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Ue, Pondicheny, India Printed ia Dubai ‘Acatalogne record for this ite avalable from the Hrtish Libary ISBN. 978 1444 181 432Contents Introduction. vi AS Level Diener eee) 1 Chapter 1 The double-entry system Chapter 2 The books of prime entry... Chapter 3 The ledger accounts in deta... Chapter 4 The cash book... Chapter 5 Discount Chapter 6 Preparing simple financial statements. Chapter 7 Accounting principles, concepts and conventions }8 Closing down the double-entry system.nn CRapter 9 Accruals and prepayments... Chapter 10 Control systems - the trial balance. Chapter 11 Suspense accounts Chapter 12 Control systems — bank reconciliations... Chapter 13 Control systems ~ ledger control accounts.. Chapter 14 Statements of financial position. Chapter 15 Profits. Chapter 16 The trading account.. Chapter 17 The profit and loss account... Chapter 18 irrecoverable debts and provision for doubtful debts Chapter 19 Depreciation of non-current assets... Chapter 20 The valuation of inventories... Chapter 21 Financial statements Chapter 22 Incomplete records. Chapter 23 Partnership accounting Chapter 24 Partnership accounting — structural changesContents Chapter 25 The financial statements of limited companies... 235 Chapter 26 Company financing aes = 1262 Chapter 27 Interpretation and analysis of financial data re 267 2 Cost and management accounting 281 Chapter 28 Absorption (total) costing, 1281 Chapter 29 Marginal costing 301 322 Chapter 30 Unit, job and batch costing..... Chapter 31 Business plannin 327 AS Level examination-style questions 330 ALevel DET] 336 Chapter 32 Manufacturing accOUMtS ...o.nesumnnnnonnnnaninnnn sii Chapter 33 Clubs and societies... nnmn SHERMER | Chapter 34 Published financial statements o 368 Chapter 35 IAS 7 Statements of cash flows 372 Chapter 36 International accounting standards.. 385 Chapter 37 The role of the auditor and directors.. 401 Chapter 38 Business purchase and merger... Chapter 39 Consignment accounts.. Chapter 40 Joint venture accounts. Chapter 41 Computerised accounting systems Chapter 42 Investment and other ratios... PR eC RULE ue rel LC Te) Chapter 43 Activity based costin Chapter 44 Budgeting and budgetary control Chapter 45 Standard costing Chapter 46 Capital investment appraisal. A Level examination-style questions 503 Index 509Contents Student's CD contents © ‘Additional questions Interactive tests Revision checklists Examination structure Glossary of command words Planning your revision ‘Answers to Additional questions ‘Appendix 1: Ratios Appendix 2: Layouts of financial statementsIntroduction The textbook ‘This hook has heen writen with the needs of students in mind, and I have tid to maximise, as fr as is possible, the achicvement of positive lesming. also, the book has been developed based on my many years of experience as both an ‘examiner and a teucher of the subject to Advanced Level students both ia the UK and overseas. “The book has been endorsed by Cambridge Intemational Examinations, sted as an endowsed textbook for students who study the Cambridge International Examinations syllabus 9706, The text covers the whole of the syllabus, onganised andl spit in accordance with the examination papers in the syllabis, and fellows as far as is possible the order in which topics apps in the published syllabus, The sections covered by each chapter arc listed. Each area of the syllabus is given as a reference point. Syllabus coverage ‘The first 31 chapters cover the AS syllabus in its entiety. At the end of the AS Level syllabus chapters there are examination style questions, Some of the questions are from past exam papers. Where appropriate the original questions have heen modified to reflec recent changes in accounting terminology and practice, Readers are advtsed that all topics in the AS section of the syllabus may also be examined at Advanced Level, Chapters 32 v0 46 deal with topics that may be examined at Advanced Level. The exumination style questions at the end of the A Level chapters are writen to reflec recent changes in accounting exam papers Features of the book Each chapter stats with the relevant syllabus statement, Throughout the chapters there are Examples and Worked examples, with answers, fo illustrate the inuoduced concepts. They are followed by a few ‘Now uy ..” questions leading students co additional questions in the GD as well as some selftest questions, which allow students to further explore the concept and test themselves Meanwhile, important terms ate explained and sometimes tips are given to help students to better understand the related ‘concepts, Each chapter ends with a summary, which covers all the key points How: the syllabus points are covered In the 46 chapters 1a Chapters 1-7and 14 | 1.1.1 Chapter 32 1. (Chapters 6 and 79 wiz Chapter 33 13 Chapters 10-12 143 Chapters 34 and 35, tat Chapter 9 and 18-20 | 1.1.4 Chapter 36 a2 Chapter 15-17 and 22 | 1.15 Chapter 37 1.43 CChopters 23 and 24 12. Chapter 36 tad Chapter 25 and 26 13 Chapters 39 nd 40 15 Chapter 27 14 Chapter at 24 Chapters 20 and 28 1s. Chapter 42 224 Chapter 28 2A Chapter 43 222 Chapter 29 22 Chapter 223 Chapters 29 and 30 23 Chapter 45 23 Chapter 31 24 Chapter 5Introduction Key concepts “The 9706 syllabus is built around five fundamental concepts that should be applied to all accounting transactions. They are: 2 A true and fair view ‘The concept of true and fair view ensures that financial siatements accurately and wuihfully rellect the transactions of the business, GQ Prats done cote) he ctl pny cing acon i air he gig Sr wali Consistency ‘The treatment of similar transactions and! items in the same way each year so that the results of business activity can be compared swith previous results @ Bovine eatiy ‘The separation of the ownership of a business from the actual business itself, Only business assets and transactions are recorded {nthe business books of account. @ Money mewurement ‘The business financial records only deal with transactions that can be measured in monetary terms. These key concepts will dictate the way that you study accounting. They underpin the work that you will study during your ‘course. You should find that they provide themes that sun through all the accounting topics that you study, The above icons appear in the text, indicating where each Key concept is covered, ‘When you are studying a topic, relate one or mote of these key concepts to that topic. The Student's CD-ROM ‘Thete is a student's CD-ROM accompanying the book to help students further their sudy in accounting, It includes: ‘© Additional questions ~ they are referred to in the book as ‘Now try .." questions which illustrate more about the conceps where introchiced and test if you have grasped the knowledge. 