CHAPTER II: BOOKKEEPING

2.1 Overview and definition of terms

Financial information is recorded in a systematic order. The process follows the procedural rules of
double entry that forms the accounting system. It also involves cross referencing for ease of tracing a
transaction so as to confirm its correctness. Besides the double entry records, there are other
supporting records like the transaction or source documents (invoices, receipts, sales orders etc) and
journal entries. Business accounting requires books of accounts to be maintained in a systematic order.

2.2 The accounting cycle

The process of accounting involves records drawn at successive stages and typically involves four
levels as follows; transaction documents, journals (day book), ledgers and financial statements. This
chapter covers the first three elements. Financial statements will be covered in later chapters.

2.2.1 Transaction documents

A transaction, is a business event, it is an exchange of value between the business and another entity.
Transactions include such events as sales, purchases and payments of salaries and wages etc.
Transactions should be properly recorded and stored for future reference. The tools used to capture
and record transactions are called transaction documents. Recording transaction in a suitable form is
vital because we cannot rely on our memory to remember everything that may have happened in the
business. Moreover, transaction documents form part of legal evidence that can be adduced in case of
differences arising in future. Transaction documents are the business records in which events are first
recorded for example; cash receipt, invoice, delivery note, cheque, salary slip, debit or credit note etc.
Transaction documents must capture the following information; date of transaction, details of
transaction, type of transaction, reference number, beneficiary of the transaction, mode of payment,
execution officer, authorizing officer etc.

2.2.2 The journal

Journals also known as day books are books that capture transactions information directly from the
transaction document. It is a day to day record of business transactions and thus is referred to as a
book of original entry also known as book of prime entry. There are four common types of journals;
sales journal (sales day book), purchases journal (purchases daybook), general journal (journal proper)
and cash book.

2.2.2.1 The sales journal (daybook)

A sales journal is a book of original entry which records credit sales as they are made. Ideally, a sales
journal should be recorded and summarized on a daily basis. However, in some cases this may not be
appropriate particularly if there is a low frequency of credit sales transactions. This book can be
represented as follows;

DATE INCOICE NO. DETAILS FOLIO AMOUNT

TOTAL

Example:
On the 1/01/2013 JBC Ltd made the following credit sakes;
Invoice no 001 sales to Muna 5,000,000 FCFA
Invoice no 002 sakes to Kameni 2,000,000 FCFA
Invoice no 003 sales to Muma 3,000,000 FCFA
Invoice no 005 sales to Ngwa 1,500,000 FCFA
Work Required:
Present the sales daybook of JBC Ltd
Solution:
2.2.2.2 The purchases journal (daybook)
A purchase journal is a book of original entry which records credit purchases as they are made. Like
the sales journal, the purchases journal should as far as possible be recorded and summarized on a
daily basis. If this is not possible then it should be summarized at a rate appropriate to the frequency of
credit purchase transactions. This book is presented as from the example below.
JBC Ltd carried out the following transactions on credit;
On the 1/01/2013 invoice no 005 purchase from Bambili Ltd 5,000,000 FCFA.
On the 2/01/2013 Invoice no 201Purchases from Macta Ltd 10,000,000 FCFA.
On the 3/01/2013 invoice no 352 purchases from Arts Ltd 4,000,000 FCFA.
On the 4/01/2013 invoice no 020 Purchases from Bambili Ltd 2,000,000 FCFA
On the 5/01/2013 invoice no 221purchases from GLOS group 2,000,000 FCFA
Work Required:
Present the purchase daybook of JBC Ltd

Solution:

2.2.3 The ledger

The books of original entry capture transactions as and when they happen but they cannot summarise
similar transactions (for example sales to a given credit customer) in one journal. In order to get a
consolidated view of the transaction of a similar nature, a separate record is required to capture that
information. This record is the ledger. A ledger is a collection of books of account. An account is a
record of similar transactions with respect to a given person or a given item. A ledger is a register with
a number of pages which are sequentially numbered and each page allocated to a specific account.

