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The Accounting Syllabus

Documents
Invoice, note, credit note, Cheques, statement of account, vouchers, agreements.

Books of Prime Entry

Sales journal, sales returns journal, purchase journal, purchases returns journal, cash
book, petty cash book, general journal, bank reconciliation

Books of Secondary Entry

Sales ledger, purchases ledger, general or nominal ledger. The double entry system,
control accounts

The Trial Balance

Checking the arithmetical accuracy of the entries, correction of errors

The Financial Statements and Final Accounts

Income statements, balance sheet, appropriation accounts, manufacturing account,
income and expenditure account, incomplete records

Interpretation (Ratios)
Liquidity ratios, profitability ratios .how to improve the performance of the business

The Theory Support part:

Objectives of accounting policies, users of accounting financial statements, the basic
accounting principles

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Types of Business Firms Types of Business

Activities
Small businesses
1. Sole trader: a business owned and Business Providing Services
controlled by one person

2. Partnership: a business owned by 2 –

20 partners

Owners of small firms have Unlimited

Liability It’s the business which is not selling
goods but providing services [intangible
This means that in case of bankruptcy
products] such as
the business debts should be paid even
by using the personal properties of the A doctor
owners.
A hairdresser
Large businesses
A travel agency
Such businesses are called companies
and they are owned by 2 or more Banks
shareholders.
Insurance companies
Each person wants to be a part-owner [or
a shareholder] will pay money and Business selling Goods
receives shares. The company must be
registered by the government.

The shareholders have Limited Liability

This simply means that if the company is

wound up, the shareholder will not be
held liable for paying the business debts
apart from the amount invested in the
business; the personal properties of the
shareholders should not be used to pay
the business debts.
There are two types of companies
It’s the business which makes or
purchases goods [tangible products] for
re-sale such as
A Manufacturer: a factory converting
the raw materials into finished goods

1. Private limited company Ltd: where A Wholesaler: a trader selling goods in

shareholders must be known to each
other
2. Public limited company Plc: where
anyone can be a shareholder by buying
shares from the stock exchange
Bulk
A Retailer : a business selling directly
to the customers in small quantities such
as a pharmacy, grocery, clothes shops,
stationery...Etc.

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Steps of Accounting
This course is divided into two main sections

Section 1. Book Keeping

The business firm performs transactions every day

Each transaction should be recorded in a document

A copy of the document will be kept by the business to be used in recording the
transactions into the business files

The Files are called Books

The books of Prime entry [Journals] are used to record the daily transactions

The books of secondary entry [Ledgers] are used to record the monthly totals and the
entries obtained from the journals

The trial balance is a checking device used to check the errors and the accuracy of the
entries

Section 2. Accounting

At the end of the year the accountant will use the records of the books to prepare the
financial statements and the final accounts. This includes

Income Statement: to calculate the net profit or loss resulting from the business
activities each period

Balance sheet : to show the financial position of the business firm at a particular date

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The Balance Sheet of a sole trader

Balance Sheet:

It is a financial statement prepared to check the financial position of the business

on regular intervals.

Ahmed wants to start his business as a retailer.

He has $ 10 000 to invest. This amount is called Capital

Ahmed has the feeling that this amount is insufficient to start a good business, that’s
why he borrowed a Loan

Of $ 40 000 from his friend Hassan. The amount borrowed is called Liabilities.

Now Ahmed has a total of $ 50 000 which he used as follows

He purchased a small shop premises $ 20 000

Then he paid $ 3 000 for fixtures and Fittings

Additionally he bought a small delivery van $ 7 000

Moreover he purchased inventory or stock of goods for resale costing $ 9 000

Finally he deposited $ 10 000 in a business bank account and kept $ 1 000 as cash in
hand

All the previous items are called Assets

The Financial position is as follows:

Capital $ 10 000

Liabilities $ 40 000

Assets $ 50 000

The Accounting equation

Assets = Capital + Liabilities

Capital = Assets - Liabilities

“Assets” are what the company owns

“Liabilities” are the company owes

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In the balance sheet

The current assets must be written down in the order as shown above.

Depreciation may be charged on the Non-Current Assets

“Decrease in the value of the non-current assets is called Depreciation”

Cost - Depreciation = Net book value

Example:
Motor vehicle=100,000
Depreciation on motor vehicle=30,000

Answer:
Net book value = 100,000-30,000=70,000

Types of Assets
Current Assets Non-Current Assets
Assets that are held by the business Assets that are held by the business for a
for a period of less than a year period more than a year.

Current Assets: Non-Current Assets:

Inventory Equipment

Trade receivables Land

other receivables
Fixture and fittings
Banks
Cash Machinery
Petty cash
Motor van

Etc…

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Types of Liabilities
Current Liabilities Non-Current Liabilities
Amounts owed by the company for a Amounts owed by the company for a period
period Shorter than a year. more than a year.
Examples:
Examples:
Trade payables
Long term banks loans
Other payables
Bank overdraft
Short term loan

Owners’ Equity:

The owner’s capital changes from one year to another due to two items
Net profit: which will be invested in the business
Drawings: anything taken by the owner from the business for personal use.

Capital beginning —---------->”initial amount invested by the owner”

+Additional Capital —---------->”Additional amount invested by the owner”

+Net Profit —---------->”Profit made by the owner during the year”

(-)Drawings —---------->”Withdrawals made by the owner”

Capital at the end —---------->”net amount that the company owes to the owners”

The EQUITY section $ $

Opening capital 60 000
Add net profit 22 000
-----------
82 000
Less drawings (2 000)
---------
= Closing capital 80 000

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Working Capital
Any business needs money to cover its expenses and to pay its short term debts as
it falls due.

