two basic financial statements:
Profit and Loss Account to ascertain the profit earned or loss incurred during an accounting
period.
Balance Sheet to ascertain the financial position of the business as on a particular date
Therefore, accounting process involves the following steps or stages:
1. Identification of transaction
In accounting, only business transactions are recorded. A transaction is an event which can be
expressed in terms of money and which brings change in the financial position of a business
enterprise. An event is an incident or a happening which may or may not being any change in the
financial position of a business enterprise. Therefore, all transactions are events but all events are
not transactions. A transaction is a complete action, to an expected or possible future action. In
every transaction, there is movement of value from one source to another. For example, when
goods are purchased for cash, there is a movement of goods from the seller to the buyer and a
movement of cash from buyer to the seller. Transactions may be external (between a business
entity and a second party, e.g., goods sold on credit to Hari or internal (do not involve second
party, e.g., depreciation charged on the machinery).
2. Recording the transaction
Journal is the first book of original entry in which all transactions are recorded event wise and
date-wise and presents a historical record of all monetary transactions. It may further be divided
into sub-journals as well which are also known subsidiary books.
3. Classifying
Accounting is the art of classifying business transactions.
Classification means statement setting out for a period where all the similar transactions relating
to a person, a thing, expense, or any other subject are grouped together under appropriate heads
of accounts.
4. Summarizing
Summarizing is the art of making the activities of the business enterprise as classified in the
ledger for the use of management or other user groups i.e. Sundry debtors, Sundry creditors etc.
Summarization helps in the preparation of Profit and Loss Account and Balance sheet for a
particular fiscal year.
5. Analysis and Interpretation
The financial information or data as recorded in the books of a account must further be analyzed
and interpreted so to draw useful conclusions. Thus, analysis of accounting information will help
the management to assess in the performance of business operation and forming future plans
also.
6. Presentation or reporting of financial information
The end users of accounting statements must be benefited from analysis and interpretation of
data as some of them are the „stock holders‟ and other one the „stake holders‟. Comparison of
past and present statement and reports, use of ratio and trend analysis are the different tools of
analysis and interpretation.
From the above discussion one can conclude that accounting is a art which starts and includes
steps right from recording of business transactions of monetary character to the communicating
or reporting the results thereof to the various interested parties.
LO2. Prepare and process banking and petty cash documents
Petty Cash
Petty Cash, also known as impress cash, is a fund established for making small payments that
are impractical to pay by check. Examples include postage due, reimbursement to employees for
small purchases of office supplies, and numerous similar items. The establishment of a petty cash
system begins by making out a check to cash, cashing it, and placing the cash in a petty cash
box:
A petty cash custodian should be designated to have responsibility for safeguarding and making
payments from this fund. At the time the fund is established, the following journal entry is
needed. This journal entry, in essence, subdivides the petty cash portion of available funds into a
separate account.
Petty cash-------------------------------- 1, 000
Cash-------------------------------------------------- 1, 000
(To record establishment of petty cash fund)
Policies should be established regarding appropriate expenditures (type and amount) that can be
paid from petty cash. When a disbursement is made from the fund by the custodian, a receipt
should always be placed in the petty cash box. The receipt should clearly set forth the amount
and nature of expenditure. The receipts are sometimes known as petty cash vouchers. Therefore,
at any point in time, the receipts plus the remaining cash should equal the balance of the petty
cash fund (i.e., the amount of cash originally placed in the fund and recorded by the entry
above).
Replenishment of Petty Cash
As expenditures occur, cash in the box will be depleted. Eventually the fund will require
replenishment back to its original level. To replenish the fund, a check for cash is prepared in an
amount to bring the fund back up to the desired balance. The check is cashed and the proceeds
are placed in the petty cash box. At the same time, receipts are removed from the petty cash box
and formally recorded as expenses.
The journal entry for this action involves debits to appropriate expense accounts as represented
by the receipts, and a credit to Cash for the amount of the replenishment. Notice that the Petty
Cash account is not impacted -- it was originally established as a base amount and its balance has
not been changed by virtue of this activity.
Supplies Expense---------------------------------- 390
Fuel Expense--------------------------------------- 155
Miscellaneous Expense--------------------------- 70
Cash-----------------------------------------------------------------615
(To record replenishment of petty cash)
Cash Short and Over
Occasionally, errors will occur, and the petty cash fund will be out of balance. In other words,
the sum of the cash and receipts differs from the correct Petty Cash balance. This might be the
result of simple mistakes, such as math errors in making change, or perhaps someone failed to
provide a receipt for an appropriate expenditure. Whatever the cause, the available cash must be
brought back to the appropriate level. The journal entry to record full replenishment may require
an additional debit (for shortages) or credit (for overages) to Cash Short (Over). In the following
entry, $635 is placed back into the fund, even though receipts amount to only $615. The
difference is debited to Cash Short (Over):
Supplies Expense---------------------------------- 390
Fuel Expense--------------------------------------- 155
Miscellaneous Expense--------------------------- 70
Cash Short (Over) --------------------------------- 20
Cash---------------------------------------------------------------635
(To record replenishment of petty cash)
The Cash Short (Over) account is an income statement type account. It is also applicable to
situations other than petty cash. For example, a retailer will compare daily cash sales to the
actual cash found in the cash register drawers. If a surplus or shortage is discovered, the
difference will be recorded in Cash Short (Over); a debit balance indicates a shortage (expense),
while a credit represents an overage (revenue). As a means of enforcing accountability, some
companies may pressure employees to reimburse cash shortages.
Bank Reconciliation
A company's general ledger account Cash contains a record of the transactions (checks written,
