Arrow International School
Address: Unit 01-02, Maisson by the Park,
Jalan PJU 1a/3, Ara Damansara, 47100
Petaling Jaya, Selangor
Year 8 accounting work book (3rd Edition 2022)
This work book will be used over a period of one year.
This Workbook is for year 8 accounting students of Arrow
international school.
The whole book will be divided into 8 Chapters. Chapters 1 to 8
and various sub sections
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Chapters
Contents
Number of
Lessons
Pages
4 lessons
3 to 13
1
Introduction to accounting
2
Accounting equation
3
Source documents
4
Book Keeping
5
Books of prime entry
6
Cash and petty cash book
7
Trial balance and Income
statement – part A
5 lesson
8
Statement of financial
position – part A
6 lesson
Chapter 1:
5 lessons
5 lessons
4 lessons
5 lessons
6 lesson
14 to 26
27 to 36
37 to 45
46 to 57
58 to 67
68 to 78
79 to 85
Introduction to accounting (4 lessons)
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Contents
Section a)
Definition of accounting, and history
Section b)
Purpose and benefits’ of accounting
Section c)
Cash and credit transactions
Section a) Definition of accounting
Accounting is the preparation of financial statements to
calculate the profit or loss of a business. The duty is done by an
Accountant.
In order for the accountant to prepare and calculate profit or loss
of a business, all business transactions must be recorded into the
books of accounts. This recording of business transactions into
books of accounts is called book keeping. This book keeping
duty is done by the Book Keeper
The owner of a business is called an Entrepreneur, who will
invest money into the company to start the business. This money
invested by the owner is called Capital. It is the duty of the
owner to employ a book keeper to records all his transactions
into the books of accounts.
When an entrepreneur starts a new business, he will be required
to put an amount of money to operate the business. This can be
in the form of cash or items such as cars, building etc. By putting
his hard earned money into his business, he will be very
interested to know whether he is making money or losing money.
He will know that when he keeps proper records of his business
transactions every year, and at the end of each year’s operation,
he can calculate how much money he makes or loses. Money that
he makes is call profit and money that he loses is called Loss.
Some of the basic accounting terms that you will learn in
accounting, include debit and credit, revenues and expenses,
assets and liabilities, trade receivables and trade payables,
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income statement, and statement of financial position. You
will become familiar with these terms in later chapters when we
show you how to record transactions.
When an entrepreneur starts a business, his aim is to make
money or what you call his profits. To make profit he has to
purchase goods at a certain cost price and sell them at a higher
price. The total value of goods he sold is term as his sales or
revenue
Example:
Sold Chairs
100 units
RM 20 each
RM 2,000
Sold Tables
30 units
RM 100 each
RM 3,000
Total revenue/sales
RM 5,000
While running his business he will have to pay for rental and
salary. This money he paid for rental and salary to operate his
business is term as his operating expenses.
Example: Expenses paid to operate the business are as follows
1
Salary paid to employees to help you run the business
2
Electricity paid to keep office lighted
3
Rental paid to landlord to operate the business
To operate his business he may be required to purchase items
like computers and building. These items which he purchase to
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help him in his business and used on a Short and long term
basis are called his Assets.
Definition of assets:
the business
An assets are items owned and owed to
Examples of assets:
1. Machinery
2. Building
3. Air conditioners
4. Trade receivables
5. Cash
6. Inventories
When you sell your goods, you can sell them in Cash Term, or in
Credit Term.
Cash term means you will receive instant cash when you sell
your goods.
Credit term means you do not collect instant cash but you allow
the buyer to pay you at a later date.
A person, who buys from you in credit term, will owe you money
and they are called Trade receivables.
Sometimes an entrepreneur may not have enough money to
operate his business and he borrows some money from the bank.
The money which the company borrows is call a bank loan and is
term as liabilities.
Definition of liability:
third party.
Money or debts owed by the company to
Money which the business owes to the suppliers due to purchases
on credit term is also term as liabilities. Suppliers whom we owe
are term as trade payables.
Examples of liabilities
1. Bank loan
2. Overdraft
3. Trade Payables
4. Debentures
At the end of each year, the owner will prepare his income
statements to calculate his profit or loss, so that he will be able
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to make decision as to whether to expand his business or close
down his business. Income statement consists of trading account
and profit and loss account which you will learn in later chapters.
Income statement is where the owner will calculate his profits or
loss for the year.
Owners and employees are called INTERNAL PARTIES. Besides
the owner of the business, there are outside parties who are also
interested in the financial results of his business. The following
are some of the outsiders who are interested in the financial
statements.
These outside parties are called EXTERNAL PARTIES
a) Bankers
b) Suppliers
c) Governments
a)
Bankers
The Bankers are interested because they may want to extend a
loan to the entrepreneur to expand his business. They will only
give out loan to businesses that makes profit.
b) Suppliers (Trade Payables)
Suppliers are people who supply the business with goods that is
required for resale to make profit. They will only extend credit
to the business if the business makes profit and have sufficient
cash to pay them.
c) Government
The government is interested in the business because if the
business makes profit the government will tax them.
Brief history of accounting
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Accounting started thousands of years ago during early
civilisation like the Egyptians, but it was only in the nineteen
centuries that an Italian by the name of Luca Pacioli, that started
recording transactions on a double book keeping method, using
the Duality method
The modern profession of chartered accountants originated in
Scotland and later merged with the professional bodies in England
to form the institute of chartered accountant in England and
Wales in 1880.
Section b) Purpose and benefits of accounting
To manage a business we have to start managing the money
earned and the expenses we paid.
At the end of a year’s operation, we can match the Revenue
earned with the expenses incurred. Any excess of revenue over
expenses is the money or profit we make.
The purpose of accounting is to provide a record or statement to
show how a business is performing. It also serves the purpose of
fulfilling statutory requirements, by submitting the financial
statements prepared to the government’s departments.
These financial statements prepared have their benefit, because
they may be used by the owner to obtain bank loan, or to obtain
credit facilities from suppliers. It is also useful for the
calculation of tax payable to the government.
In business there is a huge volume of transactions which human
mind cannot remember, and bookkeeping will help to record these
transactions as future proof of transactions.
With such a large volume of transactions, it will require the
recording of these transactions into books of accounts. There are
a total of 10 books of accounts.
Namely:
Sales Journal
Purchase journal
Sales return Journal
Purchase return Journal
General Journal
Cash Book
Petty Cash Book
Sales Ledger
Purchase Ledger
General Ledger
Section c) Cash and credit transactions
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Cash transactions are defined as any business transaction that
involve selling and buying of goods which require the immediate
receipt or payment of cash.
Credit transactions are defined as any business transactions
that do not require the immediate receipt or payment of cash. In
other words we buy now but pay the money at a later date or we
sell now and collect the money at a later date.
Examples of cash and credit transactions
CASH TRANSACTION
CREDIT TRANSACTION
Requires immediate payment of
cash when buying of goods
Payment is made at a later date
from date of purchase
A buyer chooses goods to
purchase and pay by cash. The
seller will issue a receipt.
A buyer chooses goods to
purchase but do not pay any
cash, but received and invoice
stating the amount owed.
A buyer chooses goods to
purchase and pay by credit
card is also cash transactions.
The seller will issue an invoice
to the buyer to indicate the
amount the buyer owed.
A buyer chooses goods to
purchase and pay by direct
credit from bank account
The seller will treat the buyer as
a person who owes him money
and they are called trade
receivables.
There are no trade receivables
They are called trade receivables
CLASS AND HOMEWORK
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1.
In your own words write down the definition of accounting.
2.
In your own words write down the definition of book
keeping
3.
What is the main Purpose of accounting?
4.
Name the 2 internal interested parties and describe what
they want to do with that information
5.
Name the 3 external interested parties and describe what
they want to do with that information
6.
Explain the word Entrepreneur
7.
Define Capital
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8.
Explain what Profit is to an entrepreneur.
