POA LESSONS NOTES

BY: ALIYAH ALI

2020 - 2022
Examination Format

Format of the examination

The examination consists of Paper 01, Paper 02 and Paper 031 (School Based
Assessment) and Paper 032 (alternative to the School-Based Assessment) 

Paper One

 1 hour 30 minutes
 60 marks
 A multiple-choice test of 60 items, testing the profile dimensions,
knowledge/comprehension, application, interpretation, and analysis. The paper
will sample proportionately, all sections of the syllabus as outlined below

Paper 02

 3 hours
 100 marks
 A problem-solving paper which will test the profile dimensions of
knowledge/comprehension, application (of accounting principles and skills) and
interpretation of data in the ratio 1:2:1
 Paper 02 consists of five compulsory questions drawn from the entire syllabus.
Each question will be worth 20 marks 

Paper 031

 SBA
 40 marks
 A school-based assignment component covering the non-profile dimensions of
the syllabus.

Paper 032

 1 hour 30 minutes
 40 marks
 A set of compulsory short answer questions based on case studies
Distribution of Items for Paper 01

section title no of
items

1 Accounting as a profession 4

2 Accounting as a system 4

3 Books of original entry 6

4 Ledgers and the trial balance 7

5 The preparation and analysis of financial statements of the sole 6

trader

6 Accounting adjustments 8

7 Control systems 4

8 Accounting for partnerships 5

9 Accounting for limited liability companies, co-operating and non- 8

profit organization 

10 Manufacturing and inventory control 4

11 Accounting for the entrepreneur  4

60 marks

The weighting of the Examination Components

Profiles  Paper 01 Paper 02 SBA Total  Percentage 

Knowledge / comprehension 15 25 10 50 25

Application 30 50 20 100 50

Interpretation and analysis 15 25 10 50 25

Total  60 100 40 200 100

Topics to be covered
 Accounting as a profession - understanding the concept of accounting and its
purpose as a business practice. (accounting information, careers, and ethical
issues in the field.
 Accounting as a system - understanding the concepts and conventions that guide
the accounting process. (accounting cycle, types of business, financial
statements, technology and accounting, concepts and construction of a balance
sheet, assets and liabilities)
 Books of original entry - understanding the uses of ‘books of original entry’ and its
related documents and distinguishing between cash and credit transactions
 Ledgers and trial balance - understanding classifications of accounts, types of
ledgers, significance of debit and credits and trial balance
 The preparation and analysis of financial statements of the sole trader -
understanding financial statements together with profit and loss account, income
statements and ratios (gross profit % / net profit % etc.)
 Accounting adjustments - understanding the reasons for adjustments, pre-
payments, journals, income statements and balance sheets and methods of
depreciation and its causes etc.
 Control systems - understanding the need and uses of common control systems,
cash books / bank statements, balances 
 Accounting for partnerships - understanding limited liability companies, co-
operations and non-profit organizations, methods of raising capitals and
calculations of dividends, payments etc.
 Accounting for limited liability companies, co-operatives and non-profit
organizations - identifying its features, types, advantages and disadvantages,
understanding shares, journal entries, dividends and reserves etc.
 Manufacturing and inventory control - understanding direct and indirect cost,
applying basics costing principles and inventory valuation and inventory closing
(FIFO/LIFO)
 Accounting for entrepreneur - delivery of payment methods, payroll, accounting
software, cash flow projection etc.
What is accounting?
 Accounting is simply the art of recording, classifying and summarizing a
significant manner in terms of money. Accounting is the art of record keeping.
The process starts by identifying the events and transactions which are of a
financial character and then recording in the books of accounts.
 analyzing ➜ financial ➜quantitative

Importance of accounting
 To keep systematic records
 To protect business properties
 To analyze the operational profit or loss
 To analyze the financial position of business