receipts from customers, etc.) that involve its checking account. The bank also creates a record of
the company's checking account when it processes the company's checks, deposits, service
charges, and other items. Soon after each month ends the bank usually mails a bank statement to
the company. The bank statement lists the activity in the bank account during the recent month
as well as the balance in the bank account.
When the company receives its bank statement, the company should verify that the amounts on
the bank statement are consistent or compatible with the amounts in the company's Cash account
in its general ledger and vice versa. This process of confirming the amounts is referred to as
reconciling the bank statement, bank statement reconciliation, bank reconciliation, or doing a
"bank rec." The benefit of reconciling the bank statement is knowing that the amount of Cash
reported by the company (company's books) is consistent with the amount of cash shown in the
bank's records.
Because most companies write hundreds of checks each month and make many deposits,
reconciling the amounts on the company's books with the amounts on the bank statement can be
time consuming. The process is complicated because some items appear in the company's Cash
account in one month, but appear on the bank statement in a different month. For example,
checks written near the end of August are deducted immediately on the company's books, but
those checks will likely clear the bank account in early September. Sometimes the bank
decreases the company's bank account without informing the company of the amount. For
example, a bank service charge might be deducted on the bank statement on August 31, but the
company will not learn of the amount until the company receives the bank statement in early
September. From these two examples, you can understand why there will likely be a difference
in the balance on the bank statement vs. the balance in the Cash account on the company's
books. It is also possible (perhaps likely) that neither balance is the true balance. Both balances
may need adjustment in order to report the true amount of cash.
After you adjust the balance per bank to be the true balance and after you adjust the balance per
books to also be the same true balance, you have reconciled the bank statement. Most
accountants would simply say that you have done the bank reconciliation or the bank rec.
Features or characteristics of bank reconciliation statement
a) It is merely a statement not an account.
b) This is a periodical statement.
c) It is prepared on a particular day or this statement is valid for the day it is prepared.
d) The preparation of bank reconciliation statement is not a part of the double entry book-
keeping.
e) The causes which are responsible for the disagreement of the two balances can easily be found
out.
Bank Reconciliation Process
Step 1. Adjusting the Balance per Bank
We will demonstrate the bank reconciliation process in several steps. The first step is to adjust
the balance on the bank statement to the true, adjusted, or corrected balance. The items necessary
for this step are listed in the following schedule:
Step 1. Balance per Bank Statement on Aug. 31, 2010
Adjustments:
Add: Deposits in transit
Deduct: Outstanding checks
Add or Deduct: Bank errors
Adjusted/Corrected Balance per Bank
Deposits in transit are amounts already received and recorded by the company, but are not yet
recorded by the bank. For example, a retail store deposits its cash receipts of August 31 into the
bank's night depository at 10:00 p.m. on August 31. The bank will process this deposit on the
morning of September 1. As of August 31 (the bank statement date) this is a deposit in transit.
Because deposits in transit are already included in the company's Cash account, there is no need
to adjust the company's records. However, deposits in transit are not yet on the bank statement.
Therefore, they need to be listed on the bank reconciliation as an increase to the balance per
bank in order to report the true amount of cash.
 A helpful rule of thumb is "put it where it isn't." A deposit in transit is on the company's
books, but it isn't on the bank statement. Put it where it isn't: as an adjustment to the
balance on the bank statement.
Outstanding checks are checks that have been written and recorded in the company's Cash
account, but have not yet cleared the bank account. Checks written during the last few days of
the month plus a few older checks are likely to be among the outstanding checks.
Because all checks that have been written are immediately recorded in the company's Cash
account, there is no need to adjust the company's records for the outstanding checks. However,
the outstanding checks have not yet reached the bank and the bank statement. Therefore,
outstanding checks are listed on the bank reconciliation as a decrease in the balance per bank.
 Recall the helpful tip "put it where it isn't." An outstanding check is on the company's
books, but it isn't on the bank statement. Put it where it isn't: as an adjustment to the
balance on the bank statement.
Bank errors are mistakes made by the bank. Bank errors could include the bank recording an
incorrect amount, entering an amount that does not belong on a company's bank statement, or
omitting an amount from a company's bank statement. The company should notify the bank of its
errors. Depending on the error, the correction could increase or decrease the balance shown on
the bank statement. (Since the company did not make the error, the company's records are not
changed.)
Step 2. Adjusting the Balance per Books
The second step of the bank reconciliation is to adjust the balance in the company's Cash account
so that it is the true, adjusted, or corrected balance. Examples of the items involved are shown in
the following schedule:
Step 2. Balance per Books on Aug. 31, 2010
Adjustments:
Deduct: Bank service charges
Deduct: NSF checks & fees
Deduct: Check printing charges
Add: Interest earned
Add: Notes Receivable collected by bank
Add or Deduct: Errors in company's Cash account
Adjusted/Corrected Balance per Books
Bank service charges are fees deducted from the bank statement for the bank's processing of the
checking account activity (accepting deposits, posting checks, mailing the bank statement, etc.)
Other types of bank service charges include the fee charged when a company overdraws its
checking account and the bank fee for processing a stop payment order on a company's check.
The bank might deduct these charges or fees on the bank statement without notifying the
company. When that occurs the company usually learns of the amounts only after receiving its
bank statement.
Because the bank service charges have already been deducted on the bank statement, there is no
adjustment to the balance per bank. However, the service charges will have to be entered as an
adjustment to the company's books. The company's Cash account will need to be decreased by
the amount of the service charges.
 Recall the helpful tip "put it where it isn't." A bank service charge is already listed on the
bank statement, but it isn't on the company's books. Put it where it isn't: as an adjustment
to the Cash account on the company's books.
Step 3. Comparing the Adjusted Balances
After adjusting the balance per bank (Step 1) and after adjusting the balance per books (Step 2),