An account is a record of transactions affecting a person (say a customer or supplier), a property (say
land or motor vehicles), an income or an expense. It is a brief history of the transactions with that
person or that item. It is in these records that the popular procedural rule of bookkeeping, debit and
credit is carried out. When an account receives a benefit, it is debited, while if it gives out a benefit it
is credited. Thus credit the account that receives and debit the account that gives. Accounts may be
classified as follows;
 Personal accounts
These are the accounts of persons, firms and other organizations with which the business has
transacted.
 Real accounts/ property accounts
These are the accounts of items or assets belonging to the enterprise. For example land, buildings,
motor vehicles etc.
 Nominal accounts
These are accounts that relate to income, expenses, profits and losses that is liability accounts.

An account can be drawn up as follows;

DEBIT CREDIT
DATE DETAILS FOLIO AMOUNT DATE DETAILS FOLIO AMOUNT

It is important to note that ledgers can be classified as follows;

2.2.3.1 Sales ledger

This is a register of the individual accounts of credit customers. These accounts summarises the
transactions with individual customers and thus show total sales to that customer, amounts paid by the
customer and the amounts unpaid at the end of the period. Sales ledger draws the information from the
sales daybook and the cashbook.

2.2.3.2 Purchases ledger

This is the register of the individual account of credit suppliers. These accounts summarise the
transactions with the individual suppliers and thus shows total credit purchases from the supplier,
amounts paid to the supplier and the amounts unpaid at the end of the period. Purchases ledger draws
the information from the purchases daybook and the cashbook.

2.2.3.3 General or nominal ledger

The general ledger also known as nominal ledger is a register of all other accounts not captured in the
purchases and sales ledger (or any other subsidiary ledger).

Example:
BlueMoon Ltd carried out the following transactions on credit;
On the 1/01/2013 invoice no 251 sales to Manasseh 5,000,000 FCFA.
On the 2/01/2013 Invoice no 252 sales to Nkeh 2,000,000 FCFA.
On the 3/01/2013 invoice no 254 sales to Eboua 1,000,000 FCFA.
On the 3/01/2013 invoice no 253 sales to Ojong 2,500,000 FCFA
On the 5/01/2013 invoice no 255 sales to Manasseh 3,000,000 FCFA
On the 6/01/2013 invoice no 256 sales to Ojong 4,000,000 FCFA

Work Required:
1. Draw the sales daybook of BlueMoon Ltd
2. Draw the sales ledger
Solution:

2.2.4 The cash book

One of the most important books maintained in a business is the cashbook. A cashbook is an
accounting record which documents both cash receipts and payments. Its objective is to record on
daily basis cash transactions. The cash book contains all transactions that relate to various cash
transactions. The cashbook contains all transactions that relate to various cash transactions which
include receipts such as receipts from customers, cash sales, new capital introduced, etc and payments
such as purchase of goods, payments to suppliers, payments of expenses, etc. The transactions in the
cashbook relate to all ledgers that involve cash settlements. Thus the sales and purchases ledgers as
well as general ledger may have some of their entries traced from the cashbook. It is a book of original
entry capturing cash transactions as they happen and a ledger as well affecting the double entry for
cash transactions.

Example: The following transactions took place in GoldenGate Corporation during the month of April
2013.
1st Cash balance 5,000,000 FCFA.
1st Invoice no 200 purchases from Mbou 3,000,000 FCFA.
1st Paid salaries and wages 1,000,000 FCFA
2nd invoice no 361 purchases from Zebra Ltd 4,000,000 FCFA.
2nd invoice no 230 sales to Hope foundation 4,000,000 FCFA.
2nd Made cash sales 3,000,000 FCFA.
3rd invoice no 261 purchases from Xtracare Ltd 3,000,000 FCFA
3rd invoice no 231 Sales to Bigboy Ltd 6,000,000 FCFA
3rd Paid Mbou 1,000,000 FCFA.
3rd Paid Zebra Ltd 1,000,000 FCFA
4th invoice no 231 purchases from Mbou 2,000,000 FCFA
4th Received from Hope foundation 3,000,000 FCFA
4th paid rents 1,000,000 FCFA
5th invoice no 281 purchases from Xtracare Ltd 2,000,000 FCFA
5th invoice no 232 sales to WinWin corporation 5,000,000 FCFA
5th invoice no 233 sales to Hope foundation 3,000,000 FCFA
5th paid electricity bill 200,000 FCFA
5th Received from Bigboy Ltd 4,000,000 FCFA
5th Paid Xtracare Ltd 1,000,000 FCFA
6th invoice no 234 sales to Bigboy Ltd 5,000,000 FCFA
6th Cash sales 2,000,000 FCFA.