Types of accounting
 Bookkeeping - process of recording in the books of accounts, processing
transactions and managing records
 Financial accounting - process of recording, classifying, summarizing and
communicating economic information to users of this data, allowing them to make
informed 
 Managerial accounting - purpose for insiders or organizations, a branch of
accounting that is concerned identification, measurement, analysis of information
that helps companies make necessary decisions,
 Tax accounts - a method focused on accounting rather than the financial
statements. This method is governed by internal revenue code (preparations of
standards for tax returns)

Users of accounting information

External users Internal users

Customers management

Creditors employee

potential investors owners

Government stockholders

Academe
Purpose of accounting
 To provide financial information about a business or other economic entity. This
information is need by the management, creditors, investors and by the public
 To accumulate and report financial information
 To analyze the amount of cash received or paid
 To help investors or creditors make investments and credit decisions
 To provide proof a business transaction occurred
 To keep track of the profit and losses of the organization
 To create budgets and to maintain a financial control
 To maintain records for tax purposes

Business ethics
What is business ethics
 Ethics in the disciple dealing with what is good and bad and with moral duty and
obligation
 A system of morals principles

What is business ethics

 The principles and standards that determine acceptable conduct in business
organizations
 Is a form of professional ethics that examines ethical principles and morals of
ethical problems that arise in a business environment
Ethics principles in accounts

Integrity Straightforward, honest, implies fair dealings and

truthfulness

Objectivity Uncompromised by bias, conflict of interest or the undue

influence of others

Professional Maintain professional knowledge and skill and acts

competence and due diligently
care

Confidentiality  Refrain from disclosure of confidential information and from

using such information for personal (or third party)
advantage

Professional behavior Comply with relevant laws and regulations and avoid any
action that may bring the profession into dispute

Accounting concepts/conventions
 Accounting concepts - include the assumptions and conditions on which the
science accounting is based. They are also known as accounting standards
 Accounting conventions - include the customs and traditions assist the
accountants in preparing accounting statements
Basis for Accounting concept Accounting convention
comparison

Meaning Refers to the rules of Accounting conventions implies the

accounting which are to be
followed while recording
business transactions and
preparing final accounts
customs or practices that are widely
accepted by the accounting bodies and
are adopted by the firm to work as a
guide in the preparation of final
accounts

What is it? Theoretical notion  A method or procedure

Set by Accounting bodies Common accounting practices 

Concerned Maintenance of accounts Preparation of financial statement

with 

Biasness Not possible Possible

 Business entity - this concept states that the transactions associated with a
business must be separately recorded from those of its owners or other
businesses. (It becomes difficult and impossible to audit records of a business if
they are intermingled with those of different entities/individuals. The concept
ensures that each and every business entity is taxes separately)
 Monetary unit - the money measurement concept underlines the fact that in
accounting and economics, generally every recorded event or transaction is
measured in terms of money, the local currency monetary unit of measure.
 Going concern - is a company that has the resources needed to continue
operating indefinitely until it provides evidence to the contrary. This term also
refers to a company's ability to make enough money to stay afloat to avoid
bankruptcy.
  Historical cost - its important because market valued change so often that
allowing reporting of assets and liabilities at current values would distort the
whole fabric of accounting, impair comparability and makes accounting
information unreliable
 Prudence/conservatism - in accounting ensures that the financial statements
present the realistic and fair picture of a company's revenue and liabilities. It
helps in the action of losses. It helps in not overestimating as well as not
underestimating the financial risk of a company
 The dual aspect concept - two aspects of accounting. One represented by the
assets of a business and others by the claims against them. The concept
confirms that these two aspects are always equal to each other. Double entry is
the name given to the method of recording the transaction for the dual aspect
concept 
 Assets - these are the items that a business or individual owns, which has
monetary value
 Capital - also known as 'owners’ equity' and it refers to the money of Amy assets
that is invested in a business by the owner
 Liabilities - amounts owed by the business to outside parties. They are legal
debts
 Realization - the concept holds the view that the profit can only be taken into
account when the realization occurs (until it is reasonably certain to be earned)

