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OLevel

Accounting - 7707

Sources and the Recording Data

Paper-2

Sources and the Recording Data

Double Entry – Bookkeeping

It is extremely complicated to prepare a balance sheet after every single transaction and so a double-entry system of bookkeeping is used to record day to day transactions. It is termed as double entry as giving and receiving, both ends of the transaction, are being recorded in the ledger. 

Each type of asset, expense, liability, and income for each individual creditor and debtor are maintained in a distinct ledger account. Transaction to each item and person is recorded in the ledger account. A book that is bound and every paper contains a separate account is traditionally called a ledger.

The layout of the ledger account is as follows:

Debit................................................................................................................................................................................................................................................................................................................................................................Credit

DateDetails$DateDetails$
XX/XX/XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
The left end is the debit portion and the right end of the account is the credit. The terms credit and debit are usually abbreviated to Cr and Dr respectively. On both ends, the columns are used to document the date, details, and amount of the transaction. To record two aspects of the transaction, they are entered twice, once on the debit end and once on the credit end. The account that is gaining value and is getting money is debited with the amount and the account which is losing value is credited. 

HOW TO RECORD TRANSACTIONS IN THE LEDGER:


(1) The proprietor started a venture by depositing $100,000 in its bank account.


The owner puts in $100,000 in his Business Bank account and hence is debited. The Capital account is credited when it increases in value, and it is considered as an investment and thus the debit entry is followed by an equal amount of credit entry.

(2) Bought furniture worth $7000 paying by cheque. 


A furniture account is debited because it is an asset account & is gaining value, while the bank account is losing value and will be credited, thus the debit entry is followed by an equal amount of credit entry.


(3) Brought motor vehicle on credit from General Motors Ltd. worth $6000


The motor vehicle is received and so the account is debited but since the payment hasn’t been made the account for GM motors has been credited for the same amount. Debit entry is followed by an equal amount of credit entry.


(4) Transfer $2000 from the business bank account to the cash till


The Bank account is credited as cash is taken out and the Cash account is debited as the till is gaining cash. Debit entry is followed by an equal amount of credit entry.

(5) Paid rent by cash $800


The cash account is credited as the business is losing cash and that amount is going for rent and so the rent account is debited for the same amount. Debit entry is followed by an equal amount of credit entry.


(6) Paid wages worth $1500 by cheque


The bank account is credited as cash is taken out of the bank and used to pay the wages and so the wages account is debited as it is gaining the subsequent cash.


(7) Received commission of $200 in cash


The cash account is debited as it is receiving value with commission received account debited, for the value comes from that account.


(8) Received rent worth $500 by cheque


The bank account is debited as cash is received in form of rent money and the rent received account is credited for the equal value.


(9) Took a loan from Alex worth $5000 in cash


The cash account is debited as cash is received and the loan account in the name for Alex is credited as value is coming from this account.


After posting and recording transactions in the ledger there is a need to balance off the ledger. In order to so, the ledger will act as a weighing machine. The heavier side will have a box of the total mentioned, the same amount, and the box will also be written on the other side and the shorter side will have the balancing amount known as Balance carried down. Balance is always carried down on the shorter side, the last day of the accounting period. The same balance is brought down on the heavier side on the first day of the next period on the heavier side. Balance b/d will be on that side which will reflect the nature of the accounts i.e. Assets will always have been brought down balances on the debit side, liabilities will always have it on the credit end, expenses will it on the debit end and capital and revenues will have it on the credit balance. Once all ledgers are balanced off the next task is to prepare a TRIAL BALANCE. Trial balance is a list of balances extracted from the ledgers to check the arithmetical accuracy of whether ledgers are properly made or not. The sum of all debts in the trial balance must always be equal to the sum of all credits in the trial balance.


The following transactions are available in the books of the trader.


1st Jan: Proprietor started his venture by putting $100,000 in the business bank account and $20,000 as cash.


3rd Jan: Bought motor vehicle worth $80000 paying by cheque.


5th Jan: Paid rent $12000 by cheque. 


8th Jan: Bought furniture worth $30000 on credit from Interwood Ltd. 


10th Jan: Received commission worth $3000 by cash. 


13th Jan: Took a loan from Abdul worth $35000 by cheque.


15th Jan: Repaid $30000 to Interwood Ltd. by cheque.


18th Jan: Bought machinery worth $50000 on credit from Machine Suppliers Ltd.


20th Jan: Paid utility bills worth $8000 by cash.


25th Jan: Received rent of $6000 by cash.


28th Jan: Paid wages worth $15000 by cash.














ACCOUNTING TERMINOLOGIES


1) Sales: are goods sold that were previously bought with the intention of resale. Anything other than goods when sold will not be considered as sales. (REVENUE)

2) Purchases: are goods bought with the intention of resale, if something else is bought other than goods they will not be purchases. (EXPENSES)

3) Sales Return: when the customers of business return goods to the business that were previously sold on credit are called Sales Returns. (CONTRA REVENUE)

4) Purchase Returns: when the business returns goods to its supplier that were previously bought on credit is referred to as Purchase Returns. (CONTRA EXPENSE)

5) Goods: all those things that a business trades in. (ASSETS)

6) Stocks of Goods: are those goods that were bought with the intention of resale yet unsold. They are also called inventory. (ASSETS)

7) Drawings: whenever the owner withdraws anything from the business entity for his personal use, it is called drawings. (CONTRA CAPITAL)

8) Carriage inwards: These are the transportation charges incurred by the business at the time of buying the goods. (EXPENSE)

9) Carriage Outwards: These are the transportation charges incurred when the business provides delivery of goods to its customers. (EXPENSE)

10) Freight Charges: are the transportation charges incurred when the goods are imported. (EXPENSE)

Purchases


1. Goods purchased for cheque or cash

When a business purchases goods, the purchase account is debited as the business is gaining goods. The double entry for credit would either be in cash or bank account depending on the term of payment made, which could be in cash or cheque.

2. Goods purchased on credit

Something that is also common in business transactions is purchasing on credit. The business makes the purchase and receives the goods but makes the payment on a later date. The purchases account would be debited normally, and the amount would be credited to the account of the supplier and when the payment is made later, we will credit the cash or bank account, and the supplier account would be debited.

Sales


1. Goods sold for cash or cheque

When goods are sold, they leave the business and so the sale account would be credited. With the payment method, the appropriate cash or bank account would be debited. 


2. Goods sold on credit

Due to common practice, the business may sell goods on credit and in such cases, the sales account is credited as you would normally do but the debit entries would be made in the customer’s account and would be credited back when the payment is received later with a debit entry made to appropriate cash or bank account.

Returns


When a business makes a purchase and isn’t satisfies with it due to any reason such as the product being faulty or damaged. It may return it back to the supplier. These goods are called purchase returns and the purchase returns/ return outward account is credited to show purchases leaving the business with debit entries in the suppliers' account to show him receiving the purchase back. 
Similarly, the goods that have been sold are also returned back to the business and so these goods are recorded in a sales return or return inwards account. The account is debited showing the goods coming into the business with an entry on credit end in the customer’s account indicating the goods coming from that person.

DOUBLE ENTRY RECORDS FOR DRAWINGS:

When an owner withdraws anything out of the business account for his own use it is called drawings. This may be money, non-current assets, or goods held in the inventory by the business. A drawing account records all transactions of such nature. Drawings are debited into this account and the same amount would be credited from the corresponding account. (cash, non-current assets, etc)
So, if cash is drawn, the cash or bank account would be credited. When goods are withdrawn, the purchase account would be credited. Towards the end of the year, the drawings account is closed by transferring the total to the capital account, thus reducing the amount owed by the business to the owner. 

DOUBLE ENTRY RECORDS FOR CARRIAGE INWARDS AND CARRIAGE OUTWARDS:

Carriage alludes to the cost of carrying or transporting/delivering goods. Carriage inwards is the delivery cost for the purchases that the business has made to be delivered to the business. Carriage Outwards is the expense incurred when a business has to deliver goods to the customer. Carriage inwards and Carriage Outwards accounts are debited with costs incurred and relevant cash or bank accounts are credited. 

DOUBLE ENTRY RECORDS FOR SALES, PURCHASES, AND RETURNS:

To record goods purchased with the purpose of resale and the goods sold by the business, accounts need to be made to record them in separate accounts due to differences in cost and selling price. So, purchase and sales accounts are used. To record the goods left at the end of the year, an inventory account is made. 

BOOKS OF PRIME ENTRIES AND LEDGERS:

Before the transactions are recorded in the ledger, we need to post them in relevant books of original entries. There are six books of original entries which are as follows:

1) Cash Books: all cash and bank transactions are documented in this book. Cashbook is a ledger and at the same time a book of original entry as well. Transactions once recorded in the cash book indicates that one part of double-entry is complete. 

2) Sales Day Book/ Sales Journal: All credit sales pertaining to goods are recorded in this book. 

3) Purchases Daybook/ Purchase Journal: All purchases on the credit of goods are documented in this book.

4) Sales Returns Day Book/ Return inwards Journal: when customers send back to the business goods that were precisely sold on credit are passed through this book.

5) Purchases Return Day Book/ Return Outward Journal: When goods are returned by the business to its supplier that the business had previously bought on credit are passed through this book.

6) The General Journal/ The Journal: the transactions that were not documented in this previous book are documented in the previous books are recorded in this journal. All those transactions that neither involve goods nor involves cash are passed through this book. The purchase or sale of non-current assets on credit will be recorded in this book. Any correction of error will also be made through this book. Opening entries of an accounting period are also passed through this book.

Sometimes a seventh book of original entry is also used which is known as the PETTY CASH BOOK. 
Large organizations that have lots of cash transactions make use of petty cash book. All those transactions that involve cash but are of petty amount (small amount) are passed through this book. So that the burden of the main cashier is reduced, and errors and omissions are avoided. Petty Cash Book is based on Imprest System, which means that the first time a certain amount is transferred to the petty cash book from the main cash book. Then all the transactions which are lower than a certain amount are passed through the petty cash book. The total amount spent from the petty cash book is then compensated from the main cash book at the end of each month. This process of compensation is called a reimbursement. compensation is done so that opening and closing balances are the same it is called maintaining the petty cash float.

Once the transactions are recorded in the books of original entries they are posted to the ledger. Ledger is divided into four categories.

CASH BOOK: is not only the book of original entry it is also a ledger. Transactions once posted in the cash book indicates one part of double-entry is complete and hence, we are not supposed to make cash and bank accounts again because they are already incorporated in the cash book.

SALES LEDGER: contains accounts of all the trade receivables.

PURCHASE LEDGER: accounts of all trade payables

GENERAL LEDGER: contains accounts of all assets, liabilities, capital, and expenses, and revenues other than cash, bank, receivables, and trade payables.  

Source Documents are the accounting documents that all businesses keep in order to have proof that transactions between two parties take place from the source documents transactions are made and then they are recorded for the whole accounting cycle to take place.


1. Request for Quotation:

When the buyer is searching for the suppliers who would provide them with the designed products, they send a request for a quotation asking them to provide details of the available products.

2. Quotation:

It is the document sent to the buyer by the seller providing details of all the products available, their prices, color quality, model, and so on.

3. Purchase order:

It is sent to the seller by the buyer whose quotation has been accepted indicating the products that are required and the quantity needed.

4. Sales Invoice:

It is sent to the buyer by the seller along with the goods supplied indicating the products that are to be sent, their quantity, price, and discounts. Payment policies are also mentioned.

5. Goods Received Note:

It is sent to the seller by the buyer notifying the goods that have been received.

6. Statement of Account:

It is a summary of transactions between seller and buyer which is always sent by the seller to the buyer indicating the outstanding balance that the buyer needs to pay and the summary of the transactions between the buyer and the seller.

7. Debit Note:

It is sent by the buyer to the seller if he wishes to return goods to the supplier and informing him that the buyer has debited the account of the seller.

8. Credit Note:

It is sent by the seller to the buyer once he has accepted the goods returned to him acknowledging his mistake and informing the buyer that his account has been credited.

9. Statement of Account:

as stated in (6)

10. Cheque/ Cheque Counter Foil:

A cheque is a document sent by the buyer to the seller in order to settle his outstanding balance and a cheque counterfoil is kept as proof by the buyer that the payment has been made.

11. Receipt:

It is a document sent by the seller to the buyer acknowledging that the payment has been made. 

12. Statement of Account:

as stated in (6)

DISCOUNTS

1) Trade Discount:


a) Bulk Purchases 
1 unit * 50 Rs.
10,000 units * 50 Rs = Rs. 500,000 
Payment=450,000
Trade Discount= 50,000

b) Good Bargain position

2) Cash Payment

a) Prompt Payment 

i) Discount Allowed (Expense)
ii) Discount Received (Revenue/Income)

Trade discount is not recorded anywhere in the books of Accounts it is only present in the invoice.
Cash Discount is recorded in the cash book and its ledgers are present in the General Ledgers.

Invoice Price – Trade Discount = Purchase Price
Purchase Price – Cash Discount = Amount Paid

When the business allows discounts to its customers it is called Discount Allowed
When the business receives discounts from its suppliers it is called Discount Received.

Janice uses a three-column cash book. Her ledger is divided into three parts- sales ledger, purchases ledger, and nominal ledger. You need to balance the cash book on the last day of the month. (31 January), transfer discount column to relevant accounts in the nominal ledger. Balance accounts in sales and purchases ledger appropriately. 

Jan 1 Janice had a $60 cash balance and a $1060 bank overdraft.

Jan 4 Bought goods worth $5200 on credit from Lord Traders

Jan 8 Returned goods to Lord Traders worth $200

Jan 12 Sold goods worth $770 on credit to AJ

Jan 14 Cash sales worth $680

Jan 17 Paid cash $650 to the bank account of business

Jan 21 Gets a cheque from AJ settling their account

Jan 24 Sold $1200 worth of goods to NE Stores

Jan 26 Bank returns the AJ cheque as it was dishonored

Jan 28 Paid Lord Traders through cheque the amount due with a discount of 2.5%

Jan 31 NE Stores paid due amount by cheque after deducting 3% discount

Janice - Sales Ledger

Nominal Ledger






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