16 Interactive tests — these are diferent types of questions such as tric or false and mulkiple choice, designed to improve the understanding of accounting. ‘© Revision checklia to check if you have understood every syllabus point covered in the chapter, ‘© Answers to additional questions |@ Materials to help you prepare for the examinations in Accounting In accounting, there are certain layouts that you must lean so its important that you practise questions based on exch topic area cn a regular basis. Use each piece of work inthe book and the CD to build up a hank of knowledge and skills that you may be able to apply to subsequent picces of work, Asa subject, accounting is rather ike a detective selving a crime; the pieces of Information collected some moeks ago might help 10 solve today’s problem, Most importanty, yous mus learn the concepts foreach topic. This usullycasier that you might first think; dhe dificult pat is applying the appropriate knowledge to the questions Thope you enjoy exploring in accounting andl may you have good pesformance in your AS/A Level examinations Ian HarrisonThis page intentionally left blankSR NZ-1| i alarelielel eeleao) Tal eiare) 4d The double-entry system By the end of this chapter you should be able to: (© use double-entry book-keeping to record financial transactions «© enter financial transactions into a ledger using debit and credit entries ‘© understand and explain the purpose af using a ledger ‘© understand and explain why a ledger is generally divided into three parts. See ee @ 1.1 Debit and credit entries in the double-entry system “There are two main ways in which the managers of businesses record their nancial transactions. They use either do, dd a = “This chapter looks at the double-cntcy system, which provides the accountant with ‘An income statement i a statement the information needed in erder to produce the data requited to prepare an income ‘that calculates the profit that a business statement that will show whether or not the business has been profitable. You will has made fora period of time usualy a ouble-entry system of cecording transactions single-entry system of recording transactions. hsm encounter the single en system in Chapters 22 and 23. nancial a iol leoy ‘As the name implies, double-entry book-keeping recognises that there are two Prat 1 Fides ox acts to avery pisineas Indnuactlan, Son 638 quampla ac tn Alen of elt efi ong ants 2 Beet filmy cat with $20 of fe ev $icrfov_pe- Treceve the fuel “The filling station attendant puts the fuel into my vehicle buy a pair of soccer boots costing $13. @ receive the boots. The sports shop ‘gives’ me the boots @ ‘There are two mote aspects to each of these transactions: ‘When I give the fling station attendant my $20 @ she receives the cash © Tgive' the cash Like all areas of study, accounting has its awn jargon. Whenever a new word or term is introduced, an explanation or definition will be given, Make sure When I give the shop assistant my $13 you read and understand wat these ‘terms mean and haw they are used in accounting. # he receives the cash, give the cash. ‘This way of recording both sides of any transaction is known as the dual aspect principle of accounting.EE tre couble-entry system ‘A ledger account contains the detailed record of financial transactions undertaken bya busines, Since all accounts appear ina ledger (or book, the term & often shortened ta the single word account isthe book where al accounts SS uced to creotd On occourt bx: wel (edgar Gv Own ed All financial transactions involving the business are recorded in a format ledger account of simply an account, ‘You would find each account on 2 separate page in the ledger. In fact, if a great ‘many transactions of a similar nature are undertaken, an account may spread over several pages. For the sake of convenience this one book (the ledger) is divided into several smaller books, You can imagine that lage businesses like the Toyota Motor Comporation oF McDonalds could not possibly keep all their financial records in cone book. Initially, to make our tsica litle simpler, we shall keep all our records together. ‘When the other books are introduced, you will see that it does muke sense 10 split the ledger into several dlfferent parts Do not worry if allthis scems a litle strange. You will scon be familiar with i but it does require practice. The key to success in accounting is practice An account looks like a ‘T shape, lke this Fach account has two sides. (© The lef side is known as the debit side. (© The right sil is known as the credit side ‘An account Debit Credit “The debit sce ofan account is always the receiving side or these that shows gains in value ‘The credit side of an account i always the ‘giving or losing se — the side that shows value given. Doue Debit soften abbreviated to Dr Credits often abbreviated 10 Ct Dr ‘An account Receives Gives Gains Lowes ‘An account in the ledger would be headed thus: account Note “There should always be a heading, i the account shown is not a personal account, the heading should include the word ‘account “The golden rule of the game of Mlouble entry’ is that every time you enter something on the debit side (left side) of an account you must enter an equivalent amount on the credit side (right side) of another account, “This is all fairly staightferwaed, but i does requine practice ledgers! mccourts \ ones, Coshb by poreeeste a “rac general 451.1 Debit and credit entries in the double-entry system. (es Bola owns a business selling meat: During one week the following financial teansactions take place: 1 Bola purchases meat $210 from Scragg, a meat wholesaler. She will pay for the meat in 2 couple of weeks! time 2 Bolas cash sales for the week amount to $742. 3 Bola supplies meat to the Grand Hotel $217. They will pay for the meat at the end of the month, 4 Bola pays the rent for her shop $75. 5 She pays her telephone bill $45, Required Enter the transactions in Bol's ledger, Purchases are any items that are purchased prswel va heinteton of sling Hem to 1 Bola receives meat. and Serage Loses” the meat Dr Purchases account Cr De ser09 « 5 5 Sales ar any items that are sldin the normal couse of busines to customer. 2 a 2 Bola ‘loses (ells) some meat... and she gains cash « (eu —— Con ncn ‘ s $ er atl ere \ Ps 742 82 v \ WO Pgh oe swat ce Grand Hot « $ s ef e uw a7 27 i" eo 4 Bola gains the use of her premises ... and she ‘loses (pays) cash wo Dr___Rentaccount___ cr oth account « $ $ rs 75 + Tecan he a cong ony beste we ae doling abo cen Cr le5 “pong re + lpr money oan fr he wei bling L + Bola recive/stne the use ofthe premises “mss ke th, hk fhe eh my Bit ad thon atin he sen en and she loses cash Coon ne Dr Telephone account Dr Cath account ce $ $ a a + Another confusing entry. Hola seceives/gains the use of the telephone. + Hola gives the telephone company cash for the service they provide to her,EE tre couble-entry system > Now try Question 2. you are uncertain about the telephone account ask whether Bola has gained cash fr ‘lost’ cash, You know that Bola has paid cash to the telephone company so the cash has to be a credit entry (right side), the other entry has to be a debit entry (eft side) according to the rules of double entry. @ 1.2 Treatment of similar transactions IW there are a number of similar transactions that need to be recorded, we enter them all in one account. Greta Teer owns and suns a store selling newspapers, magazines and candies, The following transactions toole place over the past few days: 1 Gash sales of newspapers amounted to $68. 2 Cash sales of chocolate and candies amounted to $151, 3 Greta purchased candies, potato chips and soft drinks $135, paying cash to her wholesaler, 4 She paid $160 casi for local taxes. 55 Greta sold four boxes of potato chips to a local club for cash $30. Required Enter the wransactions in Greta’ ledger, Answer Dr Soles account o Dr Cash account o s s $ 6 cy 135 151 15 160 20 30 Dr Purchases account G Dr Local taxes account Cr $ s 135 160 Note All the transactions involving cash have been entered in one cash account, All the sales transactions have also been entered in one account, It should be obvious that as well as keeping, money in the business, the owners of businesses will bank money and will pay many bills by means of cheques. So, #8 well as having a cash account in the lelger, the business would also keep a bark account to record transactions using the business bank account Cs Sven Drax owns and runs a hovel. He supplies the following information: 1 Sven purchases a deep freeze unit $415, paying by cheque. 