The amount needed for the day-to day running of the business is called Working
Capital

Working capital = Current assets - Current Liabilities

Working capital is also called NET CURRENT ASSETS

Disadvantages of a shortage of too little working capital

1. unable to pay wages and salaries leading to problems with employees; a possible strike

2. Unable to pay rent leading to problems with the land lord, a possible closure of the
business

3. unable to pay loan interest leading to problems with lenders; a possible takeover by
the bank

4. unable to replace the old inventory leading to problems with customers

5. Unable to benefit from cash discount offered for speedy payments.

How to improve the working capital

1. Borrowing a long term loan

2. Selling of old, surplus non-current assets such as an old machinery

3. Reduce the personal drawings

4. Injection of additional or further capital by the owner

5. Admission of a new partner

Disadvantages of Excess or too much working

1. Idle resources which could’ve been invested in expansion or deposited in a bank

account to gain interest

2. Too much inventory leads to higher costs of storage in addition to the risk of being
shop soiled

3. Too much debtors leads to the risk of bad debts

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Capital Employed
To set up any business we need a certain amount of money in order to:

1. Buy non-current assets such as machinery, van, premises

2. Working capital: amount needed for the day-to-day running of the business.

The total amount of money needed for the two items is called Capital Employed

Capital employed can be obtained from two sources

1. Owner’s equity or capital

2. Borrowing a long term loan

Rules of Capital Employed

Capital Employed = Non-Current assets + Working Capital

Capital Employed = Non-Current Liabilities + Equity

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The Vertical Balance sheet

Statement of Financial Position

Cost Depreciation Net Book Value
Non-current Assets
Land/Premises X - X
equipment’s X (X) X
Machinery X (X) X
Total Non-current assets XX
Current Assets
Inventory X
Trade Receivables X
Other Receivables X
Cash at bank X
Cash in Hand X
Petty Cash X XX
Total Assets XX
Owner's Equity X
Capital Beginning X
Add/Subtract the Profit or Loss X
Add Additional Capital X
Less Drawings (X)
Capital End XX
Non-Current Liabilities
Long term loan X
Current Liabilities X
Short Term Loan X
Trade Payables X
Other Payables X
Bank Overdrafts X XX
Total Equity & Liabilities XX

This format shows important information such as working capital and capital employed

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Exercises:
Past-Papers Extract

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The Matching Principle

The income statement should be based on the accruals or matching principle.

According to this principle the income of the year should be matched against the
expenses of the same year.

In other words the items recorded in the income statement should

I. Exclude any prepayments paid in advance for a coming year

II. Include any accruals or unpaid items because it belongs to the current year

Example 1

Rent paid $ 1300

If this amount includes $ 100 paid in advance to next year, then

The amount of rent which will be recorded in the income statement of the current year
should be

1 300 – 100 = $ 1 200

Example 2

Wages paid $ 5 000

If we still have unpaid wages or accrued wages of $ 600 then the amount of wages
which should be recorded in the income statement of the current year will be

5 000 + 600 = $ 5 600

How the matching principle was applied

Rent prepaid of $ 1000 was subtracted from the amount of rent because this amount
doesn’t belong to the current year; it belongs to a coming year

Electricity accrued of $ 200 was added to the amount of electricity charged to income
statement because this amount belongs to the current year.

Important rule

Prepaid = paid in advance (Subtract)

Accrued = unpaid = owing = due = outstanding = in arrears (Add)

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Income statement of a business providing services

The service business doesn’t sell goods but receives income from the clients.

At the end of each year the business should prepare an income statement as follows

Net profit will be recorded in the equity section of the balance sheet

Example
The following information is taken from the books of Honey, a hair dresser on 30 April
2014

$ Income statement for the year ended 30

April 2014
Fees received from clients 35 000 Income: $ $
Fees received 35 000
Commission received on beauty products 2 000 Commission received 2 000
37 000
Wages and salaries 10 500
Less expenses:
Wages and salaries 10500
Rent and rates 1 200
Rent and rates 1 200
Insurance 400
Insurance 400
Electricity 900
General expenses 1100
Electricity bills 900
Depreciation 1900
----------
General expenses 1100
(16 000)
Depreciation 1900 Net profit

Prepare the income statement for the year ended 30 April 21 000

2014

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Income Statement for Trading Business

Prepare an income statement for the year ended 31 Oct 2014 using the following information taken from
the books of Sandy, a trader of furniture
Income statement for the year ended
$
31 Oct 2014
Sales [revenue] 52 000
Sales revenue 52 000
Less sales returns (2000)
Sales returns 2 000
= net sales 50 000
Purchases 13 000 Cost of sales:
Opening inventory 200
Carriage in 400 +purchases 13 000
+carriage in 400
Inventory, 1 Nov 2013 200 13 600
Less closing inventory (300)
Wages and salaries 6000

Rent payable 1500 (13 300)

Gross profit
General expenses 300 Add other income:
36 700
Discount received
Discount received 100
100
Additional information on 31 Oct 2014 36 800
Less other expenses:
Inventory at the end of the year was valued at $ 300
Wages and salaries
Depreciation of the year $ 2 000 Rent
General expenses 6000
1500
Depreciation
300
2 000
= net profit
(9 800)

27 000

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Depreciation Methods

Each asset has three major values that aid the process of depreciation

- Cost

- Useful Life

- Scrap Value

There are three methods for depreciating and asset, the straight line
method, the Reducing (diminishing) method and the Revaluation method.

Method 1
Straight Line

The Rate of depreciation = 100

Useful life

Depreciation charge is constant

Depreciation = Cost – Scrap Value / Useful Life

Depreciation = [Cost – Scrap Value] x Rate

Method 2
Reducing (diminishing) balance

The rate of depreciation is not given

Scrap Value is not required

The depreciation Charge falls continuously

Depreciation = Net Book Value x Rate

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Method 3
Revaluation Method

The Rate of depreciation not given

Scrap Value is not given

Depreciation Charge varies each year

Depreciation = Valuation [Beginning] – Valuation [Ending]

Example

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Inventory Valuation
According to the Prudence Principle we should anticipate any
foreseeable loss and avoid overstating of Profit.

This leads to the following treatment of inventory

Basis of inventory valuation

Inventory should be valued at the lower of cost and net realizable

value

Cost: purchase price of inventory in addition to any costs incurred

in bringing the inventory such as carriage inwards

Net Realizable value: selling price less any selling and distribution
costs such as carriage out, cost of repairs.

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The Provision for Doubtful Debts

It is an estimate that some debtors may not be able to pay
what they owe

Provision for doubtful Debts = % of Trade Receivables

Creating the Provision

On 30 April 2013 trade receivables $ 40 000

A provision for doubtful debts of 396 of trade receivables is to be

created

Provision = 40 000 X 3% = $1200

Now to record the provision doubtful debts

Income Statement:

Gross profit
The Prudence Principle
Less other expenses:
According to this principle we
Provision for doubtful debts 1200 should not overstate the profits
and we should anticipate loss

Balance sheet:

Current assets

Trade receivables 40 000

Less provision for doubtful debts (1200)

Net debtors 38 800

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Expenditure and Revenue Expenditure

.Expenditure means spending money; business firms spend money in two different ways

Capital Expenditure
Amounts paid on transactions that are not part of the daily trading activities

(Recorded in the balance sheet)

Examples:

Purchase of new machinery

Cost of delivery of the new machine

Cost of installing the new machine

Capital expenditure items are unlikely to be repeated in the short term because it
benefits the firm for quite a long period of time

Capital expenditure items will be recorded as non-current assets in the Balance sheet.

Revenue Expenditure
Amounts paid on transactions that are part of the daily trading activities

(Recorded in the income statement)

Examples:

Rent of premises

Wages paid to workers

Manager’s salary

Electricity bills

Purchase of goods or inventory for resale

Revenue expenditure items are repetitive in the short term

Revenue expenditure items should be recorded in the Income statement

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Capital and revenue Receipts

Business firms receive money in two different ways

Capital Receipts:

Amounts received from transactions that are not part of the daily trading activities;

Examples

Borrowing a loan, issue of debentures

Additional capital, issue of shares

Proceeds from sale of non-current assets [disposal]

Capital receipts items are non-repetitive in the short term

Capital receipts items affects the balance sheet

Revenue Receipts:

Income gained from the normal activities of the business

Examples

Revenue [sales of goods]

Rent received

Commission received

Discount received

Revenue receipts items are repetitive in the short term

Revenue receipts items should be recorded in the Income Statement

What happens when a revenue expenditure is treated as capital expenditure?

● Non-current assets overstated

● Profit overstated

What happens when a capital expenditure is treated as revenue expenditure?

● Non-current assets overstated

● profit understated

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Year-end Adjustments
Before preparing the income statement and the balance sheet we have to make
some adjustments according to the additional information given
The following is the list of year-end adjustments

The Bold items are the common items tested in past papers. Other items are
the tricks of questions

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Exercises:
Past-Papers Extract

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Liquidity Ratios
1. Current Ratio (Liquid Ratio) =
Current Assets/Current Liabilities
The ratio shows that for every $ 1 of short term debts the firm has $ available for
repayment
Reasons for unsatisfied ratio
Decrease in current assets or too much current liabilities

2. Quick Ratio (Acid Test) =

Current - Inventory/Current Liabilities
(Inventory is deducted because it is the least liquid)

The ratio shows that for every $ 1 of short term debts the firm has 5 available for
quick Repayment without depending on the inventory

Reasons for unsatisfied ratio holding too much inventory

The ratio can be improved by reducing the level of inventory

The quick ratio is a much better measure or indicator of liquidity because it shows the
real liquidity Position without depending on the inventory which is not a liquid item and
may not be converted into cash easily .

The liquidity of the business is the ability of paying the short term debts whenever
due and to continue the day-to-day running of the business efficiently.

The liquidity can be measured from the balance sheet.

To measure the liquidity we have two ratios

The bench mark of the current ratio is 2: 1

The bench mark of the Quick ratio is 1: 1

The quick ratio is a much better measure of liquidity than the current ratio because it
shows the real liquidity position without using the inventory which is not a liquid item
and may not be converted into cash easily.

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Reasons for unsatisfactory liquidity position

Too much current liabilities in relation to the current assets

Bank overdraft when the owner takes too much cash from the business bank account
for personal use

Holding too much inventory leads to low quick ratio

3. Working Capital =
Current Assets - Current Liabilities

Profitability Ratios
1. Gross profit margin = Gross profit/net sales x 100
The bench mark more than other firms or previous years
This ratio shows that for every $100 of revenue the firm makes..... As gross profit

How to improve the gross profit margin

Selling at higher prices buying from a cheaper supplier

Buying in bulk to benefit from trade discount

2. Gross profit markup =

Gross profit /cost of sales x 100

3. Profit margin =
Net profit/net sales x 100
The bench mark
More than other firms or previous years
This ratio shows that for every $ 100 of revenue the firm makes as net profit

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How to improve the net profit margin

I. Reduce or control the expenses of running the business
II. Looking for new sources of income improving the gross profit margin

Profit x 100
4. Return on capital employed (ROCE) =
capital employed

Opening ROCE =
Opening Capital + long term loan

Closing ROCE =
Capital end + non-current liabilities
The bench mark
More than other firms or previous years
This ratio shows that for every $ 100 of revenue the firm makes as net profit

How to improve the net profit margin

I. Reduce or control the expenses of running the business
II. Looking for new sources of income improving the gross profit margin

