BUSINESS STUDIES DEPARTMENT
COMMERCE AND BOOKKEEPING/ACCOUNTING form 1
INTRODUCTION
 Every business organisation whether large or small must understand the purpose of
accounting process. Accounting plays an important role in the success or failure of a
business.
BOOKKEEPING
 Bookkeeping is the process of recording business transactions systematically into the
books of accounts or on computer.
 It helps a business to know whether or not it made profit by keeping written records of
the amounts spent and received. Nowadays, bookkeeping is performed by a
bookkeeper(or the owner himself or herself) who may record in books or use a
bookkeeping software package(a computer program).
ACCOUNTING
 Accounting is the analysis of the financial information from the books of accounts so
that the financial position of the business can be known.
 It includes bookkeeping but it is more advanced. Accountants are people who have
studied accounting. They translate accounting information into meaningful terms that
can be easily understood by those involved in the business.
THE DIFFERENCE BETWEEN BOOKKEEPING AND ACCOUNTING
BOOKKEEPING
ACCOUNTING
 Recording of financial information in
 Analysis of financial information so
the books of accounts or on computer.
that it can be meaningful to its users.
 The skills required to perform the
 Accounting skills take longer to learn
tasks of bookkeeping do not take long
than bookkeeping.
to learn.
 The person employed to record
 The person employed to use the
financial information is called a
financial information to inform and
bookkeeper.
advice management is called an
accountant.
 Accounting is more than bookkeeping
 Bookkeeping is one task carried out
because it involves designing the
in accounting
financial
records
to
inform
management,
supervising
the
bookkeeping tasks and preparing
financial reports.
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THE SIGNIFICANCE OF ACCOUNTING INFORMATION TO ITS USERS
Information obtained from bookkeeping and accounting system is very important to people
within and outside the business for different reasons. Accounting therefore is used by
everyone.
THE BUSINESS OWNER
 The owner of the business will rely on accounting information to know whether the
business is making profit or loss. To see if the business is well directed or managed
the owner of the business relies on accounting information to make sound decisions.
THE FINANCIAL MANAGER
 He or she will want accounting information to find out if the business is making profit
or loss.
GOVERNMENT
 Businesses usually have to pay tax to the government. The amount of tax is assessed
(rated) using the financial reports of the business.
BANKS
 Banks grant some loans to business based on their financial status. A business which
does not have good financial records is not likely to get loans from banks.
THE SUPPLIERS
 The suppliers of goods and services will also need to know the status of the business.
In order to provide the business with credit account they will need to use the
accounting information to judge whether it will be able to pay its debts.
WORKERS
 Workers’ salaries are dependent on the performance of the business and as such they
would also be very interested in the accounting information.
POTENTIAL INVESTORS
 A business does not always have money that is readily available. That is why
sometimes they need the assistance of other people who want to invest their resources.
The investors will only be willing to put money into the business if the business can
show financial stability in their accounts.
THE REASONS FOR KEEPING FINANCIAL RECORDS FOR A BUSINESS
The entire accounting system relies on accurate records of financial information. Every
business must keep financial records because good records help with the following:
 Monitor the progress of a business: records can show whether your business is
improving, which items are selling, or what changes you need to make. Good records
can increase the likelihood of business success.
 Preparing financial statements: business need good records to prepare financial
statements. These include income (profit and loss) statements and balance sheets. An
income statements show the income and expenses of the business for a given period
of time. Balance sheet shows the assets, liabilities, and equity in the business on a
given date.
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 Budgeting :helps to keep track of money(estimated money the business expects to
make and spend)
 For future planning: good financial records help to project the future or the past and
give an ideal picture of the business’s financial situation at that point in time. For
example any strategies on how to improve will depend on the previous financial
records.
THE ROLE OF ACCOUNTING INFORMATION IN BUSINESS
In business, accounting information plays a very important role in the sense that it
helps to answer a lot of questions which would have been difficult to answer without
this kind of information. Questions include:
 Has the business made a profit or loss during the trading period?
 How much tax is supposed to be paid to government?
 How much does the business owe and how much is the business owed?
 Does the business required more capital or not?
All the questions are clearly answered by the accounting information.