9.
Explain what a Loss is to an entrepreneur.
10.
Explain what expenses are for.
11.
Give two examples of expenses.
12.
Explain what cash transactions are.
13.
Explain what credit transactions are.
14.
Explain what is an interested party?
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15.
What do you understand about Sales?
16.
What is the other term for Sales?
17.
How is profit calculated?
18. What happen to a business, if expenses is higher than
sales?
19.
Is payment of goods by credit card a cash transaction or a
credit transaction?
20.
What is a bank loan?
21.
Name 2 examples of liabilities.
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22. What can the company do if it does not have enough
money?
23.
Customers who owe money to the company are called?
24. When money is owed to a supplier, the suppliers are
term as?
25. Capital is usually in the form of cash invested into the
company. Name two other forms of capital injected into
the company?
26. Explain if cash sales transaction will create a trade
receivable?
27.
Explain if a credit purchase transaction will create a trade
payable?
28.
Name two purpose of accounting.
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29.
Name 2 benefits of book keeping
30.
Define assets
31.
Define liabilities
RESEARCH
Q1.
Do a research and name 3 businesses that deal with cash
transaction.
Q2.
Do a research and name 3 businesses that deals in credit
transactions
Q3.
Do a research and name 2 advantages and 2 disadvantages
of dealing in cash terms.
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Chapter 2 Accounting equation (5 lessons)
Contents
Section a)
Accounting equation
Section b)
Ledger account format
Section c)
Debit and credit entries
Section a) Accounting equation
Accounting principles or rule treat owners’ assets and liabilities
separate from the business assets and liabilities. This principle is
called SEPARATE ENTITY PRINCIPLE
If an entrepreneur wants to start a business he will invest a
certain amount of his own money into the business. To do that he
will first open banking account for the business which will be
different from his own personal banking account.
Example: He may hold a Maybank account and issue a Maybank
cheque for RM. 30,000 to be deposited into a Public bank account
which belongs to the business.
The amount of RM. 30,000 which the owner puts into the business
ultimately belongs to the business, but the business owes RM.
30,000 to the owner and is a liability to the business. This
liability to the owner is what we call CAPITAL
Therefore Capital is the amount of money invested by the owner
to start a business
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When the owner starts a business he will have to register a name
for the business with the relevant government bodies. Let’s call
this business ABC TRADING COMPANY
When ABC trading company is first formed, it actually does not
own any assets or owed any liabilities. In other words it has zero
assets and zero liabilities.
When the owner deposit the RM. 30,000 into the business bank
account, the business now owns the asset of cash in the bank for
RM. 30,000 as well as owed a liability of RM. 30,000 to the
owner.
Therefore when we list out the business asset and liability, it will
appear as follows
ASSET
=
CAPITAL
The ASSET is the RM.30, 000 inside the Public bank account
which is the cash in bank, and will be the business asset.
The CAPITAL is the money of RM. 30,000 which the business
owes the owner.
Let’s say the business needed another RM. 50,000 to purchase
goods for sale in order to earn profit, but the business does not
have the RM. 50,000 to pay for the goods. The business can
either borrow the RM. 50,000 from a bank to pay for the goods or
he can negotiates with the supplier to pay them after 90 days.
Let’s also say that he decided to negotiate with the supplier to
pay him later. In other words the supplier is selling to “ABC
trading Company” on a credit term of 90 days. ABC does not
have to pay for the goods immediately but can wait till 90 days
before ABC pays the suppliers.
The supplier which the business owes is term as a trade
payable.
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Let’s look at the accounting equation after these 2 transactions.
The equation will most probably look like this.
ASSET = LIABILITY + CAPITAL
(30,000cash+50,000inventories)= (50,000trade payable+30,000 capital)
The ASSET consist of the RM. 30,000 cash in bank and the RM.
50,000 worth of goods which we call inventories, totalling RM.
80,000
The LIABILITY is the RM. 50,000 the business owes to the
supplier and the RM. 30,000 the business owes to the owner,
totalling RM. 80,000.
From the above you will notice that the equation will always
balance each other, with the left total amount equal to the right
total amount.
The above equation is called the ACCOUNTING EQUATION.
Therefore, when you are ask to write the accounting equation,
your answer would be
ASSET = CAPITAL + LIABILITY
Section b) Format of ledger accounts
Name
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All accounts are shown as a
Capital letter
T
Debit
The name of the account is at the top of the letter
Credit
T
The left side is the debit side or the receiving side
The right side is the credit side or the giving side.
Example of a Cash Account
All cash received is entered in the left hand side or debit side
All cash payment is entered in the right hand side or credit side.
When we make a cash sales and received $20,000 in cash, we will
debit the cash account
When we pay electricity bill for $3,000 we will credit the cash
accounts
Section c) Debits and credit entry
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We all know that when we run a business, the number of business
transactions is huge, and can be as many as 80,000 transactions
per month. (Example: any Supermarket)
If there is only 1 transaction in a business in a month, we do not
need book keeping and accounting. Our brain can memorise the
single transaction. When the numbers are huge we need to record
those transactions in the books of accounts.
We can record these transactions in two methods.
a) Single entry
b) Duality entry
We prefer the second method because if we use the single entry
method and we make a mistake, it will be difficult to check the
error as there is no second entry to reconcile with the first entry.
Therefore in accounting, we will use the duality entry method; so
that when one entry is wrong we can use the second entry to
check for errors.
Duality is another principle of account and it states that
ALL DUALITY ENTRY WILL HAVE A DEBIT ENTRY AND AN
EQUAL CREDIT ENTRY OF THE SAME AMOUNT
How do we record a transaction with Duality entries?
Example 1:
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Let’s say we owe “ALI” $500 and we pay him $500 by cash
The entry would be,
Credit the “CASH” ACCOUNT
(because cash account pays)
Debit “ALI” ACCOUNT
(because ALI account receives)
Example 2:
Let’s say we purchase a computer by cash for $4,000
Credit the “CASH” Account
(because cash account pay)
Debit the “COMPUTER” Account
(because COMPUTER account
receives)
In other words we credit the account that pays or gives out
money, and we debit the account that receives the money or
receives the items.
Sample of transactions entry into ledger accounts, whereby there
is one credit entry and one debit entry, is called a duality entry
Example 1:
we pay Ali cash $500
Debit
CASH
Credit
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ALI
$500
ALI
Debit
CASH
Credit
$500
Example 2: we buy a computer $4,000 in cash
CASH
Debit
Credit
Computer
COMPUTER
Debit
CASH
$4,000
Credit
$4,000
All ledger accounts has 3 columns on the credit and debit side
with the following details
NAME OF ACCOUNT
Date
Details
Debit
Amount
Date
Details
Credit
Amount
CLASS AND HOMEWORK
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1.
Define separate entity principle
2.
Define Capital
3.
Write the Accounting equation
4.
Will the accounting equation have equal total on both sides?
5.
Name 2 examples of assets
6.
Name an example of liability
7.
When the business ABC trading purchase the goods worth
RM. 50,000 from the business bank account, does the
goods belongs to the owner or to the business?
8.
The cash in business Public bank RM. 30,000, belongs to the
business or to the owner?
9. The amount which the business owes the owner is called?
10.
The supplier whom the business owes is call?
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11. The following are new information extracted from the books
of a business, AYZ Company
Total assets = $65,450
Total Liabilities = $ 34,450
Calculated the Capital of the company
12. If the Total assets are $65,450 and the value of inventories
is $30,000, how much was inside the bank account?
13. The cash in the owners’ private bank account is different
from the cash in the business bank account. Which principle
does this statement follows?
14. Before an entrepreneur starts a business, there are no
assets, no liability and no capital in the business. Is this
statement correct?
15.
When the owner starts a business and put in $30,000 cash to
open a bank account for the business, the accounting
equation appears like this
Cash in bank $30,000 = Capital $30,000
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Is the equation correct? Yes or no?