2 He purchases for cash $127 feuit and vegetables for the hore restaurant, 3 Sven purchases petrol $45 for the hotel minF-bus using cash,1.3 The division of the ledger 4 He pays for «family holiday $1800 paying with a business cheque. Drawings isthe term used to deserbe the rast irboliay $100 pation stteraenl cf essues cash orgoces) 5 He pays $2178 cash takings into the bank account. from the busines by theownerforpniate Required jevprise the babes Enter the transactions in the hotel ledger, Answer (osha? “ br___frstersouna errant Her s . $ ssc0 sccm er br Cahawoume $ 7 s eee ee eee ee $ s s 100 or Salertngd acount 6 $ 1 Note “The freezer unit is not purchases ~ itis capital expenditure. There was not already an account, so when in doubt open an account. The cheque paid out 10 the holiday ‘company is drawings — it is not a business expense. Si 3 Inwhich acount would good purchased for resale be enter?” 4 Denzil pays the ent on his factry with $300 cash. The entries to raed this transaction are debit rent account $300; credit cash account $300, Rup False? 5 Bradley pays the telephone bill $120 cash, The entries to record ths tgnsection are debit cash account $120; credit telephone account $120. Tuer)? 6 Which side of an account isthe ‘receiving’ side? KOH 7. Which side ofan account sth ‘giving’ side? aves v \ « watery @ 1.3 The division of the ledger rak ‘sei eh sc ec en i TUL maa meg a eo ee eanEE tre couble-entry system Credit customers ate people (or businesses) that we sell goods to; they wil pay for thei goods at some time in the fute, The gands are sald on credit a ‘Uni cedit customers have paid forthe goed that have heen purchased, they sretrade debtor, Fade debtors ae Collective known as trade roceivables, that we purchase goods am: we wil stl sak cvtdd Gan you think of how you might split the ledger to make it more manageable? We make it more manageable by grouping together similar accounts, We put: ‘© credit customers? accounts together in one ledger ‘© credit suppliers’ accounts together in one ledger ‘ll other accounts in another ledger. All transactions involving credit customers will be found in the sales ledger (also known as the debtors’ ledger). All ransactions with credit suppliers will be found in the purchases ledger (also ‘known as the ereditors' ledger). All other transactions will be {ound in the general ledger. (For those of you wy te} Credit suppliers are peopl (or businesses) familiar with computerised accounts, the general ledger is aften called the nominal the debt that we ce at some future date G9RL2 | The goods re puchased on credit a ‘A parson or busines supplying goods on cree krown asa trade creditor unt the debts etd. A numberof trade WHEE you) cretors are collectively known a5 trad gz oF ys Is Personal accounts are accounts that Nominal accounts, real accounts and liability accounts wl al be found inthe sere as ——— Real accounts recor the assubtian ans os inns, hi ledger in accounting packages) Initially you will make mistakes when asked which accounts would appear in of flbwhich ledger; do not worry about this — we have all made similar mistakes in (an the past “The difeult ones are as follows: 18 The sales account, which is sot found inthe sales ledger, is reserved for the personal accounts of oor credit customers. The sales account would be found in the general ledger. ‘9 The purchases account will not be found in the purchases ledger. It is reserved for the personal accounts of credit suppliers only. The purchases account would be record ransactiors with cred customs: Found in the general ledger. \pedcettsppiesT “TE lr eed Gee RanRRRN IN Ue Ee mE aI Late, ‘9 Ifa sale is made for cash itis not entered in the sales ledger {6 If something is purchased for cash it isnot entered in the purchases ledger. ‘These transactions appear in the general ledger. 1 Nadhim purchases goods for resale $73; he pays cash. 2 He sells goods $19 for cash. Required List the two entries in Nachim's ledger for exch transaction. Answer Cs eo oe > Now try Question 3. 2 [cashaccount Sales account “When you go to a takeaway food store and you order your meal, the proprietor does ‘not open an account for you; he simply takes your money and gives you your meal, He debits ~ cash account (the sale of your meal would be included in his total ccash sales for the day. Hie credits sales account (using the total sales figure for the day). Remember that each account would be in a different ledger according to the lassfication we have discussed. Each account would be shown on a separate page in the ledger There is not enough space in this book w afford such a luxury. We will write the accounts on the sme page.> Now try Question 4, 1.3 The division of the ledger (es Siobhan Murphy provides the following information for the past few days: 1 Siobhan purchases a non-current asset $1450 from Adil on credit, 2 She sells goods $77 to Fiona, who pays by cheque. 3 She purchases goods for resale $510 from Zainab on credit 4 She purchases goods for resale $65 from Joan for cash, Required Enter the transactions in Siobhan’ ledger. (indicate in which ledger each account ‘would be found.) Answer Dr__Non-current assets account (GL) rr adil PO) o 5 $ 1450 1450 Dr Sales account (GL) Cr _Dr__Bank account & $ $ 7 n Dr Purchases account (GL) rr Zainab (PL) co 5 $ 510 510 65 Note ‘© Customers! accounts and suppliers! accounts appear in the sales ledger (SL) and in the purchases ledger (PL) respectively — but only if the wansuctions are on credit. {© Accounts that are not personal accounts are found in the general ledger (Gt. {©All debit entries have a corresponding credit entry. © All credit entries have a comesponding debit entry. Readers who have hanle acenuints will have observed that whea they receive a banle statement from the bank, money paid out of the account is entered in the left columa (Gebio) of the bunk ssatement, while moneys received info dhe account are entered in. the right column (credit. This emuses problems intally. Alter what has been said above, this might seem to be the wrong way round, So ‘who is ighi? Well, both the bank statement and this book are correct. You need to remember thatthe bank statement is writen from the point of view of the bank, not from your point of view. ‘More details on this are given in Chapter 12.EE tre couble-entry system Baers Brey Abbr Cufifnceds a corresponding credit entry Name the book in Which all busines transactions are entere List the three divisions ofthe ledger. Explain the meaning of the term ‘personal account’ Name two ‘real’ accounts found in the ledger. Name two ‘nominal’ accounts found in the ledger Name two ‘iablity’ accounts found in the ledger. Gc ne ‘© All business financial transactions are recorded in accounts. ‘© Accounts ate recorded in a ledger. ‘© Non personal accounts should contain the word ‘account’ in the heading, for example ‘Motor expenses account ‘© Personal accounts only have the person's name or the name of a business in the heading, for example ‘Patel and Co.’ ‘© All transactions have a dual aspect ‘© Every debit entry in an account in the ledger must have a corresponding credit entry. ‘© Every credit entry in an account in the ledger must have a corresponding debit entry. «© The ledger is divided into three parts because its easier and more convenient to use in this form. ‘© The purchases ledger contains the accounts of suppliers with credit accounts. ‘© The sales ledger contains the accounts of customers with credit accounts The general ledaer contains nominal, real and liablity accounts,AS Level 1 Financial ac By the end of this chapter you should be able to: «identity the five books of prime entry that deal with credit transactions 1# use a cash book as a book of prime entry « identity the source documents used to make entries in the books ‘@ make entries in the six Books to record financial transactions ‘© post entries from the books of prime entry to the ledgers © understand the effect that trade discount has on entries inthe books of prime enity ‘The books of prime entry are also known as subsidiary books and books of original entry. There ate six books of prime ent’ and they ate: 1 the purchases journal 2 the sales journal 3 the purchases retums joumal 4 the sales returns journal 5 the general journal 6 the cash book Punches eur The doublocauy sem (Gencal jour Purchase joa Figure 2.1 The six books of prime entry ‘All cansactions ate first entered in a book of prime entry, Each book of prime entry is made up ofa list of similar types of wansaction. The ems are lise in the Book uni itis worthwhile to past the lis to the ledger Some ofthis may sound confusing; but when you have seen how the books work, things will become cleat All transactions must be entered in one of the books of prime entry before they ‘can be entered in the ledger. So the cash book is used to get into the ground and it will also play its part in the game of douible entry.EE te books of prime entry ‘The primary sourees of information used to make entties in the books of prime entry tre called source documents e& o ‘As long as you remember the left side is. debit and the right side is crelit, you can leave DrfGr out when writing the ledger accounts, 1© The booles of prime entry are used as & convenient way of entering transactions into the double-eatry system. 1 It is less efficient to make entries into the ledgers as they arise It is too time consuming and that means i is generally more costly. €@ Tis better to collec the entries and categorise them into bundles of similar types and then to post From these books in alk 2.1 Recording credit purchases and sales 2.1.1 The purchases journal ‘The purchases journal is also knowa asthe purchases day book. ‘When a purchases invoice is received from a supplier of goods it shows the _B0ods that have been purchased and the price charged. The details are listed in the pocchases jum ‘The purchases joutnal is list of creit purchases mace The souree documents are the purchase invoices received. ‘When itis convenient (this could be dally, weekly of monthly depending on the volume of purchases made by the business), the list of purchases is tomlled and the teal is posted to the debit se of the purchases account in the general edger because the goods have beea received ach individual supplier’ ledger account in the purchases ledger i evedited with the value of goods purchased (showing that the supplier has given’ the goods). si — Pacha Mary PickupLd 12570 PGolghtyple 740 Book of Gaiha tks 126100 win ry Googe Timms 9810 Txa20 I The grtem General eer Paciates ect hen eee s 5 ‘account; it is used to 10 156228 seer th acount, Figure 2.2 The purchases journal 102.1 Recording credit purchases and sales 2.1.2 The sales journal ‘The sales journal is also known as the sales day book ‘When goods are sold the supplier sends a sales invoice to the customer. The sales invoice itemises the goods that have been sold and the price of those goods ‘A copy of this invoice is retained by the sells. The copy sie invoice isthe source document from which the sales journal i ‘The copy sales invoices sent t customers are used to prepare a list of the ere sales made. ‘When itis convenient (thls could be dally, weekly or monthly depending on the volume of sales made by the business), che lst is totalled and the total is posted (0 the credit side of the sales accotat in the general ledger hecatse the goods have been ‘given’ to the exstomer. ‘Bach individual customer's ledger account in the sales ledger fs debited with the value of goods sold to them Gndicaing that the customer has ‘gained the goods). Sowce oct Sales tedger |) Sales Journal s eee ‘Axthur Baines ple $47.00 , 54700 Emily Sain Lid 912.50 Book af Crarchic e Sermehit 1827 prame entry Emily Smith Td $ 7 91250 ue (Catch Seratcit s 1827 Thesystem Note: The sales jour is rot am accounts only nse in ety ito the neon igure 2.3 The sales journal uEE te books of prime entry 2 2.2 Recording the return of goods 2.2.1 The purchases returns journal ‘The purchases returns journal i also known as the returns ound journal o¢ pcchases returns booke Sometimes, goods that have been purchased turn out to be fauly, dhe wrong, colous, che wrong size or not useful in some other Way. These goods wil be retuned to the supplies. The supplies in due course will send a credit note. “These credit notes are the souce coctiments ftom which the purchases returns journal i writen up. ‘The purchases returns journal is lst ofall the ccedit notes received from suppliers. When it is convenient, the lis is added and the toa is posted to the exeit of the purchases returns account (the remus have been sent hack to the supplied) Note ‘© The goods that have been retumed are net posted to the credit side of the purchases account ‘¢ Each individual entry i the purchases returns journal is then posted to the debit of the respective supplier's account in the purchases lege (he supplier receive the goods), (Codi noes Source document 9s tus jour Bees Enea ime ay ‘The system Purchases ledger F.Bloges 3 2» Figure 2.8 The purchaces returns journal2.3 The general journal and its uses 2.2.2 The sales retums journal ‘The sales returns journal is also known as the returns inward journal Sales that are not acceptable are returned by the customer and a credit note is sent to the customer. ‘A. copy of the ere note will be setained and this isthe source document from ‘which the sales returns journal fs writen up, ‘When convenient, the lists added! and the total is posted to the debit ofthe sales returns account (he goods have been received). Note 18 The goods that have been retuned are nat debited to the sales account ‘¢ Fach individual entry in the sales retums journal is posted to the credit of the cus. ‘omer who remumned the goods (they have ‘given’ the goods back to the supplied. Copy ent nos Soe dcement r Sderot ra pBoske Thegem ‘Gonaral edger Salo urs aecoust a @ 2.3 The general journal and its uses ‘he general Jounal i fi source of confi fr ude Bu donot way — twee evry ted aed no aici as we oie ase hen we fet contact. however, top tat you acd tobe fl with The gene oul use when we cnnct cmfoably nd anther bok of pine ety oe ts yo i rent rom the oer boot of pre ety dened sbove Figure 2.5 The sles returns ou ‘The general journals usually referred to ‘the journal BEE te books of prime entry @ o The ‘folio’ colurnns are often omitted in ‘examination questions 14 General journal Date Particulars Folio Debit Thedate ofthe The account Ledgerand page Amount to be entries be debited debited Theaccount to ‘Amount to be be cadted credited ‘Adaserpton of why the transection was necessary the narative) After the two entries have been entered in the general journal, an explanation of way the wansaction was necessary is required. This is referred to as the narrative ‘The general journal has six uses, Ic is used wo record: 1 the purchase of non-current assets on credit 2 the sale of non-current assets on credit 3 the entries necessary to open ledger accounts when a bussiness fist comes into 41 the enteies required to record the dosing of ledger accounts when a business finally ceases wo trade 5 the correction of errs 6 inter-lodger transfers ‘The source documents Used to write up the general journal would include «© purchase invoices for capital expenditure 1@ sales invoices for sales of capital items, ‘Other source documents will be encountered as we progress with our studies, CO (On 23 April 2014, Tamara purchased on credit an xu/397 machine from Dextel and Co. for $12600. Required Prepare the entry in Tamara’s general joumal to record the transaction. Answer General journal Date Particulars Folio Debit rele s s 23 April 2014 Machinery az 12600 account Dewtlitd —PL26 12600 Purchace of Machine st/297 on crelt from Dest! Ltd + Page numbers in the ledgers are for illustrative pape, Remember the use of the narrative explaining why enties in the ledgers are necessary.o you fn tito prepare Jota ees, ty raving up accounts as you din Chapter 1. Then from the acouns caw up the furl In reality, the journal should be done first asitis the book of prime entry. 