the two adjusted amounts should be equal. If they are not equal, you must repeat the process until
the balances are identical. The balances should be the true, correct amount of cash as of the date
of the bank reconciliation.
Step 4. Preparing Journal Entries
Journal entries must be prepared for the adjustments to the balance per books (Step 2).
Adjustments to increase the cash balance will require a journal entry that debits Cash and credits
another account. Adjustments to decrease the cash balance will require a credit to Cash and a
debit to another account.
LO3. Prepare and process invoices for payment to creditors and fordebtors
Invoice
While making a sale, the seller prepares a statement giving the particulars such as the quantity,
price per unit, the total amount payable, any deductions made and shows the net amount payable
by the buyer. Such a statement is called an invoice
VOUCHER
A voucher is a written document in support of a transaction. It is a proof that a particular
transaction has taken place for the value stated in the voucher. Voucher is necessary to audit the
accounts.
Each transaction is recorded in books of accounts providing all the required information of the
transaction. Since each transaction has an effect on the financial position of the business, there
should be a documentary evidence to establish the monetary accounts at which transactions are
recorded and also the transactions are properly authorized. The common documents that are
generally used are as under:
(i) Payment voucher;
(ii) Receipt voucher; and
(iii) Transfer voucher.
(i) A Payment voucher usually on a printed standard form, is a record of payment. When
payment is made for an expense, generally a bills is prepared to record full particulars of the
claim by the person or organization receiving payment. From the bill
(ii) A Receipt voucher is a document which is issued against cash receipts. It may also be a
printed standard form. This document shows that a certain sum of money was received from a
person or organization and also, contains information of the purpose for which the money is
received. It is signed by a responsible employee, authorized by the management to receive the
money.
(iii) A Transfer voucher is used to record the residuary transactions. An internal transaction or a
transaction not involving any cash payment or cash receipt is recorded in the transfer voucher.
Examples are: Goods purchased on credit; depreciation of assets, outstanding expenses, accrued
income, etc.
LO4: Prepare journals and batch monetary items
OBJECTIVES
After going through this lesson, you will be able to-
· Understand the meaning and importance of journal.
· Know the rules of journalizing.
JOURNAL
Journal is a historical record of business transaction or events. The word journal comes from the
French word “Jour” meaning “day”. It is a book of original or prime entry. Journal is a primary
book for recording the day to day transactions in a chronological order i.e. the order in which
they occur. The journal is a form of diary for business transactions. This is called the book of
first entry since every transaction is recorded firstly in the journal.
Journal Entry
Journal entry means recording the business transactions in the journal. For each transaction a
separate entry is recorded. Before recording, the transaction is analyzed to determine which
account is to be debited and which account is to be credited.
The Performa of journal is shown as follows:
(1) Date: In each page of the journal at the top of the date column, the year is written and in the
next line, month and date of the first entry are written. The year and month need not be repeated
until a new page is begun or the month or the year changes. Thus, in this column, the date on
which the transaction takes place is alone written.
(2) Particulars: In this column, the details regarding account titles and description are recorded.
The name of the account to be debited is entered first at the extreme left of the particulars
column next to the date and the abbreviation „Dr.‟ is written at the right extreme of the same
column in the same line. The name of the account to be credited is entered in the next line
preceded by the word “To” leaving a few spaces away from the extreme left of the particulars
column. In the next line immediately to the account credited, a short about the transaction is
given which is known as “Narration”. “Narration” may include particulars required to identify
and understand the transaction and should be adequate enough to explain the transaction.
It usually starts with the word “Being” which means what it is and is written within parentheses.
The use of the word “Being” is completely dispensed with, in modern parlance. To indicate the
completion of the entry for a transaction, a line is usually drawn all through the particulars
column.
(3) Ledger Folio: This column is meant to record the reference of the main book, i.e., ledger and
is not filled in when the transactions are recorded in the journal.
The page number of the ledger in which the accounts are appearing is indicated in this column,
while the debits and credits are posted o the ledger accounts.
(4) Amount (Debit): The amount to be debited along with its unit of measurement at the top of
this column on each page is written against the account debited.
(5) Amount (Credit): The amount to be credited along with its unit of measurement at the top of
this column on each page is written against the account credited.
SUB-DIVISION OF JOURNAL
When innumerable number of transactions takes place, the journal, as the sole book of the
original entry becomes inadequate. Thus, the number and the number and type of journals
required are determined by the nature of operations and the volume of transactions in a particular
business. There are many types of journals and the following are the important ones:
1. Sales Day Book- to record all credit sales.
2. Purchases Day Book- to record all credit purchases.
3. Cash Book- to record all cash transactions of receipts as well as payments.
4. Sales Returns Day Book- to record the return of goods sold to customers on credit.
5. Purchases Returns Day Book- to record the return of goods purchased from suppliers on
credit.
6. Bills Receivable Book- to record the details of all the bills received.
7. Bills Payable Book- to record the details of all the bills accepted.
8. Journal Proper-to record all residual transactions which do not find place in any of the
aforementioned books of original entry.
Advantages of Using Journal
Journal is used because of the following advantages:
· A journal contains a permanent record of all the business transactions.
· The journal provides a complete chronological (in order of the time of occurrence) history of
all business transactions and the task of later tracing of some transactions is facilitated.
· Complete information relating to one single business transaction is available in one place
with all its aspects.
· The transaction is provided with an explanation technically called a narration.
· Use of the journal reduces the possibility of an error when transactions are first recorded in
this book.
· The journal establishes the quality of debits and credits for a transaction and reconciles any
problems. If a business purchases a bicycle, it is necessary to decide whether the bicycle
represents ordinary goods or machinery. Further any amount paid is debited to bicycle
account and credited to cash account.
· The use of journals avoids omission or duplication of transactions or parts of transaction.
Without the journal the accountant would be forced to got to the individual account to enter
debits and credits. Therefore it is possible for accountant to miss part of a transaction,
duplicate all or part of a transaction or incorrectly record debits and credits. Even with the
Journal, it is still possible to omit transactions and make other errors. However, the Journal
reduces these problems.
· Once a transaction is recorded in the journal, it is not necessary to post it immediately in the
ledger accounts. In this, way, the journal allows the delayed posting.
In connection with the journal, the following points are to be remembered:
· For each transaction, the exact accounts should be debited and credited. For that, the two
accounts involved must be identified to pass a proper journal entry.
· Sometimes, a journal entry may have more than one debit or more than one credit. This
type of journal entry is called compound journal entry. Regardless of how many debits or
credits are contained in a compound journal entry, all the debits are entered before any
credits are entered. The aggregate amount of debits should be equal to the aggregate
amount of credits.
· For a business, journal entries generally extend to several pages. Therefore, the totals are
cast at the end of each page, against the debit and credit columns, the following words and
written in the particular column, which indicates, carried forward (of the amount on the
next page) “Total c/f”.
The debits and credits totals of the page are then written on the next page in the amount columns;
and opposite to that on the left, the following words are written in the particulars column to
indicate brought forward (of the amount of the previous page) “Total b/f”. This process is
repeated on every page and on the last page, “Grand Total” is cast.
Journalizing
Journalizing is the process of recording journal entries in the Journal. It is a systematic act of
entering the transaction in a day book in order of their occurrence i.e., date-wise or event-wise.
After analyzing the business transactions, the following steps in journalizing are followed:
(i) Find out what accounts are involved in business transaction.
(ii) Ascertain what is the nature of accounts involved?
(iii) Ascertain the golden rule of debit and credit is applicable for each of the accounts
involved.
(iv) Find out what account is to be debited which is to be credited.
(v) Record the date of transaction in the “Date Column”.
(vi) Write the name of the account to be debited very near to the left hand side in the
„Particulars Column‟ along with the word „Dr‟ on the same line against the name of the
account in the „Particulars Column‟ and the amount to be debited in the „Debit Amount
column‟ against the name of the account.
(vii) Record the name of the account to be credited in the next line preceded by the word „To‟
at a few space towards right in the „Particulars Column‟ and the amount to be credited in