16. After putting $30,000 in cash to the business bank account
and the business purchase a car worth $20,000 in cash from
the bank account, the accounting equation after the
transaction is as follows.
Cash $10,000 + car $20,000 = Capital $30,000
Total assets $30,000 = Capital $ 30,000
Is the equation correct? Yes or no?
17. Subsequently to question 16, the business purchase $15,000
worth of goods on credit term from a supplier, and after the
transaction, the accounting equation is as follows.
Cash $10,000 +Car $20,000 +Goods $15,000 =
Capital $30,000 + liability $15,000.
Or Total assets $45,000=Liability $15,000+Capital $30,000
Is the equation still correct?
18.
Define the principle of DUALITY
19 .
Define the principle of SEPARATE BUSINESS ENTITY
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Repeated question no need do
20. When an account pays or gives money, do we credit or debit
the account?
21. When an account receives money or items do we credit or
debit the account?
22. When we pay ALI by CASH for $500 which account do we
credit and which account do we debit?
23. When we purchase MACHINERY for $5,000 in CASH
which account do we debit and which account do we credit?
24. When we make a SALE on credit term to a buyer MR.BEN for
$9,000 which account do we credit and which account do we
debit?
25. Payments were made by ABC Company, for the following
transactions.
1. Computer
2. Water bill
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3. Salary
4. Motor vehicle
5. Rental
6. Furniture
Identify which of them are assets and which of them are
expenses.
Assets
Expenses
Computer
Water bill
Salary
Motor Vehicle
Rental
Furniture
26. The following transactions were made by ABC trading
company. Fill in the blank boxes with the correct answers.
The first example answer is given
Transactions
Account
Credited
Account
Debited
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Pay salary 300 by cash
CASH - 300
SALARY -300
Pay electricity 500 by cash
Pay travelling 800 by cash
Buy computer 3,000 by cash
Buy motor-vehicle 20,000 by cash
Purchase equipments 1,200 by cash
Purchase goods 6,000 by cash
Received cash 700 from Benny
Cash sale for 13,000
Pay repairs 200 in cash
Pay rental 5,000 in cash
Pay supplier ALI in cash 9,000
Receive cash from Charles 4,000
Received cash from Francis 300
Research
Do a research and name 2 types of businesses requires a capital
of less than $30,000
Chapter 3:
Source Documents
(5 lessons)
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Content
Section a)
Definition and purpose of source documents
Section b)
Types of source documents
Section c)
Format and details of source documents
Section a) Definition and purpose of source documents
Source documents are sometimes referred to as original
BUSINESS DOCUMENTS. These documents are used to record all
business transactions that take place in a business environment.
Business transactions occur every day and is too numerous to be
remembered by humans if they are not properly documented.
Therefore documents that are recorded with details of business
transactions are called SOURCE DOCUMENTS
These documents are prepared and will be transferred to the 10
books of accounts which you will learn in later chapters.
The purpose of preparing these source documents are PROOF OF
TRANSACTIONS
There are many types of source documents and some examples
are listed below by their names and their functions
Transactions
We sell goods on
credit
Ledger account entered
Credit sales account
Source documents
used
Sales Invoice issued
Debit trade receivables
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We buy goods on
credit
Debit purchase account
We pay money in
Cash to trade payable
Credit Cash account
We received money in
cash from trade
receivable
Debit Cash account
Customers return
good
Debit return inwards
Return goods to
supplier
Credit return outwards
Debit notes issued
Debit trade payables
Credit note received
Payment of small
expenses
Credit petty cash
Petty cash vouchers
Credit trade payables
Purchase Invoice
received
Cash Payment
vouchers issued
Debit trade payable
Receipts issued
Credit trade receivables
Credit notes issued
Credit trade receivables
Debit expenses account
Section b) and c) Types and format of source documents-
1. Sales Invoice issued and Purchase invoice received
Seller Co.’s name
Invoice number
Date
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Company Address
Telephone number
001
23 Jan
Bill to
Customers Name
Customer Address
Telephone number
Items description
Product A
Product B
Quantity
sold
100
400
Unit price $
3.00
6.00
Gross amount
Less Trade discount
10%
Net amount
Total Amount $
300.00
2,400.00
2,700.00
270.00
2,430.00
Credit period given 60 days
Goods return after 7 days will not be accepted
Acknowledge receipt
XXXXXXXXXXXX
Buyer signature
Authorized signature
XXXXXXXXXX
Seller signature
Ledger entry for the above source document
Debit trade receivables $2,430 and
Credit Sales $2,430
2.
Cash sales does not involve a preparation of invoices
Usually a receipt is given for cash sales
Company Name
Company Address
Telephone number
Receipt
No.
RN 001
Date
23-Jan
Sold in
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CASH- NO NAME
Items description
Quantity sold
Unit price $
Total Amount $
100
400
3.00
6.00
300.00
2,400.00
Total amount
2,700.00
Product A
Product
B
Received goods in good order
XXXXXXXXXXXX
Buyer signature
Authorized signature
XXXXXXXXXX
Seller signature
Ledger entry for above source document
Debit Cash $2,700 and
Credit Sale $2,700
Note: cash sales do not give rise to trade receivable,
because no one owes to the company.
3 Payment Vouchers
Company Name
Company
Address
Telephone
number
Payment
Vouchers
Date
PV 001
23-Jan
Pay to
Company Name
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Company
Address
Telephone
number
Pay to XXXXXXXXX
A sum of twelve thousand three hundred and forty five dollars only
12,345.00
Cheque Number xxxxxxxxxxDated xxxxx
Full payment For Invoice number INV 001
Acknowledge receipt
Authorized signature
xxxxxxxxxxxx
XXXXXXXXXX
Recipients’signature
Seller signature
Ledger entry for the above source document
Debit Trade payable $12,345 and
Credit Bank $12,345
4 Credit Notes
Issued by the seller to accept the return of damaged goods
or reduction of over charged invoice.
Seller Co.’s Name
Company Address
Telephone
number
Credit
Note
CN001
Date
23-Jan
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Buyer Co.’s Name
Company Address
Telephone
number
A sum of three hundred only
$300.00
For return of 3 pieces damaged goods sold in January
Reason Glass casing broken ( reference invoice number
112
Authorized signature
XXXXXXXXXX
Seller signature
Ledger entry for the above document
Debit return inwards $300 and
Credit trade receivables $300
5. Debit note
Issued by a buyer to inform the seller of damaged goods
returned or reduction in invoice price
Company Name
Buyer
Company
Address
Telephone
number
Debit Note
Date
DN001
23-Jan
Account debited
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Company Name
Seller)
Company
Address
Telephone
number
A sum of Five hundred only
500.00
We are returning 5 pieces of cloth not to our specification
Reason Color fastness does not pass our quality control
Authorized signature
XXXXXXXXXX
Buyer signature
Normally we do not take accounting actions to enter into
the books of accounts for debit note issued.
We wait for the credit note received before we take
accounting action
CLASS AND HOMEWORK
1.
What is the purpose of source documents?
2.
Where are source documents recorded
3.
Which source documents are issued when we make a credit
sale?
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4.
Which source documents are issued when we make a cash
sales
5.
Which source documents are issued when we want to return
goods purchased?
6.
When our customers return goods to us, which source
documents do we issue to the customers?
7.
Name 5 details you will find in a sales invoice
8.
Name 5 details you will find in a payment voucher?
9.
Do we issue an invoice for cash sales?
10.
Do we take accounting actions on debit note issued?
11.
A credit note is issued by a seller or a buyer?
12.
A debit note is issued by a buyer or a seller?
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13.
What is the reason for the buyer to issue a debit note?
14.
What is the reason for a seller to issue a credit note?
15.
Prepare a sample sales invoice issued in your exercise book.
16.
Prepare a sample of credit note issued in your exercise book.
17.
Prepare a sample of debit note issued in tour exercise book.
18.
Prepare a sample of receipt issued in your exercise book.