2.3 The general journal and its uses DO On 6 September 2014, Hussain sold vehicle P341 FIX to Greg's garage for $230. Greg will sete the debt on 31 October 2014, Required Prepare the entry in Hussain's general joumal 1o record che wansaetion, Answer General journal Date Particulars Folio Debit credit s : September Gags garage SLa2 230 2014 Vehicles cut 230 Aisposal account Sal of vehi P241 FTX to Greg’ garage Cs Marlene started in business on 1 Janwary 2014 by paying $14000 into her business bank account Required Prepare the entry in Marlene’s general journal to record the transaction. Answer General journal Date Partiailars Folio Debit Credit s 5 January 2014 Bankaccount GLY 14000 Capital o2 14000 account Captalintroduced by Marone ‘The other thuce uses are dealt with later ‘© use 4 in Chapter 38 (closing the ledge accounts when a business ceases 10 trade) ‘© use 5 in Chapter 11 (correcting errors in the double-entry system) ‘© use 6 in Chapter 13 (making transfers from the sales ledger to the purchases ledaged),EE te books of prime entry 16 Ce (On 2 August 2014, Jared purchases, on credit, new machine for his business costing, $5400 from Factre Ltd Required Prepare the ents in Jareds general jouml to record the trunsaction, Workings Ifyou ate unsure howto tackle this question, drs up the "T accounts. dete gains macbine Factre Id loses the machine Machinery account ctr itd $ 3 400 sa00 ‘Which account has been dehitec? Which account has heen credited? Ifyou can do this, then you ean draw up the general journal Answer General journal Date Particulars Folio Debit credit s s 2 August 2014 Machinery account. GLI 5400 Fact Lot Pia 5400 Purchase of new machine fom Fact it 2.4 The cash book used as a book of prime entry ‘The final book of prime entry is the easlt book. The cash book is dealt with in more detail in Chapters 4 and 5. Ics suliclent co say at this stage that any cash (or bank) transactions will be entered in the cash book (and in another account in order to complete the double entry). ‘The cash book is not only part of our double-entry system, itis also a book of prime entry ‘The source documents used to write up the cash book would include: ‘© cheque book counterfoils © receipts received from suppliers who have dealt in cash {© copy receipts given to customers © cash register tll rolls Other source documents used to write up the cash beok will be encountered in later chapters,2.5 Trade discount ‘Trade discount is « reduction in the price chased to a customer who is also. in business, Example [Extrav ple sells a wooden kitchen cupboard to the general public for $300, Clyde is a kitchen designer and fiter. He purchases a kitchen cupboard from Extrav ple, to it into one of his customers kitchens for $240, ‘Clyde gets trade discount of $60, This trade discount expressed as a percentage would be 20 per cent. ‘Trade discount is not recorded in Extrav ple’s ledges, nor is it recorded in Clyde's ledger. In Clyde's purchases journal the entry would show: s Extav pe 240 {In Extrav ples sales joumal the entry would shows che 220 Cr mpl ‘The following are the prices of some kitchen cupboards as charged to the general public bby Bxtrav ple and the rates of trade discount allowed to other different reall businesses. via 1490 2 bea 4500 50 a a 6780 7 Pea Queve Lid bora 630 10 Required Propate the entries inthe sales journal of Extra ple Answer Sales journal s Hay eo Ltd aninso Sea Dee 2300.00 M. Hea ple 2034.00 Pea Queue Ltd 567.00 6018.50EE te books of prime entry Posting & the tem wsedby accountants or entering transactions ito the ledger accounts of busines, > Now try Question 1. Similarly, in the purchases joumal of the customers of Extrav ple the amounts would be shown net of trade discewnt. So in the purchases journal of Hay Bee Ind we would find an entry 5 Extra ple 111750 Postings to the respective ledgers would follow the lines shown euler in dis chapter. RSC Why is there & need to use books of prime entry? Give an alternative name for the books of prime entry. Give another name forthe sales journal ‘What is meant by the tem ‘posting”? Which book of prime entry is also part of the double-enty system? Name the source document used to prepare the purchases journal Name the source document used to prepare the sales returns journal Which two accounts are prepared from the entries inthe sales journal? Which two accounts are prepared from the entries in the purchases returns journal? Explain how postings are made from the returns journal to the general ledger. Name one use of the general journal How is trade discount entered in the books of prime entry? Grn ‘© All business transactions must be frst entered in a book of prime entry before they can be entered in the double-ensry system. «© Five books of prime entry deal with credit transactions: «purchases journal «sales joumal «+ purchaces returns journal «sales returns journal + general journal 1@ The five books of prime entry ate "lists from which ledger accounts are compiled ‘@ The sith book of prime erty is the cash book. ‘© The cash book deals wit all cash and bank account transactions. Its also part of the double-enty system '® Trade discount is reduction in price charged by a supplier to a customer who is in business,AS Level i alarelielel eeleao) Tal eiare) 3 The ledger accounts in detail By the end of this chapter you should be able to: wake detailed entries in @ ledger account 3.1 Making detailed entries in ledger accounts Up to now we have used T’ accounts to record the two sides of a transaction. This is useful and it will give us the information that we require. However, it would be more: useful if dhe T accounts gave us more details of each transaction, # I would be useful to know when the transaction took place. €@ I wold also be usefil to he able to follow the whole transsetion throwigh to its completion, especially when a problem occurs ia the system. “These problems are rectified by simple means. Each entry showld be preceded by: @ the date ofthe transaction #8 description stating where the corresponding entzy can be located © the appropriate ledgor and folio (page) number of the ‘other entcy. ‘An entry in a ledger account may look like this: : tit e W or gout color Cott Pacouney GWA « x iN 7 ar Theil Silex LIT 27 ‘The transaction took place on 7 April. The ‘opposite’ entry (the credit entry) is in the sales account ant can he found on page 17 of the aeneral ede br en @ $ 12Sopt Purchases G28 a6 Hore the transaction toolk place on 12 September: ‘The debit entry is in the purchases ‘account, which is on page 28 of the general edger.EBB te ledzer accounts in detail Ifyou are asked to prepare a ledger © 3.2 Using the books of prime entry ‘The information shown in Jedger accounts is derived ftom one of the books of account, then your answer must have prime entry. all the details. However, when you are Co accounts because this is faster and just as ‘working things aut, you may use T° accurate, Mary accountants and teachers use ‘The following transactions took place during the first week in October. 