JOB OPPORTUNITIES IN BOOKKEEPING AND ACCOUNTING
In the field of Bookkeeping and Accounting there are many jobs opportunities at different
levels of an organisation, depending on the qualification that person has. One can become:
 A financial manager
 A bookkeeper
 Accounts clerk
 Wages clerk
 Accountant
 Auditor
 A banker
 Petty cashier
 cashier
ACCOUNTING TERMINOLOGY/TERMS
Accounting, like any other subject, uses certain terminologies that must be known and
understood by all those who want to study or taking accounting as a career.
ASSETS
 Items of value that belongs to the business and are used in the running of the business.
There are two kinds of assets: fixed and current assets
FIXED ASSETS (non-current assets)
Are possessions or items of value that are used by the business for more than a year.
Fixed assets are not for resale they enable the business to earn income. Examples of fixed
assets are: premises/buildings, machinery ,motor vehicles, furniture, fixtures and fittings,
equipment, computer e.t.c
 In the balance sheet they are usually listed in increasing order of permanence, which
means the most permanent assets are listed first. A typical order may be: premises,
machinery, motor vehicle ,furniture ,fixtures and fittings e.t.c
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CURRENT ASSETS
Are possessions or items of value that are used by the business for less than a year.
Current assets are easily changed into cash.
 They are short-term assets which are constantly changing. They can usually turn into
cash more easily than is possible with fixed assets.
 Examples of current assets are stock of goods, cash at bank, cash in hand, debtors.
 In the balance sheet they are usually listed in increasing order of liquidity, which
means the assets which could not be turned into cash more easily are listed first. A
typical order may be: stock, debtors ,cash at bank, cash in hand
LIABILITIES
 Amount owed by the business or debts of the business. They are created either when a
business borrows money in the form of a loan or when a business buys goods from the
suppliers on credit. There are two kinds of liabilities: current and long-time liabilities.
CURRENT LIABILITIES
These are amounts owed by the business which are due for repayment within a year. Current
liabilities arise from the normal trading activities, so they are constantly changing.
 Current liabilities are paid from current assets. Examples of current liabilities include:
creditors, bank overdraft (short- term loan.
LONG-TERM LIABILITIES
 These are amounts owed by the business which do not have to be repaid within a year.
 Examples of long-term liabilities include: mortgage loan, long term bank loan.
CAPITAL
 Refers to all resources supplied to a business by the owner in form of cash or goods.
 Capital can be obtained from the owner’s savings, friends and family members or
financial institutions like banks and CEDA
REASONS WHY A BUSINESS SHOULD HAVE SEPARATED ITS AFFAIRS FROM
THOSE OF THE OWNER (THE ENTITY RULE)
Entity rule means keeping personal and business affairs separated from each other.
 In business terms the owner of the business and the business are two separate entities.
Therefore, the business should take care of its affairs and the owner should also take
care of his/her own affairs. A business is considered in a law as a legal person that can
stand on its own, separate from the owner. This idea comes from a company being
registered as a separate legal entity.
REASONS FOR THE ENTITY RULE
 If the owner uses money from the business to take care of his/her affairs, the business
is likely to fail. The transaction of the owner and that of the business should always be
kept separate.
 To have clear picture of the performance of the business
 To make sure that the business does not use the owner’s resources and the owner does
not use the resources of the business.
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 To allow the business to operate with no financial interference.
PERSONAL AND BUSINESS TRANSACTIONS
Running a business is accompanied with a lot of transactions. These transactions can either
be personal or business transactions. A transaction is any activity involving money values.
Activities involving money such as buying and selling goods, paying out cash and receiving
cash are examples of transactions.
BUSINESS TRANSACTIONS
 Business transactions are done on behalf of the business and are recorded on its books
of accounts. The documents of the transaction are given to the business bookkeeper
who then records them in the books of accounts of the business.
Examples of business transaction are:
 Paying salaries and wages
 Paying rent for business premises
 Paying business electricity, rates and water
 Buying business furniture and equipment
 Receiving money from customers for goods sold or services rendered.
There are two different ways in which we can pay for goods and services this include cash
and credit transaction.
CASH TRANSACTIONS
 In cash transaction, goods and services are paid for immediately. Payment can be
made by cash or cheque.