19.
Prepare a sample of payment voucher in your exercise book.
20. Show the ledger entry for an invoice issued for $3,000 to
Mr. Sam.
21.
Name 5 examples of source documents.
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RESEARCH
Go and collect one of each actual source documents from your
own purchases or those collected by your brothers and parents
and paste them in your exercise book.
Name the source documents collected and highlight the details
you find in each of the documents.
Paste them in exercise book
Chapter 4: Book Keeping and balancing
Content
(4 lessons)
Section a)
Ledger accounts and classes
Section b)
Entry into ledgers and balancing
Section a) Ledger account and classes
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We have learnt before that ledger accounts are in the form of a
capital letter T
Sample of a ledger account
Name of Account
Date
Details
Debit
Date
Details
Amount
Credit
Amount
Each side will show the date, details and amount
The left hand side is for receiving items, cash or services
The right hand side is for giving items, cash or services.
At the top we will name the account.
Every business transactions will be recorded into two ledger
accounts following the duality principle.
There are 4 classes of accounts.
1.
Trade receivables
3. Real
2.
Trade payables
4. Nominal
We will look at transactions in dual aspect (Duality)
One account will be giving and the other will be receiving. (Just
like you give me money and I receive money). This treatment of
dual aspects and entry into two ledger accounts is following the
principle of duality. The principle of duality states that for
every credit, there is an equal debit.
Example
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When we buy a car using cash for $50,000, the two accounts
involved will be the “CASH ACCOUNT” that gives out cash to buy
the car, and the other account is the “CAR” account that receives
the car.
The book keeping entry will be done in two accounts as follows
CASH
Date
Details
Amount
Date
1 Jan
Details
CAR
Amount
50,000
CAR
Date
1 Jan
Details
CASH
Amount
Date
Details
Amount
50,000
Since the cash account gives money to buy the car, we put it in
the right hand side or the credit side.
And the CAR accounts receives the car, we put it in the left hand
side or the debit side.
The right hand side is call a “CREDIT ENTRY”
And the left hand side is called a “DEBIT ENTRY”
Section b) Entry into ledgers and balancing
Let us look at the entry into the two ledger account for every one
transaction
Example ABC a trader who is buying and selling hand phones to
make a profit.
He pays cash to buy 10 phones @ $500 each totalling $5,000.
How do we enter this one transaction?
We look at the two aspects. One aspect is paying or giving cash.
The second aspect is the receiving of the 10 phones.
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So it will involved entry into two ledgers
One ledger is called the “CASH ACCOUNT”.
The other is called the “PURCHASE ACCOUNT”.
Ledger entry
CASH
Date
Details
Amount
Date
1 Jan
Details
Purchase
Amount
5,000
PURCHASE
Date
1 Jan
Details
CASH
Amount
Date
Details
Amount
5,000
The above entry is made following the principle of duality.
The cash ledger account was credited with $5,000 and the
purchase ledger account was debited with the receipt of 10 phone
valued at $5,000.
Balancing of ledgers
After posting all transactions into the ledger for the whole
month, you will have to close the ledger and bring down the
balance to the next month.
Example of balancing and closing of the ledger accounts.
CASH ACCOUNT
Date
1 Jan
Details
Capital
Amount
50,000
Date
3 Jan
Details
Computer
Amount
5,000
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1 Feb
Total
50,000
Balance B/D
37,000
8 Jan
Salary
8,000
31 Jan
Balance C/D
37,000
Total
50,000
How to balance a ledger? (Teacher will show in class)
Step 1
Total the left side and total the right side, and see which side
has a larger figure. Place the larger figure in the total row.
Step 2
Then calculate the difference between the two sides and enter in
the lower side as “balance c/d” (The above balance C/D is
$37,000).
Step 3
Then bring down the $37,000 on the opposite side below the total
row, as “balance b/d $37,000.
CLASS AND HOMEWORK
1.
Balance the following cash account
Date
1 Jan
Details
Amount
Date
Details
Amount
Balance b/d
30,000
3 Jan
Computer
15,000
20 Jan
Sale
12,000
8 Jan
Salary
18,000
28 Jan
Sale
8,000
24 Jan
Electricity
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6000
2.
Balance the following Cash account
Date
1 Jan
Details
Amount
Date
Details
Amount
Balance b/d
20,000
3 Jan
Computer
35,000
20 Jan
Sale
12,000
8 Jan
Salary
28,000
28 Jan
Sale
8,000
24 Jan
Electricity
6000
3.
Name the principle which must be followed when we enter
a business transaction into 2 separate ledger account,
with one debit and an equal credit.
4.
When we sell an item, pay money, or give services, do we
credit or debit an account?
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5.
When we receive and item, receive money, or receive
services, do we credit or debit an account?
6.
Define the principle of duality
7.
Where will the name of a ledger account be written?
8.
9.
a)
At the right hand side.
b)
At the bottom.
c)
At the top.
d)
At the left hand side
A debit entry means the ledger is giving or receiving?
A credit entry means the ledger account is giving or
receiving?
10.
Balance C/D means balance carried down
What does balance B/D means?
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11. Is balance C/D placed above the total amount, or
below the total amount figure in a ledger account, when
balancing the account?
12. Is balance b/d placed above the total amount or below
the total amount in a ledger account, when balancing
the account?
13.
The debit and credit side of a ledger account has 3 columns.
The first column is the date. Name the other 2 columns
14. Post, and name the ledger account for the following
business transaction, in compliance with duality principle.
A business buys a printer for $500 with cash on 1st January
Date
Details
Amount
Date
Details
Amount
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Date
Details
Amount
Date
Details
Amount
15. Post and name the ledger account for the following
business transaction, in compliance with duality principle.
A business pays rental for $900 with cash on 1st February
Date
Details
Amount
Date
Details
Amount
Date
Details
Amount
Date
Details
Amount
16. Post, and name the ledger account for the following
business transaction, in compliance with duality principle.
A business buys a Car for $5000 with cash on 21st January
Date
Details
Amount
Date
Details
Amount
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Date
Details
Amount
Date
Details
Amount
17. Post and name the ledger account for the following
business transaction, in compliance with duality principle.
A business pays salary for $2,900 with cash on 31st August
Date
Details
Amount
Date
Details
Amount
Date
Details
Amount
Date
Details
Amount
Chapter 5:
Content
Journals and Ledgers.
Section a)
Journals – 7 books
Section b)
Ledgers – 3 books
(5 lessons)
Section a) Journals (books of prime entry) (books of
original entry)
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We have learnt that all business transactions are recorded in
source documents as proof of transactions
The following are various business transactions and their
respective source documents
1
Credit sales
Sales invoice
2
Credit purchases
Purchase invoice
3
Return of damaged goods
Debit note issued
4
Acceptance of damaged goods
Credit note issued
5
Payment of cheques
Payment vouchers
6
Received of cash
Receipts issued
7
Monthly records of transaction
Statement of accounts
8
Small amount payment
Petty cash vouchers
9
Yearend adjustments
Journal vouchers
All source documents must be recorded in books of journals.
Books that are used to record from source documents are called
books of prime entry or books of original entry or Journals.
The following are the 7 books of prime entry, and the source
documents that are recorded in them are as follows
Books of prime
entry
What are recorded
inside
Source
documents used
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1
Sales Journal
Record credit sales
Sales invoice
2
Purchase Journal
Record credit purchase
Purchase invoice
3
Sales Return
Journal
Record credit sales
return
Credit note issued
4
Purchase return
Journal
Record credit purchase
return
Credit note
received
5
Petty Cash Book
Payment of small
amount
Petty Cash
vouchers
6
Cash Book
Payment of large
amount
Payment vouchers
7
General Journal
Year end adjustment
Journal vouchers
Before we learn to post into journals we must learn what trade
discount means. TRADE DISCOUNT is given when we buy in bulk
and the trade discount is not recorded in the customer’s account.