 How profit is earned

 Goods and services are provided by a buyer

 Buyer accepts liability
 The monetary value of the goods or services have been established
 Buyer is in the situation to pay for goods and service
 The accrual concept - implies that your net profit is the difference between
revenue and expenses.  Revenue - expenses = net profit
 Revenue - (gross sales) it is the income generated by the sale of goods or
services related to the company operations, also known as a 'top line' because it
sits on the top of your income statement
 Expense - the cost of operations that a company incurs to generate revenue, for
example, payment to suppliers, employee wages, equipment depreciation
 Materiality - a concepts which states that firm can ignore small information which
doesn't have enough significant impact on the business, so if a piece on
information must be present in the financial statements
  Full disclosure - a concept that requires a business to report all necessary
information about their financial statements and other relevant information to any
persons who are accustomed to reading this information.
 Consistency - once you adapt an accounting principle or method, continue to
follow it consistently in the future accounting periods so that the results reported
from period to period are comparable

The accounting cycle

 It is the process of accepting, recording, sorting and creating payments made and
received within a business during a particular accounting period. It generates
useful financial information in the form of financial statements including income
statements, balance sheets, cash flow statements and statements of change in
equity.
 The cycle ensures that all accounts are updated and maintained, allowing all
payments owed to the company are addressed. It generates its financial
statement as business utilizes for analyzing overall performance for a fiscal
period.
 It starts with an accounting transaction and ends when the books of accounts
Step one: collection of data and analysis of transactions
 In this first step of the accounting cycle, the accountant of the company collects
the data and analyzes the transactions
 For a smoothly running business, there would be many transactions. The
accountant needs to look at each transaction, find out why they occurred, put it
under the right accounts and then analyze it. This step is the most critical of all
because this kick starts the process of accounting.

Step two: journaling

 After collecting and recording transactions, it is time to record the entries into the
first book of accounts
 In this step, the transaction transfers to the general journal under each entry, a
narration is written, mentioning the reason behind debiting or crediting one
amount.
 Recording all the entries in the journal is essential since if there is any error at
this stage of recording, it will linger in the next book of accounts as well

Step three: recording the journals into the ledger accounts

 Accounting is a series of steps taken one by one
 After journalizing all the transactions, it is time for the accountant to record the
entries into the secondary books of accounts
 That means if there are cash and capital, there would be no ‘t-tables’ in the
general ledger, and then the balances of respective accounts will be transferred
 General ledgers allow the accountant to get the closing balance for preparing the
trial balance in the next step of the accounting cycle

Step four: creating an unadjusted trial balance

 As you know that the trial balance is the source of all the financial statements,
that’s what trial balance gets special attention.
 Closing balances of the general ledger accounts prepare and unadjusted trial
balance
 In this trial balance the debut side records and the debit balances, and the credit
side records and the credit balances
 Then the debit is totaled and the credit is also totaled
 The accountant will then see if both sides have similar balances or not
Step five: performing adjustments
 At the juncture, the unadjusted trial balance is ready
 In this step, adjusting entries are prepared.
 The adjusting entries are typically related to accounting adjustments, periodical
depreciation adjustments or amortization adjustments
 These adjusting entries are required to prepare an adjusted trial balance

Step six: creating adjusted trial balance

 After passing the adjusting entries, it is time to create a new trial balance
 This trial balance is called adjusted trial balance since it is prepared after passing
the adjustment entries. This trial balance prepares many critical financial
statements.

Step seven: creating financial statements from the trial balance

This step of the accounting cycle is the most critical part. As an investigator, you
must know how and from where all the financial statements are coming. From the
adjusted trial balance, all the financial statements are born. Adjusted trial balance
prepared four important financial statements 