CREDIT TRANSACTIONS
 Means the postponement of payments for goods and services or payments of goods
and services is delayed until later date.
The following are examples of credit transaction: hire purchase, lay-bye, credit sale (deferred
payment).
PERSONAL TRANSACTIONS
Personal transactions are done by the owner of the business for his/her personal affairs. The
owner of the business may use cash from the business, but records of these transactions will
be kept separately from the business records and will be deducted from his or her capital
account.
Examples of personal transactions are:
 Buying family food(groceries)
 Buying clothes
 Buying household furniture
 Paying household electricity, rates and water
 Paying school fees
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DRAWINGS
 Drawings are business money and goods that the owner uses for private/personal use.
BASIC ACCOUNTING EQUATION AND THE BALANCE SHEET
 The accounting equation and the balance sheet are the foundation of the accounting
process and it is vital that we understand the equation and how it is related to the
balance sheet.
THE ACCOUNTING EQUATION
An equation is a statement where two sides are equal, such as 7+3=10 and also 5+7=12
 In bookkeeping and accounting a similar equation is used to show the relationship
between what the business owns (assets),is equal to what the business owes(liabilities
and capital).
 What the business owns must be equal to what the business owes. This relationship is
called accounting equation.
ELEMENTS OF THE ACCOUNTING EQUATION AND THE RELATIONSHIP
BETWEEN THEM
Assets, liabilities and capital are called the general elements of the accounting equation. If
you are given two of the three general elements you can find the value of the other one.
The Accounting Equation is, therefore:
 ASSETS
= CAPITAL + LIABILITIES
 P50000
=
P10000 + P40000
To find the missing element, we use the following three equations:
 ASSETS
=
LIABILITIES
+
CAPITAL (to find assets)
 LIABILITIES =
ASSETS
CAPITAL (to find liabilities)
 CAPITAL
=
ASSETS
LIABILITIES (to find capital)
To make it simpler to understand, we can use the first letters of the elements:
 A = L + C
 L = A - C
 C = A - L
An equation has three general elements and each of the three has specific elements (examples
of the general elements). The specific elements will either reduce (-) or increase (+) the
general element.
THE DUAL ASPECT OF A TRANSACTION USING THE ACCOUNTING
EQUATION
The word dual means two. This means that every transaction affects two specific elements of
the accounting equation. A transaction can affect the two specific elements by either:
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 Increasing them :( ++plus) effect e.g. Jeremiah started his business with P10000
cash. Specific elements cash increases (+) from P0.00 to P10000 and capital increases
(+) from P0.00 to P10000.This becomes a (++) effect because both specific elements
are increasing.
 Decreasing them :(--minus)effect e.g Jeremiah paid Lewis P500 cash for furniture
bought on credit. The specific elements affected are: cash (-P500) and creditors (P500).The transaction above is an example of a (--) effect because both cash and
creditors are reducing by P500.
 Increasing one and reducing the other :( +-plus minus)effect e.g Jeremiah bought
motor van for P20000 using cash. The specific elements affected are: cash (-P20000)
and motor van (+P20000).The transaction above is an example of a (+-) effect
because the motor van increases while cash reduces by P20000.
The equation will look like this:
TRANSACTION
1. Jeremiah started his business
with P10000 cash.
2. Jeremiah paid Lewis P500
cash for furniture bought on
credit.
3. Jeremiah bought motor van
for P20000 using cash.
ASSETS
Cash(+P10000)
Cash(-P500)
= LIABILITIES CAPITAL
Capital(+P10000)
Creditors
(-P500)
Motor
van(+P20000)
Cash(-P20000)
NOTE: When we start recording transaction into books of accounts, the specific
elements will become accounts.
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THE EFFECTS OF DIFFERENT TRANSACTIONS ON THE ACCOUNTING
EQUATION
EXAMPLE OF TRANSACTION
EFFECT
1. Owner pays capital into the bank.
Increase assets
Increase capital
(cash at bank)
2.Buy goods by cheque
Increase assets
(stock of goods)
decrease assets
(cash at bank)
decrease assets
(cash at bank)
4.Buy goods on credit
Increase assets
(stock of goods)
5. Owner takes money out of business
decrease assets
account for personal use.
