Accounting notes

- All financial transactions are recorded from the Business’s POV

- Sales returns is referred to as returns inwards and Purchase returns is
also known as returns outwards
- Rent is an expenditure of the business while rent receivable is income
- Books of prime entry is also known as books of original entry
Name Source Debit entry Credit entry
documents
Purchases Purchases Purchases Credit supplier
journal invoices account
Sales journal Copy sales Credit customer Sales account
invoices
Sales returns Credit notes Sales returns Credit customer
journal received
Purchase Copy credit Credit supplier Purchase
returns journal notes returns
General journal Purchases and Debit entries as Credit entries
sales invoices shown in the as shown in the
sent to journal journal
customers for
entries relating
to transactions
involving non-
current assets,
managers’
memos,
minutes of
meeting, etc.
Cash book Till rolls, Cash/Bank Drawer
receipts, Payee Cash/Bank
paying-in slips,
bank
statements,
cheque
counterfoils,
etc.

- A provision is an amount set aside out of profits for a known

expense, the amount of which is uncertain
- A reserve is any amount set aside out of profits that is not a
provision. Reserves are made at the discretion of the directors of a
limited company
- You may sometimes see a provision for doubtful debts described
as a provision for bad debts
Capital and revenue incomes and expenditures:
- Capital expenditure is money spent on the acquisition of non-
current assets or their improvement
- Revenue expenditure is money spent on the everyday running
costs of a business
- Capital income is derived from selling non-current assets or
from an injection of capital into the business by a provider of
funds (e.g. Bank) or by the owner(s)
- Revenue income is money received from the normal activities of
the business

Double-entry bookkeeping:

- Trade discounts are used to calculate the value of a sale and

are not recorded separately in ledger accounts
- Cash discounts taken are always recorded in ledger accounts at
the payment date
- Note carefully whether a cash discount is to be deducted from
statements; that checks whether one is being offered and
whether the time condition has been met
Books of prime entry:
- Never record cash discounts in sales or purchases journals
- Note whether the invoice or credit note is sent or received. This will
help you to recognize the correct book of prime entry for each
purchase, sale or returns transaction.
- Discounts are listed in the cash book because they are books of
prime entry. Discounts allowed and discounts received must still
have their own separate ledger accounts.
 Trial balance:
Benefits:
- To check that the totals of the debit balances equals the total of
the credit balances
- Help to uncover many types of error in the ledger accounts and
can make it easier to find and correct the errors
- Provides a summary of all the ledger accounts and their balances
in one document
- Used for preparing financial statements

Types of errors: (can happen even when total of debit and credit
balances match)

Type of error Explanation Example

Errors of omission A financial $100 of equipment
transaction omitted is bought for cash.
completely from the The transaction is
books results in there forgotten and not
being neither a debit entered is the
or credit entry for the equipment or the
transaction. This cash account.
could happen if a
transaction is not
entered in a book of
prime entry
Errors of A financial The payment for
commission transaction is posted stationery is
with the correct posted in error to
amount to the correct the advertising
side of the wrong account. Stationery
account, but the and advertising are
account is in the both classed as
same class. expenses.
Errors of principle A financial Payment for fuel
transaction is posted for a vehicle has
with the correct been debited to the
amount, to the correct motor vehicles
side of a wrong class account instead of
of account. the motor vehicles
running expenses
account. Motor
 vehicles expenses
are classed as
expenses while the
motor vehicles are
non-current assets
Errors of original A wrong amount is A purchase invoice
entry entered in a book of for $100 is entered
prime entry for a in the purchases
financial transaction journal as $10
Complete reversal An account that A payment made
of entries should have been to Sam is debited
debited has been to the bank
credited, and the account and
account that should credited to Sam’s
have been credited account
has been debited.
Compensating Two or more errors An invoice for
errors that cancel each $1200 in the sales
other out journal is posted to
(overcast/undercast) the customer’s
account as $1000.
At the same time,
the sales journal
total is under
added (too low) by
$200. The debit
balance on the
customer’s
account and the
credit balance on
sales account will
both be under
added by $200

Statement of Profit or loss

Advantages of being a sole trader:
- Being in full control of their own business
- Running a business that is linked to one of their hobbies or
interests
- Profit belongs only to them
 Disadvantages:
- Limit on how much finance can be introduced to the new
business
- Having to work very long hours
- Expected to have a wide range of skills and knowledge to
run every aspect of the business
- Not having another owner to discuss ideas with when they
are considering several possible alternatives
- Unlimited liability

Cost of sales: opening inventory + purchases + carriage

inwards – purchases returns – closing inventory

Gross profit: Cost of sales- net sales (revenue- sales returns)

- Combined income statement composes of the trading

account and the income statement.
- Till the gross profit: trading account
- After gross profit- income statement
- To side is for expenses and by side is for income
- Don’t include assets, liabilities, capital or drawings unless
mentioned in the adjustments/additional information because
it’s part of statement of financial position
- Income statement has the expenses
- Trading account has purchases, inventory, sales, purchase
returns, drawings, etc.
Statements of financial position for sole traders:
- Statement of profit or loss and statement of financial position
combined is known as financial statements
- SOFP contains: fixed assets, current assets, current and
non-current liabilities and capital (including drawings)
- Accounting equation: Assets- Liabilities = Capital or, assets=
liabilities + capital, and liabilities= assets- capital
- In current assets the order: inventory, trade receivable, bank
 Bank reconciliation statements:
- Shown bank overdrafts as current liabilities in SOFP, never
as current assets
- Always check if the balances given in the cash book or bank
statement are overdrafts
- If cash book and bank statement opening balances do not
match, check other balances in debit and credit. If it adds up
to the balance then it is on the same side. If on the opposite
sides, they are supposed to be subtracted.
- Receipt- debit in cash book
- Payment- credit in cash book
- Receipt- credit in bank account
- Payment- debit in bank account
If the balances in both do not match, the reasons:
- Timing differences
- Transactions unrecorded in the cash book (omitted items)
- Errors in the cash book/bank statement
Timing differences- transactions in the cash book and the bank
statement are recorded on different dates, closing balance may not be
the same.
Reasons: cheque issued but not presented (Payments unpresented)
- Cheque paid and is recorded in the cash book
- Payee does not present deposit in the bank
- Hence payment is not reflected is payer’s bank statement
Reasons: Cheque deposited but not credit (Receipts unpresented)
- Recorded in cash book immediately
- Cheque clearing process- takes about 2 to 3 days so there is a
delay in the transferring of funds
- Delay in credit (deposit) of funds in the bank account
Accounting concepts:
 
 Accruals and Prepayments (the matching concept)
P- Opening prepayment
O- Opening outstanding
O- Closing outstanding
P- Closing prepayment
Note: This mnemonic is for expenses

O- Opening outstanding
P- Opening prepayment
P- Closing prepayment
O- Closing outstanding
Note: This mnemonic is for income

- Accrued expenses and prepaid income are liabilities

- Accrued income and prepaid expenses are assets
- Accrued is added and Prepaid is subtracted
- Liabilities are under current liabilities: other payables
- Assets are under current assets: other receivables