 The income statement - the first financial statement that every investor should
look at is the income statement. In the income statement, the first item is sales
and the cost of sales and other operating expenses are deducted from the sales
to a certain operating profit. Other expenses when deducted from the operating
profit, it computes the net profit of the year
 Balance sheet - the next financial statement of the list is the balance sheets. In
the balance sheet, we record the assets and liabilities. And we see whether the
balance of assets is harmony with the balance of liabilities
 Shareholder’s equity statement - this is the next financial statement that is
prepared. In this share capital and retained earnings are taken into account. 
Retained earnings is the percentage of earnings reinvested by the company  
 Cash flow statements - finally the cash flow statement is prepared. In the cash
flow statements, the accountant needs to find the cash flow from three kinds of
activities; operating activities, financial activities and investing activities. The two
ways of preparing cash flow operating activities are; the direct and indirect cash
flow from operations
Step eight: closing the books
 This step is the penultimate step in the accounting cycle
 Closing the books means that all financial statements are prepared and all
transactions have been recorded, analyzed, summarized and recorded 
 After closing the books, a new accounting period would start, and accountant
would need to start repeating the above steps once again

Step nine: creating a post-closing trial balance

 To ensure that accounting transactions are properly recorded, analyzed and
summarized, a post-closing trial balance is prepared
 Here all accountants are taken into account and then the closing balances are
recorded as per their respective position
 Then the credit side and the debit side are being matched to see whether
everything is in the right order or not

Financial Statement 
A financial statement is a statement at the end of the accounting period. It shows you
where a company’s money came from, where it went and where it is now.

Balance sheet   ➨   Income statement   ➨   Cash flow statement

Income statement 
 The income statement is one of the company’s core financial statements that
shows their profit and loss over a period of time. The profit or loss is determined
by taking all revenues and subtraction all expenses from both operating and non-
operating activities
 The statement displays the company’s revenue, costs, gross profit, selling and
administrative expenses, other expenses and income taxes paid and net profit in
a coherent and logical manner

Income and expenditure

Is a detailed summary of every income and expenses incurred by an organization

in a specific financial year. The account records ebery income and expenses in a
particular year. Also known as “nominal account”, these accounts serve to find the
surplus of the deficit balance of an organization, taking both current income and
expenditure into account.

Balance sheet
Is a financial statement that reports a company’s assets, liabilities and
shareholder’s equity. It displays the company’s total assets and how these assets are
financed, through either debt or equity. It can also be referred to as a statement on net
worth or a statement of financial position. The balance sheet is based on the
fundamental equation:  Assets = Liabilities + Equity 

Cash flow statement 

A cash flow statement is a financial statement that summarizes the amount of
cash and cash equivalents entering and leaving a company. The cash flow statement
measures how well a company manages its cash position, meaning how well a
company generates cash to pay its debt obligations and fund its operating expenses. A
cash flow is very important to investors because it shows how much cash a company
has generated 

The impact of technology on the accounting process

The biggest impact it has made on accounting is the ability of companies to
develop and use computerized systems to track and record financial transactions.  IT
networks and computer systems have shortened the time needed by accountants to
prepare and present financial information to management. technology advancements
have enhanced the accountant’s ability to interpret data efficiently and effectively 

Uses of computers in technology 

Computers made a huge impact in a way that accounting work is performed, not just
for the big firms, but for the small businesses as well. Accounting systems are affordable
and relatively easy to use, making them a viable alternative for many businesses 

 General ledger - management of a general ledger, the backbone of an

accounting system, is a common use of a computer in the finance area. Account
codes can be added or retired with ease, making the general ledger very flexible
  Accounts payable - paying bills often takes up a lot of time and energy, especially
when using the manual system. Using software, you can pay a bill and book the
expense associated with the payment at the same time. You can pay bills in
batches and print all your checks at once, a major time saver. No more
handwritten cheques or manually entered expenses
 Reporting - paying bills often takes up a lot of time and energy, especially when
using the manual system. Using software, you can pay a bill and book the
expense associated with the payment at the same time. You can pay bills in
batches and print all your checks at once, a major time saver. No more
handwritten cheques or manually entered expenses
 Payroll - payroll, a subsection of accounting is often processed with computers
and not by hand. Complex calculations, such as benefits and taxes, are
performed by a computer, increasing correctness and efficiency  

Software used on accounting 

Accounting is not an easy task. Small businesses to large enterprises face
common challenges when it comes to managing their business’ finances. Some of the
top obstacles you may encounter involve payroll management, unforeseen expenses,
taxes and cash flow management. Accounting software can help you handle some of
the time-consuming tasks so you can focus on more important aspects of running your
business. 

Some examples of accounting software are 

 Fresh books
 Quick books online
 Plooto
 Free agents
 Invoiced
 Zoho books
 Zoho expense
 Sage business cloud accounting 
Advantages of using technology in accounting 
 Increased Productivity - Computers are renowned for efficiency, and accounting
is no exception to this rule. The use of computerized accounting eliminates
duplicating entries, hand-written ledgers and notes and manual calculations,
saving staff time and allowing the same staff to handle larger numbers of
transactions and reports.  
 Automated Report Generation - Rather than being forced to create standard
financial reports by hand each time they’re needed, computerized accounting
provides for nearly instantaneous creation of standard reports such as account
balances, trial balances, general ledgers, profit and loss statements and other
typical reporting requirements.  
 Enhanced Accuracy - Because so many calculations are required for accurate
accounting, computers are an ideal solution to human error. While errors may still
be made in data entry, the computer’s calculations will increase the accuracy and
reliability of the company’s reports.  
 Ease of Data Protection - In the event that data is corrupted or reports are
damaged or lost, computerized accounting provides instant restoration from
backup, ensuring that critical information isn’t lost. Digital backups may be
maintained on- or off-site for additional protection of vital information. 
 Staff Training - Computerized accounting systems also require specific software
training for staff, incurring additional training expenses to the business and
extending the time it takes to deploy the system before it can be utilized.  
 Reliability - Computerized accounting systems are by nature vulnerable to issues
such as computer viruses, power failures and hardware failures which may
impact the reliability and availability of the system. Correcting computer problems
will incur lost time and productivity.

Disadvantages of using technology in accounting 

 Loss of Data or Service - When a business is reliant on accounting software, any
loss of service due to a power or computer outage could cause a work disruption.
Work disruptions can prevent the input of new information as well as prevent
access to stored information. Additionally, if information is not properly backed
up, a computer outage could result in lost financial data.  
 Incorrect Information - The information in an accounting system is only as valid
as the information put into the system. Since most accounting systems require
some manual input of data, financial results could be incorrect unless all input
 data is reviewed. If there is a tendency to only review the final reports or output of
an accounting system, it may be difficult to find faulty information.  
 Cost - A disadvantage of accounting software is the cost involved. Beyond the
initial outlay to purchase the software there is the cost of maintenance,
customization, training and computer hardware. While time savings may justify
the cost, for some businesses it may take years before an accounting software
investment pays for itself.  
 Fraud - Information stored electronically can be manipulated and accessed if
proper controls and security measures are not in place. Strict controls are needed
to make sure only authorized personnel use the accounting software and have
access to reports. Since financial data can be sensitive and confidential, using
accounting software creates the potential for fraud.

Balance sheet
 A balance sheet is a financial statement that reports a company's assets,
liabilities and shareholder’s equity at a specific point in time, and provides a basis
for computing rates of return and evaluating its capital structure 
 A balance sheet is also called a ‘statement of financial position’ because it
provides a snapshot of your assets and liabilities (and therefore your net worth) at
a single point in time unlike other financial statements, such as a profit and loss
reports, which give you information about your business over a period of time.
 The purpose of a balance sheet is to report how the resources to run the
operations of the business was acquired. The balance sheet helps to assess the
financial risk of a business and the simplest way to describe it given by the
accounting equation 
Assets = liability + equity

Components of a balance sheet

Asset

An asset is a resource with economic value that an individual corporation or a country

owns or controls with the exception that it will provide a future benefit. Assets are
reported on a company’s balance sheet and are bought or created to increase a firm’s
operations 
Types of assets 

Non current or fixed assets Current assets

They are long lasting or permanent  They last for a short period of
time

They are bought to use in the business and they are not sold to customers They are bought to sell to
customers

The cannot be easily converted to cash They are easily converted to

cash

Land, building, premises, plant, machinery, equipment, motor vehicles, Stock, accounts (receivables
fixtures, fittings, furniture /debtors)
prepayments, bank/ cash

Liabilities 
The amount owed by the business to outside parties. They are legal debts

Types of assets 

Non current or long term Current liabilities

Long term loan, mortgage Bank overdraft, accounts payable / creditors, accruals, short term loan

Preparation of a balance sheet

A balance sheet is a financial statement that communicates the so-called "book value"
of an organization, as calculated by subtracting all of the company's liabilities and
shareholder equity from its total assets

Steps in preparing a balance sheet

 Determine the reporting date and period - a balance sheet is meant to depict the
total assets, liabilities, and shareholder’s equity of a company on a specific date,
typically referred to as the reporting date. Often the reporting date will be the final
day of the reporting period
 Identify your assets - typically a balance sheet will list assets in two ways : As
individual line terms and then as total assets. Splitting assets into different line
terms will make it easier for analysts to understand exactly where your assets are
 and where they came from, tallying them together will be required for final
analysis. Assets will often be split into the following terms

Current assets  Non-current assets 

Cash and cash equivalents Long term marketable securities

Short-term marketable securities Property

Accounts receivable  Goodwill 

Inventory Intangible assets

Other current assets  Other non-current assets 

 Identify your liabilities - similarly you will need to identify your liabilities. Again,
they should be organized into both line items and totals as below      

Current liabilities   Noncurrent liabilities

Accounts payable Deferred revenue (noncurrent)

Accrued expenses Long term lease obligations

Deferred revenue Long term debt

Commercial paper Other noncurrent liabilities 

Current portion of long-term debt

Other current liabilities

 Calculate capital (shareholders’ equity) - if a company or organization is privately

held by a single owner, then the shareholders’ equity will generally be pretty
straightforward. If it is publicly held, this calculation may become more
complicated depending on the various types of stock issued. Common line items
found in this section of the balance sheet include: opening balance, add net
profit, common stock, preferred stock etc.
  Add total liabilities to total capital and compare to assets - in order to ensure that
the balance sheet is balanced, it will be necessary to compare the total assets
against total liabilities plus equity. To do this you will need to add the liabilities
and shareholder’s equity together 

Balance sheet equation:  Assets = Capital (owner's equity) + liabilities

If you've found that the balance sheet doesn't balance, there is a likely problem with
some of the accounting data you've replied on. Double check that all of your entries are
in fact, correct and accurate. You may have omitted or duplicated assets, liabilities or
equity or miscalculated your totals

Types of balance sheets 

 Balance sheet vertical - a vertical balance sheet is one which the balance sheet
presentation format is a single column of numbers, beginning with the asset line
terms followed by the liability line items, and ending with shareholders’ equity
items.  The arrangement of liabilities is ordered by permanence, this is where an
accountant list is the most long-lasting items first. (e.g., land, then buildings then
equipment) in other words the permanency is decreasing 

Transactions in a balance sheet

A transaction is any event that affects the entity’s financial position and requires
recording. A transaction is a completed agreement between a buyer and seller to
exchange goods, services or financial assets. But in business bookkeeping, this plain
definition can get complicated. The cash accounting method records a transaction only
when the money is received or the expenses are paid .

Why does a balance sheet balance?

Because every financial transaction result in an equal exchange in assets or liabilities.
In order words, the concept of double entry 
How a series of transactions affects a balance sheet  

 The introduction of capital - on 1 May, 2007 B. Blake started a business and put
$50,000 into a bank account for the business. The balance sheet would appear

B. BLAKE

Balance sheet as at May 1st 2007

Assets - Cash at bank                                        50,000.00

Capital                    
50,000.00                                                                                     

 The purchase of an asset by cheque - when Blake has a bank account, he can
use cheques as payment. On 3 May 2007 Blake bought shop premises for
$30,000, paying by cheque. The effect of this transaction is that the cash at bank
is reduced and a new asset, shop premises appears