(cash at bank)
6.Owner pays creditor from private money
decrease liability
outside the firm
(creditor)
7.Debtor pays money owing by cheque
Increase assets
assets
(cash at bank)
decrease liability
(creditors)
increase liability
(creditors)
decrease capital
8.Sale of goods for cash(cheque)
increase assets
(cash at bank)
3.Pay creditors by cheque
decrease assets
(stock of goods)
increase capital
decrease
(debtors)
BALANCE SHEET
A balance sheet is a financial statement that shows the assets, liabilities and capital for
business on a certain date.
 It shows all that a business owns (its assets) and all that a business owes (its
liabilities) at a certain date. The word ‘balance’ tell us that the assets of a business
must be equal to its liabilities plus capital.
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THE NATURE OF A BALANCE SHEET
Thuso General Dealer’s Balance Sheet as at 31 December 2009
DETAILS
PULA
PULA
PULA
FIXED ASSETS
Buildings
20000
Motor van
30000
Machinery
5000
55000
CURRENT
ASSETS
Stock
Debtors
Bank
Cash
10000
3000
15000
2000
CURRENT
LIABILITIES
Creditors
7000
Bank overdraft
3000
WORKING
CAPITAL
TOTAL
NET
ASSETS
FINANCED BY:
CAPITAL
30000
10000
20000
75000
75000
 A balance sheet is prepared at the end of the financial period. The financial period
differs from one organisation to another, but the common ones are: after every four
months, six monthly or twelve months. A balance sheet must always have a heading,
which should include the date on which the balance sheet applied. It is usual to show
the name under which the business trades.
 The balance sheet usually starts with the fixed assets. They are arranged in order of
permanency. This is the arrangement in order of how long the assets will be used in
the business. The list of fixed assets begins with those that will keep the longest,
down to those that will not keep very long. For example ,Thuso General Dealer’s
Balance Sheet started with shop buildings and then the motor vehicle and machinery,
because the buildings will last longer than the motor vehicle and the machinery
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 Current assets are recorded next. The list begins with the assets that are furthest away
from being turned into cash, and ends with cash. It is arranged in order of liquidity. It
is usually arranged in the following order: stock, debtor, cash at bank and cash in
hand. For example it is easier to get cash from your debtors than to sell stock for
cash.
 Current liabilities are recorded next. The money must be paid to people or businesses
called creditors. Current liabilities must be paid out from current assets, so they come
after the current assets.
 The first balance (Total net assets) in the balance sheet is found by adding fixed assets
to working capital. Working capital is found by subtracting current liabilities from
current assets. The ‘financed’ by section contains capital and long -term liabilities.
NOTE: When the total assets of a business exceed its total liabilities the financial position of
a business is considered to be good. But when the liabilities exceed assets the business is
considered to be poor.
THE BALANCE SHEET AND THE ACCOUNTING EQUATION
 A balance sheet shows the accounting equation in a more formal way. It shows the
specific elements of the accounting equation which means that you can develop a
balance sheet from accounting equation.
DEVELOP A BALANCE SHEET FROM THE ACCOUNTING EQUATION
A balance sheet is the basic accounting equation.
Example
The accounting Equation is indicated as follows:
Assets
=
Liabilities
+
Capital
The Balance Sheet could be portrayed as follows:
Assets:
Cash
13000
Debtors
2000
Furniture
2000
Motor vehicle 11000
28000
Liabilities:
Creditors
6000
Bank overdraft
2000
Capital
20000
28000
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VERTICAL FORMAT OF THE BALANCE SHEET
Pula
Pula
FIXED ASSETS
Motor vehicle
11000
Furniture
2000
CURRENT ASSETS
Debtors
Cash
CURRENT
LIABILITIES
Creditors
Bank overdraft
Working Capital
TOTAL NET ASSETS
FINANCED BY:
Capital
Long-term liabilities
2000
13000
15000
6000
2000
8000
Pula
13000
7000
20000
20000
0
20000
THE EFFECT OF CASH AND CREDIT TRANSACTION ON THE BALANCE
SHEET
Every transaction affects two items in the balance sheet.
CREDIT TRANSACTION
There are two main credit transactions that affect the balance sheet. These are:
 Debtors-customers who buy on credit,
 Creditors-suppliers who sell on credit.