11 October: purchased goods for resale on credit from Arkimed ple $120 accounts to solve tricky problems and for 2.1 October: sold goods on cred to Mortis & Co. $600 general workings. Try jotting down your workings using 3-2 October: purchased vehicle on credit from Pooley Motors pe $17400 44 October: sold goods on credit to Nelson ple $315 5 4 October: purchased goods fo resale on credit fem Bjom & Co. $450 © 6 4 cciber: purchased goods for resale on cred fom Darth Son $170 7 7 October: sol goods on ered to Olivia Ld $1340 "T' accounts. When you gain confidence 8 7 October: returned damaged goods $38 to Arkimed ple in their use you wil find that you can ‘them as a revision tool and for solving problems. USE 9 7 October: purchased goods for resale on credit from Charlene $320, Required 1 Identify the source dectument that has hicen used in each case to write up the bool of prime entcy bb Write up the appropriate books of prime entry. «Show the entries in each ledger acconnt Answer 12 Purchase invoices: Transactions 1, 3, 5, 6,9 Copy sales invoices: Transactions 2, 4,7 Credit note: “Transaction 8 b Purchases journal Sales journal 5 s VOct Arkimed ple PL. 120, 10ck_— Mts Co. SLI 600 Ac Born &Co. PLZ ABD. «Oct Nekonpe «= SZ IS Aad Dath@Son PLAS 170— 7c Olalid «= SL _1340 Oct Charlene == PLA 20 2255 “060 Purchases returns journal s Joc Arkimed Pu 38 General journal Dre s os 20 Vehicles aia 17400 Pooley Mirsple GIS 400 Purchase of vehicle from Pooley Meters ale3.2 Using the books of prime entry « Purchases ledger br Ackimed ple o 3 $ Oct Purchasesreturns PRI «38'|1Oct_ Purchases PT 120 br Bjom & Co. ce $ Act — Purchases PL 450 Dr Darth & Son ce $ Act — Purchases 170 De Charlene ce $ Oc — Puchases ALL 320 Sales ledg Dr Mortis & Co. o 3 10x Sales Sit 600 Dr Nelson ple $ Aon Sales Sit 315 Dr Olivia ed 3 Tox Sales sit 1340 General edger Dr Purchases account ce s 7Oct Sundry payables PN 1050 count co $ 2Oct Sundry sn 2255 recevables returns account c is 70ct —Suncry payables Sit 8 Dr Vehicles account ce s 20 Pooley Motors GIT 17400 ple Pooley Motors ple G 3 20a Wehices cit 17400 ‘The cash book is a book of prime entry: It contains the business cash account and the business bank account. We consider the cash book in much more detail in Chapter 4 aEBB te ledzer accounts in detail 2 The following example uses the cash book as a book of prime entry: Worked examp! ‘The following transactions rook place during December: 1 December: paid rent using cash $250 2 December: paid Jocal taxes by cheque $110 6 December: paid wages using eash $1782 13 December: paid wages using cash $1780 17 December: paid insurance premium by cheque $240 20 December: paid wages using exsh $1780 27 December: paid wages using cash $1781 31 December: paid rent by cheque $250, Required «@ Enter the transactions in an appropriate book of prime ent. bb Show the necessary Jedyer accounts. Answer . earoee br aie 1ec Rent = GLI Goec wages GA 13x Wages Gla Dee Wages GA 210s Wages GA br ane 20s Loaltes G2 170% nsrance GL3 310e Rent Gil b exe ee o, cao Voce Cah «at 31De bank = br ame 20e bank COL br (ome $ be bank «LO Wager $ 6b eh cal 1782 13ec Cah BL 1780 woe Gah 1700 Doe Cah 7B cr 250 ve. 170 1780 1781 110 240 250 o> Now try Question 1 3.2 Using the books of prime entry Entcring transactions in the books of prime entry and then the ledgers is not a dliffcult tsk; it jnst rakes patience and the ability to enter transactions twice — once ‘on the debit sce of an account and once on the credit side of another account, Remember, practice makes perfect. 1 erty the our pieces of infmation you would expect fa find on the dete sears ager ean date pov Coley OBE eager Bede ytunt 2. Kentify the four preces of information you would expect i ig an the sears age cent ety perbncl Pu geheager BER Ue lat 3. When would youuse T accounts y @coud ty dea of « fvewackn 44 Which source document would you use to write Up the purchares returns jouralr cv@dSt note 5. Which type of account would you expect to find in the sales ledger? (Hah WeLa' 6 Name a personal edger p Ot Giicnes ‘© Ledger accounts must show date, details of a ‘corresponding’ ent, folio details and ‘the amount of the transaction. ‘© "T accounts must only be used for revision purposes or as part of workings. ‘© All transactions must be entered in a book of prime entry before being posted to a ledgerAS Level A alareiieleleteeo) UI ine) 4 The cash book Geis ease on “Money can be in the form of cash, cheques, credit and debit card transactions ” By the end of this chapter you should be able to: ‘¢ record cash and cheque payments (record receipts of cash and cheques «identify the source documents used to write up a cash book balance the cash and bank colurnns of a cash book ‘¢ make contra entries in a cash book 4.1 The cash book \Wee have looked in some detail at the five hooks of prime entry used to access the double-entry system. The sixth and! final book isthe cash book. The cash book seconds all transactions concerning money. ‘You will have noticed in the section on double entry that the cash and bane accounts wece used very frequently and as a result heeame very full with entrios. ‘Generally, in business these accounts are used more frequently than any other accounts. This means that itis sensible to remove these two accounts from the general ledger and keep them apart from the other accounts ‘The cash and bank accounts are kept separately in one book ~ the cash book, ocause itis sach an important and sensitive area of the business, all cash and cheque transactions are usually the responsibilty of one senior or well-qualified person ~ the cashier. 4.2 Recording cash and cheque payments in a cash book “The accounts in the cash book work on douible-entry principles like all ocher accounts. (© The debit (or receiving) side is found on the left ¢ The credit (or siving) side is om the right. ‘The only dliferences in the layout of the cash book are that the debit entries are distanced from the credit entries by extra columns and information; and thatthe debit ceries, generally, take up the whole of the left page while the credit enties take up the whole of the right page.4.2 Recording cash and cheque payments in a cash book The layout isthe sume on both sides of the cash books ‘The debit side of the cash book looks like this Cash book Date Particulars Folio Cath ank ‘The credit side of the cash bool Looks like this Cash book Date Particulars Folio Cash Bank “The whole cash hook looks like this De Cash book o Date Particulars Folio Cash Bank o ® e ® © Date Particulars Folio Cash Bank ® 7 ® @ «0 + Columns (1) and (6) give the date on which the transaction occurred * Columns (2) and (7) identify the account where the corresponding entry can be found. * Columns (3) and (8) show the page of the ledger where the conesponding entry ‘ean be found. * All cash received is entered in Column CD. « All monies paid into the business bank account are recorded in Colume (5). «All cash payments made ate recorded in Column (9) « All payments madle by cheque are recorded in Column (10), Serre ene onereaneen sear re athe Answer Dr cash book o Date Particulars Folio Cash Bank [Date Particulars Folio Cash 5 Sept A. Soh PLO ™ 2sept THose PLB 167 Sept ViOole PZ "a 6COU ‘The following transactions took place in February: 3 Pebruary: paid rent $400 by cheque 7 February: paid Gary $67 by cheque 9 February: paid wages $832 by cheque. Required Enter the transactions in a cash book. Answer 4.3 Recording the receipt of cash and cheques in a cash book Worked example “The following transactions took place during May: 4 May. cash received from Nigel $213, 5 May. cash received from Harry $92 9 May. cash received from Hilary $729, Required Enter the transactions in a cash book: Answer Dr Cash book o Date Particulars Folio Coch Bank|Date Particulars Folio Cash Bank 5 4 May Nigel su2 213 SMay Hany SLT 92 OMay Hilay = SLR 720 Cline “The followring transactions took place dasing January: 2 January: cheque received from Steve §249 43 January: cash sales banked $851 1 January: cheque received from Mista $29. Required Enter the transactions in a cash book:4.3 Recording the receipt of cash and cheques in a cash book Answer Dr Cath book c Date Particulars Folio Cash Bank] Date Particulars Follo Cash Bank 2lan Ste SIS Bian Cashsalee 6123 Jan Mustaf SL ‘Once you have mastered the method of recording debit entries and credit catries it should be faily seraightforward to combine the two. ‘The following transactions took place during April: 2 April: cash received from Xavier, a customer, $58 4 April: motor repairs $530 paid using cash 6 April cash received from Milly, 2 customer, $7 7 Apel vent $210 paid using cash 9 April insurance premium $156 paiel using cash 12 Aprils cash sales $743, Required Enter the transactions in a cash book. Answer Dr Cech book ce Particulars Folio Particulars Folio s s 2Ape Xaver Sida Apr Motor G23 530, erpensas Agr Milly = SLI9. 77 Thor Rent GIB 210 Wap Cashsales GI2 743 Spr Insurance GLI 156 ee +3 October: paid Price, a supplier, $350 by cheque see RES Se ote sou tame weak 11 October: Bliff, a customer, paid by cheque $639 sone mT nt nc a> Now try Question 1. 2B Answer Date Pertiailars Folio Cash Bank] Date Particulars Folio Cash Bank s é 60ct Rent ow 450| 30a Pre Slt 350 90ct Sales GLIT 2187] 17 0ct Localtaxes GL7 29 11.08 alte si23 a0 120ct Box Pua 2 tis now simply a mauer of putting cash payments and cash receipts in the same book as cheque payments and monies paid into the bank “The flowing transactions hare taken place: 1 November: cheave from Norman, a customer, $258 pad into bank 2 November motor expenses paid by cheque $311 5 Nawember matthew draws a cheque for private vse $150 10 November: cash sles $2390 15 November moto ful purchased with cash $42 21 November: cheque paid into bank for Insurance refund $273 29 November: paid wages in cash #1309 30 November: cash sales $5630, paid diecty into bank, Required ter the transactions ina cash book: Answer Dr cash book ce Date Particulars Folio Cash Bank [Date Particulars Folio Cash Bank sos a # Now Norman sla 288 | 2Nov Motorespenses GL12 an 1WNov Sales GLO 2300 SNov Drawings G23 150 21 Nov Insurance LIT 273 | 15Nov Motorexpenses GLI2 42 30Nov Sales GL 5630 | 23 Nov Wages 7 1309 44 Source documents used to write up a cash book ‘The source dacuments used to write up a cash book are Copy receipts Recebts Til rls Cheque book counterois ‘Bank payingon book counter |A further source of information to be used to write up the cash book is @ copy of the details (recorded by the bank) of transactions made using the business bank account = but more of this source later,Cashin hand i the tem used to describe ‘the amount of each held by 2 business at any ane time The cash in hand in shop ‘eid be found in the tis. na larger ‘business it might Be found in a safe ‘A balancing figure san amount that needs tobe Included in the debt side or side equal to the credit side. The amount teed t start the next time piel QO be mks eet ow Always bring balances down. This is important, so make sure you get in the practice of doing so. @ oo 3123 451 Inledger accounts, use ‘Balance cfd’ (carried down) forthe balances above the ‘otal, Use ‘Balance b/d! (brought down) for the balance below the total pedi sie of an account to make the debt 4,5 ‘Balancing’ a cash book IEC Draw out the headings used in a cash book. (On which side of a cash book would you enter a cheque received?” Inwhich colurnn would a cash sale be entered? 1 2 3. On which side of a cash book would a cheque payment be entered?” 4 5 Inwhich column would a cheque for the payment of rent be entered? @ 4.5 ‘Balancing’ a cash book [At the end of 2n appropriate length of time, a cash book should be balanced. (The time when balancing takes place will generally depend on the size ofthe business and the number of transactions that are included in the cash books) Both of the balances in a cash book should be verified '® How could you verify the cash balance brought down? {@ Howe could you verify the bank balance that you brought down? ‘The balance brought down in the cash column should agree with the cash in hand at that date “The bank balance inthe cas book can be verified by reference tothe bank statement, The balances are brought down to start the ‘new’ time period. Remember the cash balance will always be brought down as a debit. The bank balance brought down could be ether a debit or a credit balance, used to balance a cash book column is then Worked exampl ‘The cash book of Geey is shown: Dr Cash book cr Date Particulars Folio Cash Bank |Date Particulars Folio Cash Bank $6 sos Nov Reid 516 1438 | 4Nov Wages Git 28 Nov Sales cia 1270 Nev Hunt PG B BNov Gong S123 at | 11Nov Rent as 600. 14Nov Pots sua 349 | 16 Nov Trig Puig 38 Required Balance the cash and bank columns of the cash hooks on 16 November and carry any balances down. Answer Dr Cash book cr Date Particulars Folio Cash Bank ss 5 os Nov. Reid st 1439 | ANov Wages GL 428 Nov Sales cis 1270 TNov Hunt AB 73 Nov Rent as 600 1a.Nov Potts sua 349 | 16Nov Tig AiG 38 TGNov Balarcesfd 41591211 1270 2238 “1270 2239 17 Nou Balances b/d 1158721 29Eel tte casi book > Now try Question 2. ‘transaction that appears on both the debit and credit ster of the doubleentry system is called a contra entry. Contra entries have no effect onthe well-being of the busines, 30 Note ‘Make sure that all four totals are on the same line. Balance the cash columas fist then balance the bane columns. Do aot try to do them both at the same tine. 4.6 Contra entries in a cash book Clearly, it is unsafe to keep large amounts of cash and cheques on the business premises for prolonged periods of time. The cashier will arange for the monies received to be taken to a bank and deposited when the amount in the till or sa ‘The following is an extract from the eash book of Grant br Cash book c Date Particulars Folio Cash Bank |Date Particulars Folio Cash Gank s 5 4 ul Cashsales GLa2 4397 SJul Puchases GL7 48 iol Bradley SIS1 74, Grant has more than $4000 cash on his premises ~ his represents a secuty risk, He pays $4000 into the business hank account on 5 fly “Tall yourself through this transaction, Gao tlees $400 from the il. the cash column loses 4000. Date Particulars Folio Cash Bank 5 Sil Bank © 4000 Note + the date of the transaction + the particulars telling where the ‘corresponding! entry is to be found (la the bank column) + 'C is for ‘contra’ showing that Grants business is neither better nor worse off because of the transaction + $4000 in the cash column shows that cash has been los. Grant takes the money to the bunk and the bank receives the money Date Particulars Folio Cash Banke 5 Sul Cah oc ‘4000 Note + the date of the transaction + the particulars telling where the ‘comesponding! entry i column) °C is for ‘contra’ showing that Grants business is neither better nor worse off because of the transaction + $4000 in the bank: column shows that money has been received into the bank account to be found (in the cash ‘The effect on the business is the same as the effect on your finances that would occur if you removed a five-dollar bill from one pocket and put it into another pocket> Now try Question 3. 