Inventory & Payables Ratios

1. Rate of inventory turnover =
Cost of sales / average inventory = …………Times

To obtain the average inventory use the following formula

Average inventory = (beginning inventory + end inventory) / 2

The bench mark

More than the rate of a previous year or a similar firm

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How to improve the rate

I. Keeping the inventory level as minimum as possible

II. Order new inventory only when needed
III. Change the product mix
IV. Promote sales by means of advertising and discounts

Trade Receivables
2. Trade Receivable Collection Period =
Credit Sales x 365

The bench mark

Less than the credit limit period allowed by the firm less than last year or a similar
firm

Reasons for unsatisfied ratio

I. Inefficient collection system
II. Too much credit sales

How to improve the debtor’s collection period

Offering cash discount to encourage speedy payment within a stipulated period

Refuse any further supply of goods on credit till paying the amount due

Charging interest on balance overdue

Using the help of Factoring for early collection of debts

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3. Trade payables payment period =

Trade payables / Credit purchases x 365

The bench mark

Less than the credit limit allowed by the suppliers to the firm Less than last year or a
similar firm

Reasons for unsatisfied results

Poor liquidity position

Very long collection period of trade receivables

Too much credit purchases shortly before the year end

Ratios allow the measurement of a firm’s performance, this could be done

to improve the firm performance but also it allows people involved in the
business firm to have an idea about how the firm is performing, people who
are interested in the firm are referred to as stakeholders

The stakeholders are usually some of the following list

1. Owners, sole trader, proprietor, partners, shareholders

2. Lenders, bank manager, loan creditor, Debenture holders

3. Suppliers, trade creditors, trade payables

4. Investors, potential partners

5. Managers

6. Government

7. Customers and employees

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The importance of any ratio

The ratios are useful indicators of the business performance, the results will be used by the owner
or the management for comparability [with other firms or previous years] to identify the similarities
and differences, weakness and strength. This will help in making decisions of corrective actions
needed

Objectives of accounting policies Inter-Firm Comparison

I. Understandability It’s comparing the business
performance with the results of
The financial statements should provide the users with other business firms
understandable information as long as they have a
To ensure that the comparison is
reasonable knowledge of business and accounting
useful and to avoid misleading results
II. Comparability the following should be taken into
account
The financial statements are useful to users if it
enables them to make useful comparisons with previous
years (trend comparison) or similar firms

III. Reliability
The financial statements are useful if it can be
described as

True statements Based on actual events Free from

significant errors Free from bias Based on agreed
principles and standards

IV. + Relevance
Financial statements are useful when it influence the
users Decision making
Comparison between Businesses

 Companies must be of the same type

 Companies must be of the same size
 Companies must have the same type of
ownership
 Companies must operate on the same
accounting principles

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Example 1
Rent paid $ 1300

If this amount includes $ 100 paid in advance to next year, then

The amount of rent which will be recorded in the income statement of the current year
should be

1 300 – 100 = $ 1 200

Example 2
Wages paid $ 5 000

If we still have unpaid wages or accrued wages of $ 600 then the amount of wages
which should be recorded in the income statement of the current year will be

5 000 + 600 = $ 5 600

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Exercises:
Past-Papers Extract

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The Trial balance

It’s a list of debit and credit balances at a particular date
The two sides of the trial balance should be equal

Sources of finance The business entity principle

Capital: what the owner lends to the business
Liabilities: what the others lend to the business
Income: what the customers give to the business
The previous items will be acting as Creditors to
the business
According to this principle the business
has o separate legal Identity other than
its owner
This simply means that when the owner
Introduces capital to the business he or
she acts as a lender to the business

Reasons for preparing the trial balance

I. for checking the accuracy of the entries
II. it’s a source of information needed for preparing the final accounts

If the two sides of the trial balance fail to agree then the unexplained difference
will be entered in a ledger account called Suspense account

The trial balance records only one inventory

Opening inventory: before preparing the income statement

Closing inventory : after preparing the income statement

Limitations of the trial balance

The trial balance can’t reveal all the errors because some errors do not affect the
agreement of the trial balance such as errors of

Omission, commission, principle, original entry

Complete reversal and compensating errors

[This will be discussed in details later under the heading of Errors]

Uses of a Trial balance:

I. Help in tracing errors
II. Help in preparing financial statements
III. Reduce risk of frauds

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D Dr
E Expenses Dr
Drawings
A Assets Assets
Expenses
D Drawings

C Cr
L Liabilities Cr
Capital
I Income Liabilities
Income
C Capital

Use the DEADCLIC method to easily determine the nature of the items
given, this helps greatly in all the accounting process and assures accuracy.

Suspense Account
Notice: if the trial balance failed to agree
then a suspense account is created.

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Example:

Dr $ $ Cr
Assets x
Liabilities x
Capital x
Drawings x
Income x
Expenses x

xxxx xxxx

Both Sides should be EQUAL!

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Exercises:
Past-Papers Extract

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The Duality Principle

According to this principle there are two aspects for any financial transaction

This simply means that any financial transaction takes place in the business will affect
at least two accounts This leads to the Famous accounting rule of Double Entry which
was introduced first to the world during the 16," Century by a Franciscan Monk called
Father Luca Pac olio

The value of any financial transaction should be

recorded in two accounts one should be recorded
on the debtor (Dr) side and the other should be
recorded on the creditor (Cr) side of another
account

Values are to be recorded on the side which represents the nature of the account
unless the account is decreasing, in this case the value should be recorded on the
Opposite side.