 Credit transaction can increase the assets,ie debtors, and increase liabilities,ie
creditors.
CASH TRANSACTION
 Cash transaction when debit in nature increases the assets and when on credit reduce
assets.
DOUBLE ENTRY SYTEM FOR ASSETS, LIABILITIES AND CAPITAL
What is an Account?
Account is the place in a ledger where all transactions relating to a particular asset, liability or
capital, expenses or revenue items are recorded.
An Account can also be define as the place in the records where the monetary value of
transactions is recorded.
Debit is the left hand side of the accounts in the double entry.
When you entre the account on the debit side you will be saying you have debited an account.
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Credit is the right hand side of the accounts in the double entry.
All the accounts that are recorded on the credit side one will say that he/she have debited the
account.
Ledger is a records of amounts received and spent.
THE TERMS RELATING TO THE DOUBLE-ENTRY SYSTEM
 ACCOUNT
 DEBIT
 CREDIT
 LEDGER
DOUBLE ENTRY
 Is a system of financial accounting where each transaction is recorded twice once on
the debit side (left hand side) and once on the credit side (right hand side).
ACCOUNT
DR
Name of account
CR
 Is a summary of what have happened i.e the money spent or the money received.
 It is a record of how a particular item has been increased or decreased by a
transaction.
 The account is divided into two sides by the centre line. The left- hand side is the
debit side (usually abbreviated as DR) and the right-hand side is the credit side
(usually abbreviated as CR).On each side there are columns in which to record the
date, details and amount of each transaction.
 The debit entry is made in the account which gains/receive the value, which can be
assets gained/received by the business or expenses paid by the business.
 The credit entry is made in the account which gives the value, which can be
liabilities incurred by the business or income received by the business.
 An account is given a name or title. It can be cash, capital, bank, furniture, creditor,
debtor e.t.c.
 An account shows the history of assets, liabilities, capital and any other transactions.
DEBIT
 This is receiving side of any account. Always debit the account that has received
goods or services or money. A debit entry is for assets or an expense in the ledger.
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CREDIT
 The right hand side is called the credit side. Always credit that account which is
giving goods or services or money. A credit entry is for liability, capital, or income in
the ledger.
LEDGER
 A ledger is a main book of account where all or specific accounts are maintained.
Examples of ledger books are: general ledger, sales ledger, purchases ledger. All
accounts are recorded in the ledger, which can be written into a book or stored in a
computer.
TYPES OF LEDGERS
PURCHASE LEDGER
 This is also known as the creditors’ ledger and is where all personal account of the
credit suppliers (the creditors) are kept.
SALES LEDGER
 This is also known as the debtors ledger and is where all personal accounts of credit
customers (the debtors) are kept.
GENERAL LEDGER
 This is also known as the nominal ledger and it is where all other accounts (except
cash and bank) are kept. The accounts for sales, purchases, returns, assets, liabilities,
expenses and income all appear in this ledger. The accounts which record expenses,
income and capital are called nominal account. Those recording assets are known as
real accounts.
USES OF THE COLUMNS IN THE LEDGER
The ledger has four main columns which are found on both sides of the T account.
DR
TITLE
CR
DATE DETAILS
FOLIO AMOUNT DATE DETAILS
FOLIO AMOUNT
TITLE
 This is the title of the account which may be bank, cash, capital, creditors, and
debtors’ e.t.c.
DATE COLUMNS
 This is the date of the transaction. It reminds the user of the accounting information of
when the transaction took place.
DETAILS
 The title of the other account where the debit or credit is found.
AMOUNT
The amount of the transaction.
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FOLIO
 The reference page of the ledger where the debit or credit is found.
CLASSIFYING ACCOUNTS
Accounts can be described in two ways: as personal or impersonal accounts.
PERSONAL ACCOUNTS
These are accounts for individuals or business. E.g example Bruce account, Duncan account,
Choppies account, Spar account e.t.c.
REAL ACCOUNT
These are accounts in which we record possessions (assets) of the business .E.g buildings
account, machinery account, motor van account e.t.c.