Work Required:
1. Present the cashbook
2. Post the respective entries to the sales ledger and purchases ledger
3. Present the general ledger extract.

Solution:

2.2.5 The sales and purchase ledger control accounts

The sales and purchases ledgers, maintains the records of the transactions with individual customers
and suppliers respectively. Where there are many such customers and creditors, both ledgers will be
voluminous books. It would be difficult to tell at a glance how much have been sold on credit, how
much have been paid by the customers and how much is outstanding. The same applies to credit
purchases. One would have to go to every account and sum up the entries, quite a tedious job and
prone to errors. To solve this problem an account would be drawn to summarise the totals of the
entries in the respective ledgers. These accounts are the sales and purchases ledger control accounts.

2.2.5.1 Sales ledger control account

The sales ledger control account otherwise known as total debtors account records the total
transactions with credit customers and reflects the amount owed by all the individual debtors. The
balance of the sales ledger control account must equal the total of the debtors list, which represents the
amounts owed by the individual debtors obtained from the individual balances in the various
subsidiary ledger accounts for the respective customer.

2.2.5.2 Purchases ledger control account

This account, otherwise known as the total creditors account, records the total transactions with credit
suppliers and reflects the amount owed to all the individual suppliers. The balance of this account
must be equal to the total of the creditors list, which represents the amount owed to the individual
creditors obtained from the individual and balances in the various subsidiary ledger accounts for the
respective suppliers.

Practical exercise
Using information from the preceding example, draw the sales and purchases ledger control accounts.

Solution:

2.3The trial balance

When all transactions have been recorded in their respective ledgers, there will be numerous books of
accounts. It would be difficult to tell at a glance, which accounts have what balance. A trial balance
would help put this in perspective. A trial balance is a statement showing the list of debit and credit
balances of accounts. It is a check on the arithmetical accuracy and the completeness of the double
entry regarding the business transactions at a given period of time. The total worth of items recorded
in all the accounts on the debit side of the books should be equal to the total worth of items in all the
accounts on the credit side of the books. All the debit balances are listed in the first column and all the
credit balances listed in the second. The totals of these two columns should be identical.

2.3.1 The function of a trial balance

A trial balance is an attempt to check the accuracy of the double entry in the ledger accounts. Knowing
that every credit entry should have a corresponding debit entry, a difference in the trial balance is an
indication of existence of errors that may have been made in the ledgers. However, it must be noted
that though the total of all the credit entries should agree with the total of all the debit entries, this does
not necessarily guarantee the accuracy of the entries in the ledger accounts.
Balance accounts and extracting the trial balance.

A trial balance has two sides, debit and credit. The debit side summarises all debit balance figures
while the credit side summarises all credit balance figures in the ledgers.
Example of a trial balance
 ELEMENTS DEBIT CREDIT
Assets XXX
Expenses XXX
Sales XXX
Purchases XXX
Capital XXX
Liabilities XXX
TOTALS XXX XXX

2.3.2 Balancing the accounts and extracting a trial balance

To make this purpose simple, the accounts should be balanced off so as to get their balances
at the end of the financial period. The balancing of accounts involves the following steps;
i) Add amounts on both sides of the accounts
ii) Find the difference between the two sides by deducting the lesser amount from the
greater amount of the two sides.

This process leads to a common terminology in accounting, that is balance carried forward or
carried down written in short as balance c/f or b/d. Balance carried forward or down is the
balancing figure at the end of the accounting period. It is the difference in amounts between
the two sides of the accounts at the end of the accounting period. Balance brought forward or
down on the other hand is the balance in the account at the beginning of the accounting
period.

The balance brought forward is used to tell whether the account has a debit or credit balance.
If the account is having its balance brought down on the debit side, then it is said to have debit
balance and if it is on the credit side, it is said to have a credit balance.

Practical exercise
The following transactions are presented by Fallowing Ltd for the month ended 31st
December 2012.
- Started business with a cheque of 2,000,000 francs
- Bought goods by cash for sale 600,000 francs
- Paid rents 200,000 francs
- Sold goods by cash 1,000,000 francs
Required: From the above transactions, balance off the accounts and extract the trial balance.
Solution: