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 This booklet is prepared by Peter for usage in arrow school onlyPage 1 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) This booklet is prepared by Peter for usage in arrow school onlyPage 2 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, This booklet is prepared by Peter for usage in arrow school onlyPage 3 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 This booklet is prepared by Peter for usage in arrow school onlyPage 4 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 This booklet is prepared by Peter for usage in arrow school onlyPage 5 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 This booklet is prepared by Peter for usage in arrow school onlyPage 6 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 This booklet is prepared by Peter for usage in arrow school onlyPage 7 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 This booklet is prepared by Peter for usage in arrow school onlyPage 8 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 This booklet is prepared by Peter for usage in arrow school onlyPage 9 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? This booklet is prepared by Peter for usage in arrow school onlyPage 10 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. This booklet is prepared by Peter for usage in arrow school onlyPage 11 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. This booklet is prepared by Peter for usage in arrow school onlyPage 12 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. This booklet is prepared by Peter for usage in arrow school onlyPage 13 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 This booklet is prepared by Peter for usage in arrow school onlyPage 14 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. This booklet is prepared by Peter for usage in arrow school onlyPage 15 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 This booklet is prepared by Peter for usage in arrow school onlyPage 16 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 This booklet is prepared by Peter for usage in arrow school onlyPage 17 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: This booklet is prepared by Peter for usage in arrow school onlyPage 18 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 This booklet is prepared by Peter for usage in arrow school onlyPage 19 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 This booklet is prepared by Peter for usage in arrow school onlyPage 20 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? This booklet is prepared by Peter for usage in arrow school onlyPage 21 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 This booklet is prepared by Peter for usage in arrow school onlyPage 22 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 This booklet is prepared by Peter for usage in arrow school onlyPage 23 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 This booklet is prepared by Peter for usage in arrow school onlyPage 24 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 This booklet is prepared by Peter for usage in arrow school onlyPage 25 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) This booklet is prepared by Peter for usage in arrow school onlyPage 26 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 This booklet is prepared by Peter for usage in arrow school onlyPage 27 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 This booklet is prepared by Peter for usage in arrow school onlyPage 28 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 This booklet is prepared by Peter for usage in arrow school onlyPage 29 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 This booklet is prepared by Peter for usage in arrow school onlyPage 30 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 This booklet is prepared by Peter for usage in arrow school onlyPage 31 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 This booklet is prepared by Peter for usage in arrow school onlyPage 32 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? This booklet is prepared by Peter for usage in arrow school onlyPage 33 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? This booklet is prepared by Peter for usage in arrow school onlyPage 34 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. This booklet is prepared by Peter for usage in arrow school onlyPage 35 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 This booklet is prepared by Peter for usage in arrow school onlyPage 36 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 This booklet is prepared by Peter for usage in arrow school onlyPage 37 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. This booklet is prepared by Peter for usage in arrow school onlyPage 38 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 This booklet is prepared by Peter for usage in arrow school onlyPage 39 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 This booklet is prepared by Peter for usage in arrow school onlyPage 40 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? This booklet is prepared by Peter for usage in arrow school onlyPage 41 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? This booklet is prepared by Peter for usage in arrow school onlyPage 42 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 This booklet is prepared by Peter for usage in arrow school onlyPage 43 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 This booklet is prepared by Peter for usage in arrow school onlyPage 44 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) This booklet is prepared by Peter for usage in arrow school onlyPage 45 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 This booklet is prepared by Peter for usage in arrow school onlyPage 46 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% This booklet is prepared by Peter for usage in arrow school onlyPage 47 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 This booklet is prepared by Peter for usage in arrow school onlyPage 48 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 This booklet is prepared by Peter for usage in arrow school onlyPage 49 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 This booklet is prepared by Peter for usage in arrow school onlyPage 50 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 This booklet is prepared by Peter for usage in arrow school onlyPage 51 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 This booklet is prepared by Peter for usage in arrow school onlyPage 52 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 This booklet is prepared by Peter for usage in arrow school onlyPage 53 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 This booklet is prepared by Peter for usage in arrow school onlyPage 54 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% This booklet is prepared by Peter for usage in arrow school onlyPage 55 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 This booklet is prepared by Peter for usage in arrow school onlyPage 56 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 This booklet is prepared by Peter for usage in arrow school onlyPage 57 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% This booklet is prepared by Peter for usage in arrow school onlyPage 58 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. This booklet is prepared by Peter for usage in arrow school onlyPage 59 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 This booklet is prepared by Peter for usage in arrow school onlyPage 60 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. This booklet is prepared by Peter for usage in arrow school onlyPage 61 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 This booklet is prepared by Peter for usage in arrow school onlyPage 62 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? This booklet is prepared by Peter for usage in arrow school onlyPage 63 160 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. This booklet is prepared by Peter for usage in arrow school onlyPage 64 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. This booklet is prepared by Peter for usage in arrow school onlyPage 65 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? This booklet is prepared by Peter for usage in arrow school onlyPage 66 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. This booklet is prepared by Peter for usage in arrow school onlyPage 67 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 This booklet is prepared by Peter for usage in arrow school onlyPage 68 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 This booklet is prepared by Peter for usage in arrow school onlyPage 69 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 This booklet is prepared by Peter for usage in arrow school onlyPage 70 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) This booklet is prepared by Peter for usage in arrow school onlyPage 71 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? This booklet is prepared by Peter for usage in arrow school onlyPage 72 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 This booklet is prepared by Peter for usage in arrow school onlyPage 73 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 This booklet is prepared by Peter for usage in arrow school onlyPage 74 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. This booklet is prepared by Peter for usage in arrow school onlyPage 75 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 This booklet is prepared by Peter for usage in arrow school onlyPage 76 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 This booklet is prepared by Peter for usage in arrow school onlyPage 77 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. This booklet is prepared by Peter for usage in arrow school onlyPage 78 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 This booklet is prepared by Peter for usage in arrow school onlyPage 79 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 This booklet is prepared by Peter for usage in arrow school onlyPage 80 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 This booklet is prepared by Peter for usage in arrow school onlyPage 81 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 This booklet is prepared by Peter for usage in arrow school onlyPage 82 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 This booklet is prepared by Peter for usage in arrow school onlyPage 83 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 This booklet is prepared by Peter for usage in arrow school onlyPage 84