NOMINAL ACCOUNTS
These are accounts in which we record business income, expenses and capital. E.g rent
account, electricity account, rent received account, discount received account e.t.c.
ANALYSING TRANSACTIONS
Means showing the account to be debited and account to be credited.
Examples:
1. Sold furniture for cash P150.
 The two accounts with the transaction are furniture and cash.
 Cash account is receiving some money-so debit it. Furniture account is giving some
money-so its to be credited.
RULES FOR DOUBLE ENTRY
In any business transaction, there are always two actions involved. There are giving action
and the receiving action. This is why transaction has to be entered on two sides:
 Giving side-also called credit or right hand side.
 Receiving side-also called the debit or left hand side
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RULES FOR ASSETS
 Rule 1: when there is an increase in an asset, you record on the debit side of that asset
account.
 Rule 2: when there is a decrease in an asset, you record on the credit side of that asset
account.
RULES FOR CAPITAL
 Rule 1: when there is an increase in capital, you record on the credit side of the capital
account.
 Rule 2: when there is a decrease in capital, you record on the debit side of the capital
account.
RULES FOR LIABILITIES
 Rule 1: when there is an increase in a liability, you record on the credit side of the
liability account.
 Rule 2: when there is a decrease in a liability, you record on the debit side of the
liability account.
DOUBLE ENTRY SYSTEM FOR GOODS
The terms: purchases, sales, returns, debtors and creditors
PURCHASES
 In accounting purchases means goods bought for resale. Whenever a business
purchase goods, the purchases account will be debited. Purchases are in two forms i.e
cash and credit purchases.
CASH PURCHASES
 Buying goods and paying immediately. Payment can be made either by cheque/ cash.
CREDIT PURCHASES
 Buying goods and paying for them later.
SALES
 These are goods sold to customers to make profit. The sales are in two forms i.e cash
credit sales.
CASH SALES
 These are goods sold to customers and payment is received immediately.
CREDIT SALES
 These are goods sold to customers and payment is received later.
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RETURNS OUTWARDS/PURCHASES RETURNS
 It can happen that goods purchased are not satisfactory, they may be damaged, faulty,
or not what the was ordered. These will be returned to the supplier and are known as
purchases returns /return outwards.
RETURNS INWARDS/SALES RETURNS
 Where goods sold by a business prove to be unsatisfactory customer may return them
to the business. These are known as sales returns/return inwards.
DEBTORS (customers)
 Individual/business who owes money to another business.
CREDITORS (suppliers)
 These are other businesses including banks which have lent money to the business or
have supplied goods without yet receiving payments.
NB: Purchases and sales are recorded from a document known as an invoice.
: Return inwards and return outwards are recorded from a document know as a credit
note.
RULES FOR CASH TRANSACTION
DEBIT PURCHASES ACCOUNT
CASH PURCHASES
CREDIT CASH/BANK ACCOUNT
DEBIT CASH/BANK ACCOUNT
CASH SALES
CREDIT SALES ACCOUNT
RULES FOR CREDIT TRANSACTION
DEBIT PURCHASES
CREDIT PURCHASES
CREDIT PERSONAL ACCOUNT (creditor)
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DEBIT PERSONAL ACCOUNT (debtor)
CREDIT SALES
CREDIT SALES ACCOUNT
DOUBLE ENTRY FOR EXPENSES, REVENUE AND DRAWINGS
EXPENSES (PAYMENTS)
 Expenses mean the cost of goods and services used in process of obtaining business
income
OR
 Costs which the business has to pay for during making of a product or while
providing a service.
Examples of expenses
 Rent
 Commission
 Electricity
 Salaries and wages
 Insurance
 Telephone
 Postage and stationery
 Water bills
 Motor expenses
 Discount allowed
NB: Expenses are recorded in accounts called nominal accounts.
TREATMENT OF EXPENSES
 Each time we pay for any expense by cash or cheque, the cash/bank account is
credited. To complete the double entry that account is debited.e.g paid rent P500 by
cash. The accounts affected are rent account and cash account. To complete the
double entry in the ledger debit rent account for receiving value and credit cash for
giving value.
NB: Expenses are part of the losses of a business. They reduce the profit and capital of the
business. This will be shown in the profit and loss account. All expenses have debit balances
in the ledger.