It is only shown in the journals and invoice.
1. SALES JOURNAL
Date
1 Jan
Name, details, quantity and
list price
Ali 300 units bags at $20 each
Less trade discount 10%
5 Jan
Ben 100 units Hangers at $30
each
Gross
amount
Net
Amount
$6,000
$600
$5,400
$3,000
$300
$2,700
Less trade discount 10%
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15 Jan
Charles 600 units Boxes at $50
each
Less trade discount 10%
31 Jan
$30,000
$3,000
Total for month Transfer to sales account
$27,000
$35,100
End of the month the total for the sales journal will be posted
into the sales ledger account.
Before posting to the ledger, we prepare the posting journal
entry inside the general journal
Posting Journal entry (written inside the general Journal)
Detail
Debit
Sale
Credit
35,100
Ali
5,400
Ben
2,700
Charles
27,000
Total
35,100
35,100
Narrative: Being posting of January sales to sales account
After the preparation of the posting journal entry, we will then
post into the ledger accounts using the duality principle
Sale account
31 Jan
Total for month
Jan
35,100
Trade receivable - ALI
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31 Jan
Sale
5,400
Trade receivable - BEN
31 Jan
Sale
2,700
Trade receivable - CHARLES
31 Jan
Sale
27,000
2. PURCHASE JOURNAL
Date
1 Jan
Name, details, quantity and list
price
ABC 100 units bags at $10 each
Less trade discount 10%
7 Jan
LMN 200 units Hangers at $15 each
Less trade discount 10%
25 Jan
XYZ 500 units Boxes at $30 each
Gross
amount
Net
Amount
$1,000
$100
$900
$3,000
$300
$2,700
$15,000
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Less trade discount 10%
31 Jan
$1,500
Total for month Transfer to purchase account
$13,500
$17,100
End of the month the total for the purchase journal will be posted
into the purchase account.
Before posting to the ledger, we prepare the posting journal
entry inside the general journal
Posting Journal entry (written inside the general Journal)
Detail
Debit
Purchase
Credit
$17,100
ABC
$900
LMN
$2,700
XYZ
$13,500
Total
$17,100
$17,100
Narrative: Being posting of January purchase to purchase
account
After the preparation of the posting journal entry, we will then
enter the posting into the ledger accounts using the duality
principle
Purchase account
31 Jan
Total for month
$17,100
Trade payable - ABC
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31 Jan
Purchase
$900
Trade payable - LMN
31 Jan
Purchase
$2,700
Trade payable - XYZ
31 Jan
Purchase
$13,500
1. SALES RETURN JOURNAL
Date
10 Jan
Name, details, quantity and
price
Ali 30 units bags at 20 each
Less trade discount 10%
15 Jan
25 Jan
Gross
amount
$600
$60
Ben 10 units Hangers at $30 each
$300
Less trade discount 10%
$30
Charles 60 units Boxes at $4
Net
Amount
$540
$270
$2400
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each
$240
$2,160
Less trade discount 10%
31 Jan
Total Transfer to sales return account
$2,970
End of the month the total for the sales return journal will be
posted into the ledger account.
Before posting to the ledger, we prepare the posting journal
entry inside the general journal
Posting Journal entry (written inside the general Journal)
Detail
Debit
Return inwards
Credit
$2,970
Ali
$540
Ben
$270
Charles
$2,160
Total
$2,970
$2,970
Narrative: Being posting of January sales return to the
ledger account
After the preparation of the posting journal entry, we will then
enter the posting into the ledger accounts using the duality
principle
Return inwards account
31 Jan
Total for
month
$2,970
Trade receivable - ALI
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31 Jan
Return inwards
$540
Return inwards
270
Trade receivable - BEN
31 Jan
Trade receivable - CHARLES
31 Jan
Return inwards
$2,160
2. PURCHASES RETURN JOURNAL
Date
1 Jan
Name, details, quantity and price
ABC 10 units bags at $10 each
Less trade discount 10%
7 Jan
LMN 20 units hangers at $15 each.
Less trade discount 10%
25 Jan
XYZ 50 units Boxes at $30 each
Less trade disco8unt 10$
31 Jan
Gross
amount
Net
Amount
$100
$10
$$90
$300
$30
$270
$1,500
$150
Total transfer to purchase return account
$1.350
$1,710
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End of the month the total for the purchased return journal will
be posted into the ledger account.
Before posting to the ledger, we prepare the posting journal
entry inside the general journal
Posting Journal entry (written inside the general Journal)
Detail
Debit
Return outwards
Credit
$1,710
ABC
$90
LMN
$270
XYZ
$1,350
Total
$1,710
$1,710
Narrative: Being posting of January return outwards to
ledger account
After the preparation of the posting journal entry, we will then
enter the posting into the ledger accounts using the duality
principle.
Return outwards
31 Jan
Total for month
1,710
Trade payable - ABC
31 Jan
Return outwards
$90
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Trade payable - LMN
31 Jan
Return outwards
$270
Trade payable - XYZ
31 Jan
Return outwards
1,350
CLASS AND HOMEWORK
1.
Enter the following transactions of ABC Company into
the sales journal, total up the sales journal and prepare the
posting journal entry to post the sales journal into the
ledger accounts (Narrative required)
a.
1 Jan sold 300 packets of iron to Ali for $3 per
packet on credit and gave 10% trade discount.
b.
4 Jan sold 500 pieces of wood to Ben for $8 per
piece on credit and gave a trade discount of 5%
c.
25 Jan sold 600 pieces of copper to Charles for $5
per piece list price, less trade discount 10%
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2.
Enter the following transactions of XYZ Company into
the sales Journal, total up the sales journal and
prepare the posting journal entry to post into the
ledger account (Narrative required)
a.
3 Feb sold 500 units boxes to Daniel at $8 each
list price on credit with trade discount 10%
b.
11 Feb sold 1,000 units of butter to Ethan at $4
each on credit, less trade discount 5%
c.
19 Feb sold 200 plastic Cups to Francis at $5 each
on credit. Less trade discount 8%
Post into the journal and prepare the posting journal inside
the general journal book.
Show the entries in the ledger accounts
Q3 Enter the following transactions of ABC Company into
the purchase journal, total up the purchase journal
and prepare the posting journal entry to post the
purchase journal into the ledger accounts (Narrative
required)
a.
2 Jan purchased 200 pieces of steel from Albert for
$6 per piece
on credit less trade discount 10%
b.
6 Jan purchased 300 pieces copper from Barry for
$8 per piece
on credit less trade discount 5%
c.
23 Jan purchased 500 pieces of carbon from Charlie
for $5 per piece list price, less trade discount 10%
Q4 Enter the following transactions of XYZ Company into
the purchase Journal, total up the purchase journal
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and prepare the posting journal entry to post into the
ledger account (Narrative required)
a.
7 Feb purchased 500 units glue from Darren at $2
list price each on credit with trade discount 10%
b.
15 Feb purchased 1,000 units of ladder from Elvis
at $9 each on credit less trade discount 8%
c.
26 Feb purchased 200 hammers from Francis at $5
each on credit less trade discount 10%
Post into the journal and prepare the posting journal inside
the general journal book.
Show the entries in the ledger accounts
Q5 Enter the following transactions of ABC Company into
the sales return journal, total up the sales return
journal and prepare a posting journal entry to post the
sales return journal into the ledger accounts
(Narrative required)
a.
1 Jan 20 packets of iron was returned by Ali
were sold at $3 per packet on credit
b.
4 Jan 40 pieces of wood was returned by Ben
which were sold at $8 per piece
on credit
c.
25 Jan 50 pieces of copper was returned by
Charles which were sold at list price of $5 per
piece, less trade discount 10%
Q6 Enter the following transactions of XYZ Company into
the sales return Journal, total up the sales return
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journal and prepare the posting journal entry to post into
the ledger account (Narrative required)
a.