B. Blake

Balance sheet as at 3 May 2007

Assets Capital $50,000.00

Shop premises $30,000.00

Cash at bank $20,000.00

$50,000.00 $50,000.00

 The purchase of an asset and the incurring of a liability - on 6 May 2007 Blake
buys some goods for $5000 from D. Smith agrees to pay for them sometime
within the following two weeks. The effect of this is that a new asset, the stock of
goods, is acquired, and a liability for the goods is created. A person to whom
money is owed for goods in accounting language is known as a creditor

B. Blake
 Balance sheet as at 6 May 2007

Assets $ Liabilities $

Shop premises 30,000.00 Creditor 5,000.00

Stock of goods 5,000.00 Capital 50,000.00

Cash at bank 20,000.00

55,000.00 55,000.00

 Sale of an asset on credit - on 10 May 2007 goods that had cost $1,000 were
sold to J. Brown for the same amount, to be paid at a later date. The effect is a
reduction in stock of goods and the creation of a new asset. A person who owes
the firm money is known in accounting terms as a debtor. The balance is:

B. Blake

Balance sheet as at 6 May 2007

Assets $ Liabilities $

Shop premises 30,000.00 Creditor 5,000.00

Stock of goods 5,000.00 Capital 50,000.00

Debtor 1,000.00

Cash at bank 20,000.00

55,000.00 55,000.00

 Sale of an asset for immediate payment - on 13 May 2007 goods that had cost
$2000 were sold to D. Daley for the same amount, Daley paying for them
 immediately by cheque. Here one asset, stock of goods, while another asset,
cash at bank is increased. The balance sheet now appears

B. Blake

Balance sheet as at 6 May 2007

Assets $ Liabilities $

Shop premises 30,000.00 Creditor 5,000.00

Stock of goods 2,000.00 Capital 50,000.00

Debtor 1,000.00

Cash at bank 22,000.00

55,000.00 55,000.00

 The payment of a liability - on 15 May 2007 Blake pays a cheque for $3000 to D.
Smith in payment of the amount owing. The asset bank is therefore reduced, and
the liability of the creditor is also reduced. The balance sheet appears as:

B. Blake

Balance sheet as at 6 May 2007

Assets $ Liabilities $

Shop premises 30,000.00 Creditor 2,000.00

Stock of goods 2,000.00 Capital 50,000.00

Debtor 1,000.00

Cash at bank 19,000.00

52,000.00 52,000.00
  Collection of an asset - on 31 May 2007 J Brown who owes Blake $1000 made a
part payment of $750 by cheque. The effect is to reduce one asset, debtor and to
increase another asset, the bank. The balance sheet after these transactions are:

B. Blake

Balance sheet as at 6 May 2007

Assets $ Liabilities $

Shop premises 30,000.00 Creditor 2,000.00

Stock of goods 2,000.00 Capital 50,000.00

Debtor 250.00

Cash at bank 19,750.00

52,000.00 52,000.00

Double entry system

 The double entry system of accounting or bookkeeping means that for every
business transaction, amounts must be recorded in a minimum of two accounts. 
 The double entry system also requires that for all transactions, the amounts
entered as debts must be equal to the amounts entered as debts
 Double entry accounting is a practice that helps minimize errors and increases
the chance that your books balance. 
 This method gets its name because you enter all your transactions twice.
 When it comes to double entry bookkeeping, the key formula for the balance
sheet (assets = liabilities + equity) plays a major role
 The main principle of the double entry system is that for every debit there is a
corresponding debit for an equal amount of money and for every credit there is a
corresponding debit for an equal amount of money i.e. for every transaction one
account is debited for the amount of transaction and the other account is credited
 The double entry system, recognizes and records both aspects of a transaction, it
is proved to be a scientific and complete system of accounting followed by every
enterprise and organization 
 The information for every item that is entered into the books of accounts is
obtained from a ‘source document’, like credit notes, cheques, paying in book