4.6 Contra entries in a cash book ‘Another common contra entry inthe eash book i the withdrawal of cash from the bank for use in the business, This transaction often occurs when cash wages need 10 be paic and the business has insufficient cash in the safe to make up the necessary swage packets, In fac, for scourity reasons, many larger businesses now pay waxes land salaries directly into salf bank accounts so that lange amounts of exsh do not ‘need 1o be transported from the bank and then kept on the business's premises. ‘The following is an extract from the cash book of Diego: Dr Cash book ce Date Particulars Folio Cash Bank [Date Particulars Folio Cash Bank s s 12 Aug Robson 5132 4574 | 11 Aug Machinery Gls 2350 Aug Nkomo —SL73 5490 ‘Wages amounting to $4529 have to be paid in cash on 18 August Diewo withdraws this sum from the bank on 17 August. If we tlk ourselves through the process, the entries become clear: Diego goes to the bank and withdraws $4529. Date Particulars Folio Cath Bank s 17 ug Cash c 4529 Hee returns to his business premises and puts the cash in the safe Date Particulars Foo Cash Bank 5 17 Aug Banke case ‘Many larger businesses now keep a cheque payments book and s cash receipts and lodgement book. This is certainly the case where the bull of tansuctions ane ‘conducted though the bank account, SSE 6 What does the word ‘contra’ mean? 7. The cash book is not only @ book of prime ent itis ako part of the syste 8 Fin the gaps with ‘debited’ or ‘credited’ 1a Money taken from the safe and deposited in the bank would be in the cash column of the cash book and be. the bank column, 'b Money withdrawn from the bank for use in the business would be in the cash column of the cash beok and bein the bank column, ‘9 Which book of prime entzy would you use to record a sale of goods on credit? 10 Name two source documents used to write up a cash book, 11 Isit possible to have a credit balance in the cash column of a cash book? 12 Isit possible to have a credit balance in the bank column of a cash book? 113 Under what circumstances do we write ‘C’ for contra against transactions in the cash book? aGren '© The cash book is both a book of prime entry and it is part of the double-entry system. ‘© All transactions that involve cash and cheques are entered in the cash book. ‘© All cash transactions are entered in the cash colurnns. «© All transactions involving cheques are entered in the bank columns. ‘© Allentries in @ cash book need ‘corresponding’ entries in other ledger accounts to complete the double entry. ‘© Contra items have no effect on the worth of the business, ‘© Any balance shovm in the cash column must be a debit balance. ‘© Balances shown in the bank column could be either a debit or a credit balance,SR NZ-1| i alarelielel eeleao) Tal eiare) 5 Discounts By the end of this chapter you should be able to: « distinguish between trade discount and cash discount « calculate both kinds of discount f record cash discount allowed and cash discaunt received in ledger accounts ‘use discount columns in a cash book as memorandum entries @ 5.1 Types of discount “There are two types af scout avallable to businesses trade discount ard cash discount. As we srw catlicr, trade diseotnt is a rection in the price of goods charged by 3 manufacturer o¢ distributor to another business, Trade discount is act recorded in the double-entry books of account. Cash discount is reduction in the price charged for goods when a credit customer setles their debe within a time given by the supplier. Cash discennts are available to ‘cncauirage trade receivables to settle debts promptly. A customer owes $100, A retailer may indicate that ifthe debt is setled before the month end, a cash discount of five per cent will be allowed The debxor pays before the month end, so only $95 needs 10 be paid ~ $100 less $5 cash discount, Both the receipt of the money and the cash discount are recortied by the retailer and the custome. 5.2 Recording cash discounts allowed ‘The ledger accounts necessary to record cash discount allowed to credit customers are shown below: Co On 1 Anos Yang has thre debtor. Hr scent teams allow a cash dlacount of five per cent to customers who settle thelr debts before the end, of August. (For illustrative purposes only, Yung does not keep a cash book.) Geosi 2800 | 23 August ‘Ahmed $80 17 September Fatima $360 | 29 August 33Required Prepare the ledger accounts to record the setting of the debts duc Answer 1 Aug Balance bid 1 Aug Balance bed 1 Aug Balance bd 23 Aug 29 Aug 17 Sept Discount, 23 Aug 29 aug Georgi Fatima Ahmed Georgi Fatima Sales ledger Georgi 3 2800.00 | 23 Aue 23.89 ‘Ahmed 5 20.00 | 17 sept Fatima $ 360,00 | 29 Aug st 33 su sa 2909 Bank Discount allowed Bank Bank Discount alowed General ledger Bank account $ 2660.00 342.00 80.00 s 140.00 1800 cu a au au a 2660.00 140.00 ee 342,00 1800 cr ‘You can sce that discount allowed is credited to the customer's account, thus reducing the amount so be paid in settlement. I is debited to the discount allowed account in the general ledger. Ahmed did not qualify for a discount ~ he did not pay before the ‘ond of August. 5.3 Recording cash discount received ‘Yung has three creditors on 1 August (For ilustative paeposes only, Yung does not ‘keep a cash bool). Hameed & Co. 400 2 ara ple 7400 5 Carat Lid 200 2 “Yung settled the amounts she owed by cheque on 26 August. Required ‘The ledger accounts in Yung's books of account recording the payments made by het.5.4 Entering cash discounts in the general ledger Answer Purchases ledgs Dr Hameed & s 26 Aug Bank Gia 39200 |1Auy Balance bid 400.00 26 Aug Dscountrecsived GLA 800 De 270 pl s 26 Aug Bank Gia 703000 |1Aug —Balancebid 7400.00 25g Dscountrecewved GLA 370.00 Dr Carot Ltd $ 26 ug Bank 61a 19400 | 141g alance bid 26 ug Discountrecewed GLA 6.00 General ledger Bank account ea 3 26 Aug Hamed &Co. PLi 302.00 26 Aug BT ple Pi2 7030.00 26 Aug Corct td ria 198.00 Dr Discount received account G s 26 Aug Homeed &Co. PLT 3.00 26 Aug BTQ ple 2 370.00 26 Aug Cart Lid a3 6.00 ‘You can sce that discount received is debited to the supplier's account, thus reducing the amount that Yung has to pay in settlement. The discounts are credited to the discount received account in the general ledger. ‘To summarise: ‘© Discount allowed is debited to the discount allowed account in the general ledger ‘and is credited to the customer's acccunt in the sales ledger {© Discount received is eredited to the discount received account in the general edger and is debited to the supplie’s account in the purchases ledger. 5.4 Entering cash discounts in the general ledger “To write up the discount accents in the general ledger in the way ontlined above ‘means that all the accounts in the sales ledger must be scrutinised and all he accounts in the purchases ledger must also be examined and lists must be made of all the discounts allowed and discounts received in order to post them to the general ledger. This could be a huge task. We simplify our work by adding an extra column to those already founel in the eas book. ‘We have already used a ‘two-column’ cash book (cash columns and bank ccolumns), The principles used still hold good. We introduce a thicd column on the debit and credit sides for eiscounts, so that we now have a three-columa’ cash book, 35