3 Feb 20 paper boxes was returned by Daniel
which were sold at list price of $8 each on credit
with trade discount 10%
b.
11 Feb 90 units of butter was returned by Ethan
which were sold at $4 each on credit
c.
19 Feb 70 plastic Cups was returned by Francis
which were sold at $5 each on credit.
Post into the journal and prepare the posting journal inside
the general journal book.
Show the entries in the ledger accounts
Q7 Enter the following transactions of ABC Company into
the purchase returned journal, total up the purchase
returned journal and prepare a posting journal entry to
post the purchase returned journal into the ledger
accounts (Narrative required)
a.
2 Jan 10 pieces of steel were returned by Albert
which were sold for $6 per piece on credit
b.
6 Jan 30 pieces copper were returned by Barry
which were sold for $8 per piece on credit
c.
23 Jan 50 pieces of carbon were returned by
Charlie which were sold for list price $5 per
piece, less trade discount 10%
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Q8 Enter the following transactions of XYZ Company into
the purchase returned Journal, total up the purchase
returned journal and prepare the posting journal
entry to post into the ledger account (Narrative
required)
a.
7 Feb 80 units glue were returned by Darren
which were sold at $2 each list price on credit
with trade discount 10%
b.
15 Feb 40 units of ladder were returned by Elvis
which were sold at $9 each on credit less trade
discount 10%
c.
26 Feb 30 hammer were returned by Francis which
were sold at $5 each on credit. Less trade
discount 5%
Post into the journal and prepare the posting journal inside
the general journal book.
Show the entries in the ledger accounts
Chapter 6: Cash and Petty Cash Book (6 lessons)
Contents:
Section a) Cash Book
Section b) Petty Cash book
Section a) Cash Book
This section covers cash book, which records the main payments
and receipts of the business.
Students must learn the format for both the books and the system
to post transactions into the books, using source documents such
as payment vouchers and receipts.
Students must learn the following terms, in order to learn about
the Cash book.
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Bank charges, bank interest paid and received, credit transfer,
direct debits, direct credits, dividend received and standing
instructions. (Teacher will explain terms)
Banking system
Businesses make payments and receipts for their daily
transactions via cheques.
Payments made are for expenses and purchases, and receipts are
from their sales and other income sources
Teacher will explain some of the commonly used terms related to
banking
Current account and saving accounts
Cheque signatory
Overdraft and long term loan
Bank statement
Cheque counterfoil and payment vouchers
Standing instructions, direct debit and direct credit
Cash book comes with 3 columns for “discount”, “cash” and
“bank”
Source documents used to record into the cash book are payment
vouchers, cheques, and cheque counterfoil, bank in slips, official
receipts, credit note issued and received, and letter of standing
instruction
Cash book function as a journal and as a ledgers. The debit and
credit entry for cash and banks are the ledger portion and the
discount allowed and received are the journal portion
Format and entries for Cash Book will be shown below, including
balancing. (Teacher will explain in white board)
Sample of entries
1st Jan cash sales $5,000
3rd Jan
received cheques from Ben $12,000
7th Jan
paid rental cheque $1,200
th
9 Jan
paid cleaner salary in cash $900
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15th Jan received cheque from Charles $1,800 after deduction
cash discount 10%
21st Jan Paid Lim amount owed $3,000 less 10% cash discount
3 column cash book
Date
Details
1Jan
sales
3Jan
Ben
15Jan
Charles
Total
1Feb
Disc
All
Cash
Bank
Date
Details
7Jan
rental
12,000
9Jan
cleaning
1,800
21Jan
Lim
31Jan
Bal c/d
5,000
200
200
Bal b/d
5,000
13,800
4,100
9,900
Total
Disc.
Rec.
Cash
Bank
1,200
900
300
300
2,700
4,100
9,900
5,000
13,800
Cash discount
The cash discount are offered when a trade receivable make a
prompt payment within the credit period allowed
This discount will be taken up in the books and will be entered in
the cash book under the discount allowed or discount received
columns
Section b) Petty cash book
Petty cash book is kept by a junior staff for the purpose of
paying small amount of expenses and it will free the management
of valuable time
Petty cash will be maintained at an Imprest amount and the
amount spent will be reimbursed the following month. This system
will also prevent fraud.
Petty cash book acts as a journal as well as a ledger account. The
debit and credit entry column will act as a ledger account and the
analysis column will act as a journal which must be posted to the
ledger account subsequently.
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The definition of imprest system is as follows.
The imprest system is a fixed float of money kept inside the petty
cash account for payment of small amounts. At the beginning of
each month the amount spent will be reimbursed to bring the
balance in the petty cash account back to the fixed imprest
amount.
The format for petty cash and entries will be shown below.
(Teacher will show in white board)
Sample of entries. (Teacher will show in class)
1Jan
stared petty cash in Jan with $500 imprest amount
1Jan
paid repairs $30
3Jan
paid stationery $50
7Jan
paid postage $40
9Jan
paid cleaning $20
11Jan
paid Ali $160
15Jan
paid postage $60
17Jan
paid repairs $70
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Petty cash book
Date
Details
Debit
1Jan
Bank
500
1Jan
repair
30
3Jan
stationery
50
7Jan
postage
50
9Jan
cleaning
20
11Jan
Ali
160
15Jan
postage
60
17Jan
repair
70
Total
500
Credit
440
stationery
Repairs
Postage
Cleaning
30
50
50
20
160
60
70
50
100
110
20
60
Bal c/d
Total
500
1Feb
Bal b/d
60
1Feb
Bank
440
Ledger
500
CLASS AND HOMEWORK
1 Which source documents are used to record the following
transactions?
Payments made in cash book
Money received and entered in cash book
Record of cheque issued in cash book
Monthly payment of hire purchase installments
Cash discount received
Cash discount allowed
Direct debits
Credit transfer received
2 What is the difference between a current account and a
savings account?
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160
3 Define the following terms in banking transactions
Cheque signatory
Overdraft
Long term loan
Standing Instruction
Direct debits
Direct credits
4. Which column in the cash book acts as a ledger account and
which column acts as a journal?
5. Enter the following transaction into a 3 column bank book,
close the book and show the journal entry for the posting of
the discount allowed and discount received column balances
1st Jan
Balance brought down from previous year; cash column
500 debit and bank column 3,000 debits
rd
3 Jan
Paid by cheque 1,000 to trade payable John
5th Jan
Pay salary by cheque for 1,500
th
7 Jan
Paid trade payable ABC a cheque of 1,200 in full
settlement of accounts 1,400
9th Jan
received a cheque from trade receivable Ali for 800, in
full settlement of his account of 1,000
11th Jan Paid rent by cheque 1,300
15th Jan money received from cash sale of 4,000
17th Jan Bank in a cheque for 2,000 for commission received
20th Jan sold an item in cash with a list price of 2,000 and a
trade discount of 10%
25th Jan Purchase a computer by cheque for 3,200
Answer the above in exercise book. Draw your own Cash book.
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6. Define what is an Imprest system of petty cash?
7. Which 2 books acts as a ledger account as well as a
journal?
8. Post the following transactions into a petty cash book of
ABC which has an Imprest amount set as 200. The cash
balance in the petty cash box was 48 brought down from
last year December. Balance the book and show the
reimbursed amount for beginning of next month.
1st Jan
5th Jan
7th Jan
9th Jan
11th Jan
15th Jan
20th Jan
parking charges
Postages
travelling
Postages
repair car
printing papers
post parcel
15
10
12
13
42
16
14
Answer the above in exercise book. Draw your own petty
cash book.
9. Elliott started business selling machinery on 1 May 2015.
He opened a business bank account with $90,000 of his
own money.
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He provided the following summary of the transactions in
the first month of trading.
1Jan
paid $3000 by standing order for three months’
rent.
2Jan
Bought 6 machines at $300 each paying by credit
transfer.
3Jan
Sold 5 of the cheaper machines cash for $450
4Jan
Sold 6 of the more expensive machines each for
$700 receiving the funds by cheque.