the „Credit Amount Column‟ in front of the name of the account.
(viii) Record narration (i.e. a brief explanation of the transaction) within brackets in the
following line in „Particulars Column‟.
(ix) A thin line is drawn all through the particulars column to separate one Journal entry from
the other and it shows that the entry of a transaction has been completed.
LO5. Post journals to ledger
Objectives
After going through this lesson, you should be able to-
· Know meaning and importance of ledger.
· Understand the rules regarding posting.
· Know balancing of an account.
· Know meaning and objectives of trial balance.
Ledger
It has already been discussed in earlier lesson that accounting involves recording, classifying and
summarizing the financial transactions. Recording is made in Journal, which has been explained
in the preceding lesson. Classification of the recorded transactions is made in the ledger. This is
being discussed in the present lesson.
Ledger is a book which contains various accounts. In simple words, ledger is a set of accounts. It
includes all accounts of the business enterprise whether Real, Nominal or Personal. Ledger may
be kept in any of the following two forms:
Posting
The term „Posting‟ means transferring the debit and credit items from the Journal to their
respective accounts in the ledger. It is important to note that the exact names of accounts used in
the Journal should be carried to the ledger. For example:
If in the Journal, Salary Account has been debited, it would not be correct to debit the
Outstanding Salary Account in the Ledger. Therefore, the correct course would be to use the
same account in both the Journal and Ledger.
example
Suppose salaries of Rs. 10,000 have been paid in cash, the following entry will be passed in the
Journal:
Salaries Account Dr. 10,000
To Cash Account 10,000
In the Ledger two accounts will be opened (i) Salaries Account, and
(ii) Cash Account. Since Salaries Account has been debited in the Journal, it will also be debited
in the Ledger. Similarly Cash Account has been credited in the Journal and, therefore, it will also
be credited in the
Ledger, but reference will be given of the other account involved. Thus, the accounts will appear
as follows in the Ledger:
LO6. Enter data into system
Introduction to Data and Data Collection
Data collection is the first operational stage in the information system. The objective is to ensure that
event data entering the system are valid, complete and free from material errors. In many respects, this
is the most important stage in the system.
Two rules govern the design of data collection procedure:
 Relevance and
 Efficiency.
The information system should capture only relevant data. A fundamental task of the system designer is
to determine what is and what is not relevant. He or she does so by analyzing the user‟s needs. Only
data that ultimately contribute to information are relevant. The data collection stage should be designed
to filter irrelevant facts from the system.
Data versus Information
Data are facts which may or may not be processed (edited, summarized or refined) and have no direct
effect on the user. By contrast, information causes the user to take an action that he or she otherwise
could not have taken. Information is simply defined as processed data.
The distinction between data and information has pervasive implications for the study of information
systems. If output from the information system fails to cause users to act, the system serves no purpose
and has failed in its primary objectives.
Importance of data
The data serve as the bases or raw materials for analysis. Without an analysis of factual data, no
specific inferences can be drawn on the questions under study. Inferences based on imagination or
guesswork cannot provide correct answers to research questions. The relevance, adequacy and
reliability of data determine the quality of the findings of a study.
Data form the basis for testing the hypotheses formulated in a Study. Data also provide the facts and
figures required for constructing measurement scales and tables, which are analysed with statistical
techniques. Inferences on the results of statistical, analysis and tests of significance provide the answers
to research questions. Thus the scientific process of measurement, analysis, testing and inferences
depends on the availability of relevant data and their accuracy. Hence the importance of data for any
research studies.
LO7. Prepare deposit facility and lodge flows
DEPOSITS & ITS TYPES
DEPOSIT:
A sum of money placed or kept in a bank account, usually to gain interest. The terms Deposit
refers to an amount of money in cash or check form or sent via a wire transfer that is placed into
a bank account. The target bank account for the Bank Deposit can be any kind of account that
accepts deposits.
TYPES OF DEPOSITS:
There are two types of deposits. These are
1. Demand Deposit
Here money is not deposited for a specific time period. Investor can withdraw money at any
time. Bank is responsible to return the money on customer‟s demand. This account allows you to
demand your money at any time.Its further classified into types:
a) Saving deposits :These deposits accounts are one of the most popular deposits for individual