Nature and recording rules

Type Nature Increase Decrease

Assets Dr Dr Cr
Expenses Dr Dr Cr

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Drawings Dr Dr Cr
Liabilities Cr Cr Dr
Income Cr Cr Dr
Capital Cr Cr Dr
Provisions Cr Cr Dr

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Exercises:
Past-Papers Extract

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Documents
The business firm sometimes sells and buys goods on credit. This requires recording
the transactions in the books of prime or original entry

To do so the business needs Documents as an evident for each transaction

The following is a list of documents involved in the case of goods sold

or purchased on credit

Invoice: Issued by the supplier to the customer when goods are sold on credit

Debit note: Sent by the customer to the supplier asking for replacement of goods
returned

Credit note: Issued by the supplier who accepted the returns of goods it informs
the customer with the amount of deduction

Cheque: Issued by the customers to pay the suppliers

To better understand the process of issuing the documents let us imagine

the situation between a buyer and a seller that had some problems
regarding the order received.

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Seller Buyer

The seller sells goods to the buyer

Copy

Sales Purchases
Journal Journal

The Buyer returns the goods asking for a replacement

The seller could not replace the

returned goods so a deduction
was made

Sales Copy
Purchase
Returns Returns
Journal Journal

Cash Book Cash Book

At the end of the month the seller sends a copy of the customer Account

Statement of Accounts

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Exercises:
Past-Papers Extract

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BOOKS OF PRIME ENTRY

There are 7 books of prime or original entry

The books of prime entry are used for two purposes

1. To record the doily transactions from the business documents

2. To provide information and totals which will be posted to the ledger accounts books
of secondary entry

The books of prime entry are:

BOOK PURPOSE DOCUMENT

Sales journal To record goods sold on credit Invoice issued

To record returned goods from

Sales returns journal Credit not issued
on credit customers
To record goods purchased on
Purchases journal Invoice received
credit
To record returned purchased
Purchases returns journal Credit note received
goods to suppliers
To record small items of receipts
Petty cash book Petty cash voucher
and payments
To record payments done in cash
Cashbook Cheque
or by Cheque
To record other transactions
such as opening and closing
entries, year-end adjustments,
General Journal
purchase and sales of non-
current assets on credit, bad
debts written off-etc.

BOOKS OF SECONDARY ENTRY

 Sales ledger
 Purchases ledger
 Cashbook
 General ledger

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STATEMENT OF ACCOUNT
Statement sent by the supplier to the customer reminding them of the amount due.

Notes:

Debit note: customer to the supplier (Request for returns)

Credit note: supplier to customer (Accept returns)

Exercises:
Past-Papers Extract

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The Control Accounts

Business firms keep a record of all the debtors’ accounts or trade
receivables in the Soles Ledger

The accounts of creditors or trade payables are kept in Purchases Ledger

The information recorded in soles ledger and purchases ledger is obtained

from the books of prime entry
To ensure that the information is posted correctly from the Journals to
the Ledgers we have to prepare two control accounts

1. Sales ledger control account: which is a summary of all the accounts

of trade receivables

2. Purchases ledger control account: which is a summary of all the

accounts of trade payables

The individual entries are not posted from the journals to the control
accounts, only the Totals of the journals will be posted to the Control
accounts.

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1. Sales Ledger Control Account

Sales Ledger Control Account
Dr Cr
Beg balance b/d x Beg Balance b/d x
Trade receivables beg

End Totals for the month End Totals for the month
Credit Sales x Sales returns x

Cash and Cheques received from

Interest Charged x Debtors or Trade xx
on debtors overdue balances receivables/customers
Dishonored Cheques x Discount allowed x
Refund to debtors for overpayment Bad debts written off x

Contra x
Transfer from/to purchases ledger
Balance c/d x Balance c/d x
xxx xxx
Balance b/d xx balance b/d xxx

Important Rule
Three items should not be recorded in the sales ledger control account

Cash Sales Bad debts recovered Provision for doubtful debts

Reasons for a credit balance

Overpayment by the customer/ prepayment by the customer/ goods returned by
customer after full payment/ errors

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2. Purchase Ledger Control Account

Sales Ledger Control Account

Dr Cr
Beg Balance b/d
x x
Beg balance b/d [Creditors Beg]

End Totals for the month End Totals for the month
Purchases Returns x Credit Purchases x

Cash and Cheques paid to suppliers or Interest charged by creditors for

x xx
creditors or trade payables overdue

Discount Received x Bad debts written off x

Contra [Transfer from/ to sales Refund by creditors for

x x
ledger] overpayment

Balance c/d x Balance c/d xx

xxx xxx
Balance b/d xx balance b/d xxx

Important Rule
Cash purchases should not be recorded in the control account

Reasons for creating control accounts

I. It makes fraud more difficult
II. It produces instant totals of trade receivables and trade payables reads to be
used in the balance sheet
III. To locate any errors in the sales ledger and purchases ledger

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Exercises:
Past-Papers Extract

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Provision for Doubtful Debts

Estimate of trade receivables who are unwilling or unable to pay the amounts due in
time.

Reasons for making a provision for doubtful debts

Due to Prudence principle to avoid overstating the net profit and overstating the assets
trade receivables], to estimate any foreseeable loss

Due to Matching principle to charge the income statement with the change in provision
each year

Journal Entry

Dr Cr

Provision for doubtful debts xxx

Income statement xxxx

Dr Cr

Income statement xxx

Provision for doubtful debts xxx

Notice
Provision for doubtful debts is considered either income or expense depending on its
value (nature Cr)

Relation between prudence concept & provision for doubtful debts:

Provision for doubtful debts is considered an expense in the future so we record it to

not overstate the trade receivables and profit.