5Jan
withdrew $3600 from the bank as drawings.
6Jan
paid sundry expenses, $150, in cash.
7Jan
transfer cash, $2000, into the bank.
8Jan
Used, but did not pay for, electricity, $80.
REQUIRED
(a)
Prepare Elliott’s cash book for May 2015. Balance the
cash book and bring down the balances on 1 June
2015.
Answer in exercise book. Draw your own cash book
10. State what is the benefit of keeping a petty cash book?
11. ABC sold goods on credit to Benny with a list price of
4000 and a trade discount of 10%. Benny paid for the
amount within the credit period allowed and obtain a cash
discount of 5%
What is the amount that Benny paid to ABC?
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RESEARCH
Find out how do businesses open a current account?
Write in 20 words below.
Chapter 7: Trial balance and Income statement
(5 lessons)
Contents
Section a)
Trial balance
Section b)
Trading account
Section c)
Profit and loss account
Section a) Trial balance
Every business must close their accounts once every year. This
requirement follows the accounting principle called
(ACCOUNTING PERIOD)
Definition of “accounting period”: It states that all
businesses must close their accounts once every 12 months.
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Example:
If a business starts operating from 1st January 2000, then the
business must close their accounts and calculate their profit and
loss as at 31st December 2000, exactly 12 months from the date it
started operations.
If the business starts operation in 1st July 2000, then on 30th
June 2001 it must close their accounts.
During the whole year’s operation, the business will record all its
transactions into the 7 books of journals (refer chapter 5) from
source documents.
From the 7 Journals, the total for each month will then be
transferred to the 3 ledger books. (Refer to Chapter 6)
All the ledger accounts inside the 3 ledger books will be closed
and balanced. We will then proceed to extract all these balances
and use them to prepare the trial balance.
Definition of a TRIAL BALANCE: A trial balance is a list of
all ledger balances as at a certain date (normally at the end
of the accounting year)
Once the trial balance is prepared, we will then use it to prepare
our income statement. (To calculate our profit and loss for the
year)
Example of a trial balance
The following ledger balances are extracted from the 3 ledger
books
Trial balance of ABC trading as at 31st December 2000
Debit bal $
Credit bal $
Sales
203,000
purchases
101,000
Return inwards
2,000
Return outwards
3,000
Opening inventory
8,000
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Carriage inwards
Rental income
Rental
Salary
Repairs
Carriage outwards
Computer
Furniture
Vehicles
bank
Trade receivables
Trade payables
Bank Loan
capital
Total
Additional information
Ending Inventory is valued
2,500
4,000
5,000
3,600
6,800
9,200
30,000
50,000
70,000
6,900
70,000
365,000
45,000
10,000
100,000
365,000
6,000
You will notice that the total of the debit and the credit are
exactly the same ($365,000). The reason being that all
transactions are entered using the duality principles. That means
for every credit entry there must be an equal debit entry and
therefore the total of debits will always equal to the credits.
Ending inventory are usually given at the bottom of the trial
balance because the value have to be based on certain valuation
method which you will learn later chapters.
Section b) Trading account
The trading account and the profit and loss account are part of
the income statement. The purpose of the trading account is to
calculate the GROSS PROFIT. While the profit and loss account
is to calculate the PROFIT FOR THE YEAR.
The gross profit is the difference between your total net sales
and your cost of your sales
Formula:
NET SALES – COST OF SALES = GROSS PROFIT
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Using the trial balance given above how to calculate net sales,
net purchases, cost of sales and gross profit? (Teacher will show
in class)
NET SALES = SALES less return inwards
NET SALES is ($203,000 – $2,000 = $201,000)
NET PURCHASES = PURCHASES less return outwards plus
carriage inwards
NET PURCHASE is ($101,000 - $3,000 + $2,500) = $100,500
COST OF SALES (COS) = Opening stock + net purchase –
Closing stock
COS is ($8,000 + $100,500 – 6,000) = $102,500
GROSS PROFIT = NET SALES – COST OF SALES
Gross profit is ($201,000 - $102,500) = $98,500
Example of trading account preparation
Mr. Ben a trader, extracted the following ledger balances as
at 31st December 2000
Sales
purchases
Return inwards
Return outwards
Opening inventory
Carriage inwards
Closing inventory
40,000
10,000
4,000
6,000
18,000
5,000
7,000
Prepare the trading account (Teacher will explain)
Trading account for the year ended 31st December 2000
Sales
40,000
Less Return inwards
-4,000
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Net sales
Opening inventory
purchases
Less return outwards
Plus Carriage inwards
36,000
18,000
10,000
-6,000
5,000
Closing inventory
Cost of sale
Gross profit
9,000
7,000
20,000
16,000
The gross profit will then be transferred to the profit and loss
account where all other income are added and all expenses are
deducted to arrive at the profit for the year
Section c) Profit and loss account
Profit for the year is calculated by adding other income to your
gross profit and deducting all expenses.
PROFIT FOR THE YEAR = GROSS PROFIT + OTHER INCOME –
EXPENSES
Example of profit and loss account preparation
Mr. Ben a trader, extracted the following ledger balances as
at 31st December 2000
Gross profit
Rental income
salary
repairs
electricity
rental
16,000
5,000
4,000
6,000
5,000
2,000
Prepare the profit and loss account (Teacher will explain)
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Profit and loss
account for the year ended 31st December
2000
Gross profit
16,000
Add rental income
5,000
Total profit
21,000
Less salary
4,000
repairs
6,000
electricity
5,000
rental
2,000
Total expenses
17,000
Profit for the year
4,000
The profit for the year will then be used to update the capital
and to prepare the statement of financial position.
CLASS AND HOMEWORK
1.
What is the purpose of preparing trading account?
2.
What is the purpose of preparing the profit and loss
account?
3.
What is a trial balance?
4.
How is net sales calculated?
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5.
How is net purchases calculated?
6.
How is gross profit calculated?
7.
How is profit for the year calculated?
8.
Prepare the correct trial balance of ABC trading.
Sales
purchases
Return inwards
Return outwards
Opening inventory
Carriage inwards
Rental income
Rental
Salary
Repairs
Carriage outwards
Computer
Furniture
Vehicles
bank
Trade receivables
Trade payables
Ledger balances
203,000
101,000
2,000
3,000
8,000
2,500
4,000
5,000
3,600
6,800
9,200
30,000
50,000
70,000
6,900
70,000
45,000
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Bank Loan
capital
Closing inventory valued at
10,000
100,000
6,000
Answer in exercise book.
8.
Prepare the trading account section from the following
figures
Sales
purchases
Return inwards
Return outwards
Opening inventory
Carriage inwards
Closing inventory
9.
80,000
20,000
6,000
8,000
12,000
9,000
5,000
Prepare the trading account section from the following
figures
Sales
purchases
Return inwards
Return outwards
Opening inventory
Carriage inwards
Closing inventory
10.
50,000
30,000
16,000
9,000
15,000
3,000
7,000
Prepare the trading account section from the following
figures
Sales
purchases
Return inwards
Return outwards
100,000
50,000
16,000
18,000
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Opening inventory
Carriage inwards
Closing inventory
11.
Prepare the profit and loss account section from the
following figures.
Gross profit
Discount received
salary
repairs
Discount allowed
rental
12.
26,000
8,000
6,000
4,000
5,000
3,000
Prepare the Income statement from the following
figures.
Sales
purchases
Return inwards
Return outwards
Opening inventory
Carriage inwards
Closing inventory
Commission income
salary
water
electricity
cleaning
13.
19,000
12,000
5,000
50,000
30,000
16,000
9,000
15,000
3,000
7,000
8,000
6,000
4,000
5,000
3,000
Prepare the Income statement from the following
figures.