accounts. These accounts not only provide cheque facility but also have lot of flexibility for
deposits and withdrawal of funds from the account. Most of the banks have rules for the
maximum number of withdrawals in a period and the maximum amount of withdrawal, but
hardly any bank enforces these. However, banks have every right to enforce such restrictions if
it is felt that the account is being misused as a current account. Usually there are 100 withdrawals
per year i.e 2 withdrawal per week. Till 24/10/2011, the interest on Saving Bank Accounts was
regulared by RBI and it was fixed at 4.00% on daily balance basis. However, wef 25th
October, 2011, RBI has deregulated Saving Fund account interest rates and now banks are free to
decide the same within certain conditions imposed by RBI. Under directions of RBI, now
banks are also required to open no frill accounts (this term is used for accounts which do not
have any minimum balance requirements). Although Public Sector Banks still pay only 4% rate
of interest, some private banks like Kotak Bank and Yes Bank pay between 6% and 7% on such
deposits. From the FY 2012-13, interest earned up to Rs 10,000 in a financial year on Saving
Bank accounts is exempted from tax.
b) Current deposits: Current Accounts are basically meant for businessmen and are never used
for the purpose of investment or savings. These deposits are the most liquid deposits and there
are no limits for number of transactions or the amount of transactions in a day. Most of the
current account is opened in the names of firm / company accounts. Cheque book facility is
provided and the account holder can deposit all types of the cheques and drafts in their name or
endorsed in their favor by third parties. No interest is paid by banks on these accounts. On the
other hand, banks charge certain service charges, on such accounts.
2. FIXED/TERM/TIME DEPOSITS:
Under this scheme money is deposited for a fixed period of time so it is also called Fixed
Deposit. Investor can withdraw the money only after the time period. Premature withdrawals are
also allowed by paying a penalty. Interest is calculated on monthly, quarterly or yearly depends
on the bank and scheme. These are further classified into following types:
a) Recurring Deposit
This is another type of fixed deposit in with investor pay a small amount every month for a
specific time period. For example pay Rs.1000/- every month for a period of 5 years. After 5
years he will get the principle with interest accumulated. A Recurring Bank Deposit is a good
option for regular savings. It is also called RD Account & is usually operated by salary earners.
b) Cumulative deposit:
In a Cumulative Deposits, interest is payable at the time of maturity along with the principal.
This Scheme is suitable for the people who do not require periodic interest payment. This is also
called Money Multiplier Scheme.
c) Non-Cumulative Deposit:
In a non-Cumulative Deposits principal amount is paid at the time of maturity & interest amount
is paid is paid on periodical basis.
Term Deposit Facility Resource Center
The Term Deposit Facility is a program through which the Federal Reserve Banks offer interest-
bearing term deposits to eligible institutions. A term deposit is a deposit with a specific maturity
date. The Term Deposit Facility was established to facilitate the conduct of monetary policy by
providing a tool that may be used to manage the aggregate quantity of reserve balances held by
depository institutions. An increase in term deposits outstanding drains reserve balances because
funds to pay for them are removed from the accounts of participating institutions for the life of
the term deposit.
Operation Results
Recent operation results may be found on the Board of Governors' website(Off-site Link).
An archive of previous operation results may be found on the Board of Governors' website (Off-
site Link).
Term Deposit Facility Operations
Term deposits may be awarded through a competitive single-price auction format with a non-
competitive bidding option, a fixed-rate format at the interest rate specified in advance, or a
floating-rate format. The interest rate paid on term deposits awarded through a floating-rate
format will be the operation effective interest rate, which is determined by the average of the
daily effective rates over the term of the instrument. The daily effective rate is the sum of the
value of the reference rate for that day and the spread rate for the operation.
Lo8. Extracting a trial balance and interim reports
Trial balance
Aims and Objectives
i) To study the meaning and definition of Trial balance.
ii) To know the objectives, features and limitations of Trail balance.
iii) To understand the methods of preparing Trial balance.
(a) That both the aspects of each transaction are recorded and
(b) That the books are arithmetically accurate.
(iii) It facilitates the preparation of profit and loss account and the balance sheet.
(iv) Important conclusions can be derived by comparing the balances of two or more than two
years with the help of trail balances of those years.
Features of Trail Balances
The following are the important features of a trail balances:
(i) A trail balance is prepared as on a specified date.