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Rules

1 in the first year of the business where the provision is to be created there is No
balance b/d from last year

2. The change in provision will be recorded in the Income statement

As expenses when increases

As income when decreases

3. The new provision I the final balance I will be recorded in the balance sheet
subtracted from Trade receivables under the heading of Current assets

Bad Debts
Trade Receivables who are unwilling or unable to pay the amounts due

Journal Entry

Dr Cr

Income Statement xxx

Transferring bad debts to
Bad Debts xxx income statement

Notice

Bad debts are considered an “Expense” (nature Dr)

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Bad Debts Recovered

Debts that were previously written off as bed debts now being collected

Journal Entry

Dr Cr
Transferring bad debts
Bad debts recovered xxx recovered to income
statement
Income statement xxx

Notice

Bad debts recovered are considered on “income” (nature CR)

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Exercises:
Past-Papers Extract

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Cash Book
The cash book is a record of any amount of money received or paid by the business
during the month, whether it was made in cash or by Cheque.

The cash book doesn't record any transactions on credit because such transactions do
not lead to any cash inflow or outflow.

The same rule is also applied on depreciation

The cash book in concerned with cash in hand and cash at bank

Contra entry

It's the case where a certain amount of money is transferred from cash to bank or
vice versa

The cash book has two sides

Dr Cr
All the money received on the debts side All money paid on the credit side

Cash sales
Purchases
Loan expenses
Carriage inwards
Trade receivables
Bad debts recovered
Rent received
Sales returns
Commission received
Dishonored cheese
Capital sales on non-current assets
Drawings
Contra entry
Trade payables
Contra entry

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Contra Entry:

Withdrew $xxx cash from the banks for personal use

Paid all cash into the bank except $xxx

Discounts:

Cash discount: given for prompt payments & speedy payments

Discount allowed Discount received

“Given by the company to its customer” “given by the suppliers to the

company”

(Expense Dr) (Income Cr)

Trade Discount: given for bulk purchases (not written in books) “don't record it in the
cashbook”

Keyword:
List price = price BEFORE discount

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The two types of Cash Book formats:

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Exercises:
Past-Papers Extract

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Petty Cash Book

It is used to record all small items of expenses.

The petty cash book is used to record the small cash items of receipts and payments

A petty cashier is given a fixed amount of money called imprest

Which will be used to cover the small payments such as cleaning expenses, stationery
expenses, postage, flowers, refreshments and small payments to creditors.

The petty cashier should record each payment in special document called Vouchers

Each month the petty cashier will present the vouchers to

the chief cashier to obtain a refund which will enable him
to restore the balance of the petty cash to the imprest
amount; thus starting each month with the same fixed
amount of money

Advantages of the petty cash

1. Saving time and efforts of the chief cashier

2. Saving enough room in cash book for important transactions

3. Training and delegation practice to junior accountants

4. The totals of the analysis columns will be posted of the end of the month to the
relevant ledger accounts to complete the double entry

Petty cash balance In hand

♦ total vouchers = imprest amount

What is meant by Imprest system?

It is a fixed amount of money given by the main cashier to the petty cashier to pay for
small items of expenses; at the end of each financial period, the impress system is
restored.

Advantages of the imprest system Acts as a checking device because at any time the
following should be true

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An example of petty cash book format

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Exercises:
Past-Papers Extract

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Bank Reconciliation
At the end of each month the business will receive a Bank Statement from
its bank telling them of the detailed transactions which took place during
the month between the business and the bank. This includes all the
receipts and payments done by the business during the month but only
from the Bank's point of view.

The statement usually ends up with final balance owed to or by the

business in respect of the bank account. The final balance shown in the bank statement
usually differs from the final balance shown in the business cash book.

Reasons for the differences between the cash book and the bank statement

1. Items recorded in cash book but not in bank statement this includes three main
reasons:
 Bank lodgments: when the cash book includes a Cheque received but the Cheque
doesn't appear in the bank statement
 Unpresented Cheque: when the cash book includes a Cheque paid on the credit
side but the Cheque doesn't appear in the bank statement
 Errors made in the cash book such as overcast, omission

2. Items recorded in bank statement but not in cash book:

This includes seven main reasons

 Standing order: when the bank pays fixed amounts on behalf of the firm such as
insurance and installments
 Direct debit: when the bank pays non-fixed amounts on behalf of the firm such
as electricity and telephone bills
 Dishonored Cheques: when the banks deletes some Cheques received by the
business and deposited in its account due to insufficient balance
 Bank charges: when the bank deducts an amount from the business bank balance
for the services provided
 Interest received: when the bank adds to the business an amount of interest
resulting from its deposits
 Credit transfer: when a customer puts an amount of money directly in the
business bank account without informing the firm
 Errors made by the bank in the business bank statement such as an item
recorded wrongly, or recorded twice

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Rule
Items recorded in cash book will appear in the opposite side of the bank statement
because it represents the business point of view where the bank is treated as a debtor
while the bank statement represents the bank point of view where the business is
treated as a creditor. What appears Dr in cash book should appears Cr in bank
statement and vice versa

The business provision and the banks provision are opposite:

Business provision Bank provision

Dr paid Dr received
Cr paid Cr received

Items that appear only in cash book:

Bank lodgments: Cheques received not yet credited

Un-presented Cheques: Cheques not paid by the bank

Errors

Example of Bank Reconciliation Statements Items that appear only on the

bank statement:
Balance as per bank statement xxxx
1. bank interest
+Bank lodgments xxxx
2. bank charges
+/- Error xxxx or (xxxx) 3. credit transfer
4. dishonored Cheques
(-) un-presented Cheques (xxxx)
5. direct debits
Balance as per updated cashbook xxxx
6. standing
7. errors

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Exercises:
Past-Papers Extract

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Incomplete records [Single entry]

Some small firms do no keep complete or proper accounting records.