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Sales
80,000
purchases
40,000
Return inwards
6,000
Return outwards
8,000
Opening inventory
5,000
Carriage inwards
6,000
Closing inventory
9,000
Interest income
11,000
salary
7,000
repairs
6,000
electricity
8,000
rental
2,000
14.
The following trial balance was taken from the books
of ABC as at 1st January 2001
Machinery
Opening stock
Purchases
Building
Carriage inward
Carriage outward
Wages for purchases
Other receivables
Salaries paid
Furniture
Selling expense
Cash Discount allowed
Advertisement
Trade receivables
Insurance prepaid
Insurance paid
Bank
Sales
Sales Return
Interest received
Trade payables
Bank loan
Capital
80,000
50,000
120,000
200,000
4,000
3,000
6,000
40,000
25,000
60,000
12,000
2,000
7,000
80,000
1,200
5,800
25,000
502,000
2000
723,000
3,000
45,000
68,000
105,000
723,000
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Closing stock
$30,000
Required: Prepare the Income statements for the year ended 31st
December 2001
Capital
Drawings
Premises at cost
Equipment at cost
Motor vehicle at cost
Inventory 1st January 2017
109,900
3,000
90,000
52,000
30,400
7,000
Revenue
209,000
Purchases
192,000
Sales
returns
4,000
15. The following trial balance was extracted fro
m the books of
st
Wages
6,500
Benjamin as at 31 December 2017
General expenses
3,000
Commission received
1,584
Trade receivables
24,200
Interest receivable
5,000
Trade payables
6,900
Petty cash
290
Bank
4,006
Loan – AB Finance (repayable 2025)
86,000
Total
417,390
417,390
Additional information : Ending stock was 38,000
Prepare the Income statement as at 31st December 2017
Chapter 8: Statement of financial position (6 lessons)
Content: Section a) Classifying ledger accounts
b) Updating capital account
c) Statement of financial position
Section a) Classifying ledger accounts
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Before we can start to prepare the statement of financial
position, we have to learn how to identify the various ledger
accounts
Ledger accounts can be classified into the following categories
according to their balances (either a debit balance or a credit
balance)
Debit balances
Credit balances
expenses
purchases
Return inwards
drawings
Loss for the year
Assets
Income
sales
Return outwards
capital
Profit for the year
Liabilities
The top 3 items are dealt with in the income statement.
The last 3 items are dealt with in the statement of financial
position
The statement of financial position is represented by the
accounting equation.
ASSET = CAPITAL + LIABILITIES
Before we prepare the statement of financial position, we have to
update our capital. Using the opening capital for the year, we add
the profit for the year and less the drawings for the year.
Section b) updating capital
Let us say Mr. Ben started a new business with a capital of
$50,000 on 1st January 2000. During the year from 1st January
2000 till 31st December 2000, he made a profit for the year of say
$32,000.
During the year he took some cash advance of $4,000 as drawings
for personal usage, and also took some goods valued at $3,000
for personal usage.
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We have to treat the drawings as withdrawal of capital following
the separate business entity principle and have to be
deducted from the capital invested.
During the year he also added some additional capital to finance
the business operation of $20,000.
Therefore to update the capital, the calculating will be as follows
Opening capital as at 1st Jan
Plus additional capital
Plus profit for the year
Less drawings (4,000+3,000)
Updated Closing capital as at 31st Dec
$50,000
$20,000
$32,000
($7,000)
$95,000
Example
Teacher will guide you through this.
A trader started a new business with a capital of $80,000 on 1st
January 2001. During the year from 1st January 2001 till 31st
December 2001, he made a loss for the year of say $2,000.
During the year he took some cash advance of $5,000 as drawings
for personal usage, and also took some goods valued at $6,000
for personal usage.
Please update the trader capital.
Answer should be closing capital = $67,000
Section c) Statement of financial position
The format for the statement of financial position is as follows
Statement of financial position of ABC as at 31st December 2000
NON CURRENTS ASSETS
$400,000
CURRENT ASSETS
$200,000
TOTAL ASSETS
$600,000
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CAPITAL
$450,000
NON CURRENT LIABILITIES
$100,000
CURRENT LIABILITIES
TOTAL LIABILITIES
$50,000
$600,000
Notice that the total assets must always equal to the total
liabilities.
The 5 headings or fields are fixed.
1.
2.
3.
4.
5.
Non current asset
Current assets
Capital.
Non current liabilities
Current liabilities
Notice that assets are divided in Non-current assets and current
assets.
Notice also that liabilities are also divided into Non-current
liabilities and current liabilities
Example on how to prepare statement of financial position
(Teacher will show and explain in class)
Prepare the statement of financial position of ABC from the
following trial balance.
Trial balance of ABC trading as at 31st December 2000
Debit bal $
Credit bal $
Sales
203,000
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purchases
Return inwards
Return outwards
Opening inventory
Carriage inwards
Rental income
Rental
Salary
Repairs
Carriage outwards
Computer
Furniture
Vehicles
bank
Trade receivables
Trade payables
Bank Loan
capital
Total
Additional information:
Closing inventory valued at
101,000
2,000
3,000
8,000
2,500
4,000
5,000
3,600
6,800
9,200
30,000
50,000
70,000
6,900
70,000
45,000
10,000
100,000
365,000
365,000
6,000
First we have to calculate the profit for the year in the income
statement. From the trial balance, let’s say the figure is $77,900
(Try to prepare the income statement to see if it tally with the
profit for the year $77,900) (Teacher will show in class and
calculate with students)
Statement of financial position of ABC as at 31st December 2000
NON CURRENT ASSETS
Computer
Furniture
Vehicles
Total
CURRENT ASSETS
Inventory
$
$
30,000
50,000
70,000
150,000
6,000
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Trade receivables
Bank
70,000
6,900
Total assets
CAPITAL
Opening capital
Profit for the year
82,900
232,900
100,000
77,900
177,900
NON CURRENT LIABILITIES
Bank Loan
10,000
CURRENT LIABILITIES
Trade Payables
45,000
Total Liabilities
232,900
CLASS AND HOMEWORK
1.
The following ledger balances were extracted from ABC
trader as at 31st December 2000
Premises
Motor Vehicles
Capital
Drawings
Bank
Amount $
300,000
80,000
300,000
5,000
30,000
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Trade receivables
Trade Payables
Bank Loan
Petty cash
Additional information given
60,000
42,000
40,000
3,000
Ending inventory $10,000
Profit for the year $106,000
Prepare the statement of financial position of ABC as at 31st
December 2000.
Answer in exercise book
2.
The following ledger balances were extracted from John a
trader as at 31st December 2002
Computers
Mahinery
Capital
Drawings
Bank overdraft
Trade receivables
Trade Payables
Bank loan
Petty cash
Additional information given
Amount $
80,000
120,000
100,000
7,000
15,000
60,000
72,000
50,000
1,000
Ending inventory $5,000
Profit for the year $36,000
Prepare the statement of financial position of John as at 31st
December 2002.
Answer in exercise book
3.
The following ledger balances were extracted from Bernard a
trader as at 31st December 2006
Premises
Furniture
Capital
Drawings
Bank overdraft
Trade receivables
Trade Payables
Bank Loan
Amount $
200,000
70,000
100,000
2,000
62,000
50,000
142,000
70,000
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Petty cash
Additional information given
2,000
Ending inventory $9,000
Loss for the year $41,000
Prepare the statement of financial position of Bernard as at
31st December 2006.
Answer in exercise book
4.
The following ledger balances were extracted from Charles a
trader as at 31st December 2008
Delivery Van
Fixtures
Capital
Drawings
Bank
Trade receivables
Trade Payables
Bank loan
Petty cash
Additional information given
Amount $
60,000
20,000
50,000
3,000
5,000
20,000
52,000
30,000
2,000
Ending inventory $7,000
Profit for the year $15,000
Prepare the statement of financial position of Charles as at
31st December 2008.
Answer in exercise book
Take note that additional exercise need to be given for
each chapter to let students have more practice.
END OF WORKBOOK
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