(ii) It contains a list of all ledger account including cash account.
(iii) It may be prepared with the balances or totals of Ledger accounts.
(iv) Total of the debit and credit amount columns of the trail balance must tally.
(v) It the debit and credit amounts are equal, we assume that ledger accounts are arithmetically
accurate.
(vi) Difference in the debit and credit columns points out that some mistakes have been
committed.
(vii) Tallying of trail balance is not a conclusive profit of accuracy of accounts.
BALANCE SHEET
A Balance Sheet is a statement of financial position of a business concern at a given date. It is
called a Balance Sheet because it is a sheet of balances of those ledger accounts which have not
been closed till the preparation of Trading and Profit and Loss Account. After the preparation of
Trading and Profit and Loss Account the balances left in the trial balance represent either
personal or real accounts. In other words, they either represent assets or liabilities existing on a
particular date. Excess of assets over liabilities represent the capital and is indicative of the
financial soundness of a company.
A Balance Sheet is also described as a “Statement showing the Sources and Application of
Capital”. It is a statement and not an account and prepared from real and personal accounts. The
left hand side of the Balance Sheet may be viewed as description of the sources from which the
business has obtained the capital with which it currently operates and the right hand side as a
description of the form in which that capital is invested on a specified date.
Characteristics
The characteristics of a Balance Sheet are summarised as under:
(a) A Balance Sheet is only a statement and not an account. It has no debit side or credit side.
The headings of the two sides are „Assets‟ and „Liabilities‟.
(b) A Balance Sheet is prepared at a particular point of time and not for a particular period. The
information contained in the
Balance Sheet is true only at that particular point of time at which it is prepared.
(c) A Balance Sheet is a summary of balances of those ledger accounts which have not been
closed by transfer to Trading and Profit and Loss Account.
(d) A Balance Sheet shows the nature and value of assets and the nature and the amount of
liabilities at a given date.
Classification of assets and liabilities
Assets
Assets are the properties possessed by a business and the amount due to it from others. The
various types of assets are:
(a) Fixed Assets
All assets that are acquired for the purpose of using them in the conduct of business operations
and not for reselling to earn profit are called fixed assets. These assets are not readily convertible
into cash in the normal course of business operations. Examples are land and building, furniture,
machinery, etc.
(b) Current Assets
All assets which are acquired for reselling during the course of business are to be treated as
current assets. Examples are cash and bank balances, inventory, accounts receivables, etc.
Liabilities
A liability is an amount which a business is legally bound to pay. It is a claim by an outsider on
the assets of a business. The liabilities of a business concern may be classified as:
(a) Long Term Liabilities
The liabilities or obligations of a business which are not payable within the next accounting
period but will be payable within next five to ten years are known as long term liabilities. Public
deposits, debentures, bank loan are the examples of long term liabilities.
(b) Current Liabilities
All short term obligations generally due and payable within one year are current liabilities. This
includes trade creditors, bills payable etc.
PROFIT AND LOSS ACCOUNT (Unadjusted income statement)
Trading Account results in the gross profit/loss made by a businessman on purchasing and
selling of goods. It does not take into consideration the other operating expenses incurred by him
.
Important points in Profit and Loss account
1. Selling and Distribution Expenses
These expenses are incurred for promoting sales and distribution of sold goods. Example of such
expenses are good own rent, carriage outwards, advertisement, cost of after sales service, selling
agents commission, etc.
2. Management Expenses
These are the expenses incurred for carrying out the day-to-day administration of a business.
Expenses, under this head, include office salaries, office rent and lighting, printing and stationery
and telegrams, telephone charges, etc.
3. Maintenance Expenses
These expenses are incurred for maintaining the fixed assets of the administrative office in a
good condition. They include repairs and renewals, etc.
4. Financial Expenses
These expenses are incurred for arranging finance necessary for running the business. These
include interest on loans, discount on bills, etc.
5. Abnormal Losses
There are some abnormal losses that may occur during the accounting period. All types of
abnormal losses are treated as extra ordinary expenses and debited to Profit and Loss Account.
Examples are stock lost by fire and not covered by insurance, loss on sale of fixed assets, etc.
Following are the expenses not to appear in the Profit and Loss
Account:
(i) Domestic and household expenses of proprietor or partners.