This problem leads to some missing information
The target of this topic is to use some arithmetical calculations to
calculate the missing figures

The methods used are:

1 .Statement of affairs
This will help in calculating the opening capital, closing capital and the net profit or loss
without using the income statement

2. Mark up and Margin

This will help in calculating any missing item from the trading account information,
specially the closing inventory if missing or stolen or destroyed by fire

3. Control accounts
This will help in calculating the value of Sales revenue and Purchases in addition to
other missing information

4. Revaluation method
This will help in calculating the depreciation of non-current assets

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1) Statement of Affairs (capital = Assets - Liabilities)

Details $ $
Non-current assets:

Premises xx

Fixture and fittings xx

Equipment xx xx

Current assets:

(Closing) inventory xx

Trade receivables xx

Other receivables xx

Bank xx

Cash xx

Petty cash xx xx

Total assets: xxx

Noncurrent liabilities:

Long term loan xx

Current liabilities:

Trade payables xx

Other payables xx

Bank overdraft xx

Total liabilities (xxx)

Capital xxx

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2) Equity section to find ending capital

Opening xx

+ Additional xx

+ Net profit xx

(-) drawing (xx)

Ending capital xxx

3) Markup and margin to calculate inventory:

Details $ $ %
Sales xx xxx

(-) sales returns (xx)

Net sales xx

Cost of sales

Opening inventory xx

+purchases xx

(-) ending inventory xx (xxx) xx

Gross profit xx xx

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4) Find “credit sales”

Sales ledger control account or Credit sales

= trade receivables end

(-) trade receivables beginning

+ Receipts bank/cash

+ Bad debts

+ Discount allowed

+ Contra entry

(-) Interest charged6

(-) Refunds

+ Sales returns

5) Find “credit purchases”

Purchases ledger control account or Credit purchases

= Trade payables end

(-) trade payables beginning

+ Payments bank/cash

+ Discount received

+ Contra entry

(-) interest charged

(-) refund

+ purchases returns

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The Magic Box

According to the Matching principle we should prepare the income statement of any
accounting period by Matching the income or revenue of the period against the
expenses of the same period

This means that we have to

1. Exclude the prepayments at the end of the year because it belongs to a coming year

2. Exclude the accruals at the beginning of the year because it belongs to a previous
year

3. Include the prepayments at the beginning of the year because it belongs to the
current year

4. Include the accruals at the end of the year because it belongs to the current year

This leads to the following magic box which should be applied to any income statement

Accrued Prepaid
Beginning - +
End + -

The Magic Rule

P A

A L

P L

A A

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Exercises:
Past-Papers Extract

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What is meant by Depreciation?

It's an estimate of the possible reduction in the value of non-current assets over its
estimated useful life

Methods of depreciation

Method 1: Straight line or equal instalments Annual depreciation is constant,

calculation is based on Cost

Method 2: Reducing (diminishing) balance Annual depreciation decreases continuously,

calculation is based on the Net book value

Method 3: Revaluation method Annual depreciation varies from one year to another,
calculation is based on the valuation of assets at the end of the year

Reasons for depreciation

I. Passage of time
II. Economic reasons
III. Depletion

Reasons for charging depreciation to the financial statements

Due to Prudence principle , to avoid overvaluation of profit and overvaluation of assets

Due to Matching principle , to charge the income statement with the amount of
expenses resulting from the use of the assets during the year

The Consistency Principle

According to this principle, the same treatment

should be applied to similar items at all times
This means that if we use the straight line
method in one year then we are not allowed to
change it to the reducing balance method in the
subsequent years because net profit will be
changed and this affects the decisions made by
many groups or parties of stakeholders such as,
the owners, tax authorities, potential partners
and shareholders

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Dr Provision for Depreciation Cr

During Disposal x Beg balance b/d x

End Income Statement x

End Balance c/d x

xx xx
Beg of next year
Balance b/d x

Rules

1. The opening balance b/d will be nil in the first year

2. Depreciation of the year will be recorded in the

income statement

3. If an asset is sold (disposal) then its depreciation

should be deducted by recording it on the debit side of
the account

The final balance of the account will be recorded in the

balance sheet subtracted from the cost of non-current
assets

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Dr The Ledger account of Disposal Cr

Date of Selling Date of Selling

Cost Provision
x x
Name of assets sold

Selling Price x

Rules
The final balance of disposal account will be transferred to the income statement

As income if Profit on disposal

As expenses if loss on disposal

The Arithmetical Calculation

Profit or loss on disposal

= Selling Price – Cost + Provision

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Exercises:

Past-Papers Extract

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Six Types of Errors that Effects the Trial Balance

I. ERROR OF OMISSION
A transaction was completely omitted from the books

Example:

● cash sales $500 was omitted

Solution:

Dr Cash 500

Cr Sales 500

II. ERROR OF COMMISION

Recording the wrong person’s name

Example

● goods sold on credit $300 C.Jones was wrongly debited to the account of
S.Jones
Solution:

Dr C.Jones 300

Cr S.Jones 300

III. ERROR OF PRINCIPLE

Recoding the wrong types of accounts

Example:

Dr Repairs 100

Cr Machinery 100

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IV. ERROR OF ORIGINAL ENTRY

Recoding the wrong amounts

Example:

● cash sales $3000 was recorded in the accounts as $300

Solution: we get the difference between the numbers and record them

Dr Cash 2700

Cr Sales 2700

V. ERROR OF COMPLETE REVERSAL

Recording the wrong sides

Example:

● cash sales $200 was debited to sales account and credited to the cashbook
Solution: Double the amount

Dr Cash 400

Cr Sales 400

VI. ERROR OF COMPENSATING

An error which cancels or illuminates another error

Example:

● sales overcast by $500 and purchases overcast by $500

Solution:

Dr Sales 500

Cr Purchases 500

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Exercises:
Past-Papers Extract

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Manufacturing

A Manufacturer is a producer of finished goods.

The manufacturing process requires the use of
machinery and equipment to convert the raw
materials into finished goods, and with the
introduction of new variables into the mix means
that new entries will be introduced into the
statements of the business.

The business is divided into two divisions; they are:

The Factory or Plant

Where the manufacturing process takes place by two types of labor

Operatives
Workers directly involved in production who are paid direct wages or direct labor

Supervisor
Forman instructing the workers who will paid indirect wages or indirect labor

The Administration [office]

Management
Where managers and sales staff make the important decisions of running the business
and selling its products. They are paid Salaries and sales commission

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Income Statement Trading Account

$ $

Net Sales (Revenues) X

- Cost of Sales

Opening Inventory of Finished Goods X

+ Cost of Production X
+ Purchases of Finished Goods X
- Closing Inventory of Finished Goods (X) (X)
Gross Profit XX

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Exercises:
Past-Papers Extract

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Partnership
A Partnership is a business owned by 2 - 20 partners.

Each partner introduces capital to finance the business

One or more of the partners will be responsible for management and running of the
business.

The partners should record an

AGREEMENT to show how net profit
or loss will be divided between the
partners the agreement is important
to avoid any conflicts or
disagreement between the partners

In case of absence of an agreement

then the net profit or loss will be
shared equally between the partners.

The Appropriation account is the final account which shows how the net profit or loss
will be divided between the partners

The partner's current account is to be used to show each partner share of total profit
less the partner's drawings and the final balance owed to or by each partner

Why do partners write up an agreement?

To avoid conflicts

Advantages of partnership:
● larger capital
● sharing loss and risks
● sharing tasks and responsibilities

Disadvantages of partnership:
● profit is shared
● lack of control over the firm
● decision making process takes longer time

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The process of reporting in a partnership consists of the following

Let’s assume that Mr. Fasolya and Mr. Besela are in a partnership

Step 1 Income Statement Step 3 Current Accounts

Step 2 Appropriation Account

Step 4 Balance Sheet

The balance sheet mostly remains the same as

the sole trader except the equity section

Financed by [Equity} Fasolya Besela Total

Capital Accounts xx xx xxxx

Current Accounts xx xx xxxx

xxx xxx xxxx

Capital Employed = Equity + Loans

ROCE = xx%

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Exercises:
Past-Papers Extract

in 2009 to start a business selling Furniture

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Non-Profit Organizations
Some organizations are non-profit organizations. They operate to:

1. Provide satisfactory services to the members and the society

2. Breakeven; making enough income to cover the expenses.

Nonprofit organizations include Clubs, societies, charities, unions and school clubs.

The person responsible for finance, book keeping and preparing the final accounts is
called the Treasurer

The club has many sources of finance such as:

 Subscriptions membership fees Donations Sales or takings from trading activities

such as bar, café, refreshments and shops
 Soles of tickets of social events such as matches, competitions, party, gala,
raffle...etc. Loan from banks or members
 Sale of old equipment
 Other income such as interest received from bank deposit account

The club will use the money

collected to pay expenses,
purchase of new equipment

Pay creditors of purchases pay

social events expenses all
receipts and payments are
done through a bank current
account.

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The receipts and payments account

This is the cash book [bank current account] of the club. It has two sides the Dr Side:
to record all receipts during the year even if it belongs to previous or coming years
The Cr side: to record any payments during the year

The receipts and payments account records any amount received such as normal income
or even loans borrowed the receipts and payments account records any amount paid
such as expenses and purchases of new equipment the receipts and payments account
ignores the Deprecation because it's not a payment or a cash flow item. It also ignores
the Accruals principle. This simply means we do not make any adjustments of
prepayments and accruals

Club Bank Account

Cr Dr
Receipts Payments
Beg balance b/d x Expenses x
Subscriptions x Bar Purchases x
Donations x Party Expenses x
Bar Sales x New Equipment x
Sales of tickets x
Loans x
Sale of Old Equipment x
xx xx
Balance b/d x

Rules
The receipts and payments account should start with the
balance at bank at the beginning of the year. This amount
should be nil in the first year where the club is formed.

The final balance of the receipts and payments account

represents the bank balance at the end of the year which
will be recorded in the balance sheet As current assets if
OR a current liability if CR

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Exercises:
Past-Papers Extract

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Limited Companies
Limited companies are large firms owned by two or more shareholders

Owners of the company pay money to finance the firm and receive shares of equity

The owners [shareholders] do not run the business, they elect a board of directors to
be responsible for management

The shares are two main types

Ordinary shares
Enables the shareholder to have voting rights, attend the meetings and receives part
of the profit each year called Dividend which varies from one year to another

Preference Shares
Enables the shareholder to receive a fixed dividend in the profitable years without
having voting rights

Long term loans

A company can borrow from the public by issuing Debentures

The debenture holder is not an owner but a loan creditor lending money to the company
and receives a fixed Interest each year even in the case of loss but has no right to be
involved in the day to day running of the business

Two types of Limited Companies

1. private limited companies: share are not traded at stock market

2. public limited companies: shares are traded at stock market

UNLIMITED LIABILITIES LIMITED LIABILITIES

In case of bankruptcy the owner Risks In case of bankruptcy the maximum is

his personal properties the amount invested in the business

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Two types of Shares

ORDINARY SHARES PREFERENCE SHARES

1) voting rights 1) No voting rights

2) variable dividend rate 2) fixed dividend rate
3) rights to attend meetings 3) prior claim over ordinary share

DEBENTURES:

1. long term liabilities

2. fixed interest rate
3. not members of the firm
4. prior claim over preference and ordinary shares

Authorized Share Capital:

Maximum amount of shares a company is allowed to sell at stock market

Issued Shares Capital:

Actual amount of shares a company sold at stock market

Called Up Capital:

Amount requested from shareholders by the company

Paid Up Capital:

Actual amount paid by shareholders to the company

General Reserves:

Amounts held by the business for future reinvestments

Retained Earnings:

Amounts held by the business for expansion

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The first step is the Limited Company Income Statement

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Exercises:
Past-Papers Extract

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