(ii) Drawings in the form of cash, goods by the proprietor or partners.
(iii) Personal income tax and life insurance premium paid by the firm on behalf of proprietor or
partners.
6. Gross Profit
This is the balance of the Trading Account transferred to the Profit and Loss Account. If the
Trading Account shows a gross loss, it will appear on the debit side.
7. Other Income
During the course of the business, other than income from the sale of goods, the business may
have some other income of financial nature.
The examples are discount or commission received.
8. Non-trading Income
Such incomes include interest on bank deposits, loans to employees and investment in
debentures of companies. Similarly, dividend on investment in shares of companies and units of
mutual funds are also known as non-trading incomes and shown in Profit and Loss Account.
9. Abnormal Gains
There may be capital gains arising during the course of the year,
e.g., profit arising out of sale of a fixed asset. Such profit is shown as a separate income on the
credit side of the Profit and Loss Account.
CLASSIFICATION OF ERRORS
The errors can be classified as follows:
1. Clerical errors
Clerical errors are those errors which are committed by the clerical staff during the course of
recording the business transactions in the books of accounts. These errors are:
a) Errors of omission
b) Errors of commission
c) Compensating errors
i) The totals of the trial balance itself should be thoroughly rechecked in order to find out exact
or correct difference.
ii) Make sure that the balances of cash and bank are included.
iii) The difference of the two sides of the trial balance should be found and be divided by two
and then find out whether a figure equal to the same (i.e. half the difference) appears in the trial
balance. This procedure would enable to locate the amount placed on the wrong side.
iv) If the error remains undetected, divide the exact difference by 9. If it is divisible by 9, this
will mean that there may be transposition error or slide error. A transposition error is committed
when the digit of an amount is misplaced. For example, machinery account has a balance of Rs.
5689, but it has been written as Rs. 5869 in the trial balance. The resulting error is Rs. 180,
which is divisible by 9. A slide error is committed when the decimal point is placed incorrectly.
For example, Rs. 3670 is copied as Rs. 36.70.
The resulting error is Rs. 3633.30 which is also divisible by 9.
v) See that there is no mistake in balancing of the various accounts.
vi) The schedules of debtors and creditors should be scrutinized so as to find out that all the
debtors and creditors have been included in these schedules; their totals are correct.
vii) If the difference is of a substantial amount, compare the figures of trial balance of the current
year with the trial balance of the preceding year and see whether there is any abnormal difference
between the balances of important accounts of the two trial balances.
viii) The total of subsidiary books should be checked and it should be seen whether posting has
been done from these books correctly to respective accounts in the ledger or not.
ix) It should be checked that opening balances have been correctly brought forward in the current
year‟s books.
x) If the difference is still not traced, check thoroughly the books of original entry and their
posting into the ledger and finally the balancing of various accounts.
xi) If the error still remains undetected, repeat the above steps with the help of other members of
the staff, who are not involved in maintaining the books of accounts.
Assignment40%
1. ABCcompanyinvestedincash200,000birr
2. Abc company purchase machine on account 300,000birr
3. ABC company sales on account 500,000birr
4. ABC Company collects 400,000birr from sales on account
5. ABC company paid one half of purchase on account
6. ABC Company paid salary, utility and maintenance expense 85,000, 50,000and 40,000 birr respectively
7. ABC company purchase office equipment in cash 150,000 birr
8. abc company purchase office supply 45,000birr in cash
9. ABCcompany paid administrative expense 20,000birr
10. abc company issued machine 48,000birr in cash
REQURED
A. PASS all necessary transaction
B.General journal post to ledger
C.Prepare trial balance, Income statement, owner’s equity statement and balance sheet

Process Financial Transactions And Extract Reports

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RIFT VALLEY UNIVERSITY

ACCOUNTS AND BUDGET SUPPORT

Learning Guide #01

After adjusting the balance per bank (Step 1) and after adjusting the balance per books (Step 2),

Salaries Account Dr. 10,000

DEPOSITS & ITS TYPES

2. Abc company purchase machine on account 300,000birr

3. ABC company sales on account 500,000birr

4. ABC Company collects 400,000birr from sales on account

5. ABC company paid one half of purchase on account

7. ABC company purchase office equipment in cash 150,000 birr

8. abc company purchase office supply 45,000birr in cash

9. ABCcompany paid administrative expense 20,000birr

10. abc company issued machine 48,000birr in cash

A. PASS all necessary transaction

B.General journal post to ledger

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