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REVENUE (INCOME)
 Money the business makes or earns from its activities. Business generates most of its
revenue by selling products and services. However, there might be other income
which comes with the operation of the business e.g commission received.
Examples of revenue
 Rent received
 Commission received
 Interest received
 Discount received
 Sales(bank, cash)
NB: Revenue is recorded in accounts called nominal accounts.
TREATMENT OF REVENUE
 When a business receives any income either in form of cash or bank. We debit the
cash or bank account and credit particular income account. E.g if cash of P200 is
received as commission, we debit cash account and credit commission received
account.
NB: All revenue is income of the business. It increases the profit and capital of the business.
All revenue has credit balances in the ledger.
DRAWINGS
 The term used when the owner of a business takes money or goods from the business
for his/her own use. The owner invests capital into the business and therefore, when
he withdraws any resources in the form of drawings, it reduces the amount he/she has
invested.
TREATMENT OF DRAWINGS
 Whenever the owner makes drawings, the drawings account is debited (to show the
value going into that account).If money is withdrawn, the cash account or the bank
account is credited (to show the value going out of that account).
 If the owner of the business withdraws goods for his/her own use, the purchases
account is credited with the cost of these goods (to show the value going out of the
account).
NB: Drawings form parts of the balance sheet. They are deducted from what the owner has
invested in specific period of time. Drawings decreases capital.
18
BALANCING OF ACCOUNTS
 Refers to calculating the value remaining in the account (closing balance) and the
value at which the business will start another period (opening balance).
IMPORTANCE OF BALANCING ACCOUNTS
Accounts are usually balanced off at the end of the trading period. Some accounts are
balanced regularly or monthly as we need to know:
 Amount remaining in that account
The balance is simply the difference between two sides of account i.e debit and credit side.
BALANCE CARRIED DOWN (Bal c/d)
 This is the amount the business has at the end of the trading period. It is sometimes
called the closing balance as it is the value the business has at the close of the trading
period.
BALANCE BROUGHT DOWN (Bal b/d)
 This is the amount the business has at the beginning of trading period. It is sometimes
called the opening balance.
DEBIT BALANCE
 Means that when the business closed trading a specific account had value in the
account. This is reflected by the balance brought down being on the debit side. It is
sometimes called positive balance.
CREDIT BALANCE
 When the opening balance is on the credit side, the account is said to have a credit
balance. This means the account has given out more value than it received on that
specific account. A credit balance is sometimes called a negative balance.
STEPS TO BE FOLLOWED WHEN BALANCING OFF ACCOUNTS
1. Add the total of the debit side
2. Add the total of the credit side
3. Take the bigger amount and record it at the bottom of each side. Double underlined.
4. Subtract the smaller amount from the bigger amount
5. Write the answer on the side with smaller amount.
7. Write the balance carried down next to the answer and the date which is the end of the
trading period.
8. Write the balance brought down on the side with the bigger amount under the double
underlined amount and the date which is usually the first day of the next month.
19
FORM 2
TWO AND THREE COLUMN CASH BOOKS
 The cash book acts as ledger account for cash and bank, and it is part of the double
entry bookkeeping system, it is also a book of prime entry. The basic rules of the
double entry still apply.
LAYOUT OF THE TWO COLUMN CASH BOOK
DR(Receipts)
TWO COLUMN CASH BOOK
(Payments) CR
Date
Details
Cash
Bank
Date
Details
Cash
Bank

Any money received is recorded on the debit side and entered in the appropriate
column, depending on whether it was put in the cash till or put into the bank.
 Any money paid is recorded on the credit side, being shown in the cash column if it
was paid in cash, and the bank column if it was paid by cheque.
NB: There are two sides accounts side by side, and each account must be balanced separately.
The three column cash book is different from the two column cash book one because it has
an extra column on each side of the cash book where cash discount can be recorded. Cash
discount is an allowance given for payment by a customer within a time limit set by the
supplier.
LAYOUT OF THE THREE COLUMN CASH BOOK
DR(Receipts)
THREE COLUMN CASH BOOK
(Payments)CR
Date
Details Discounts Cash
Bank Date
Details Discounts Cash
Bank

Discount allowed is when a business allows its customers (debtors) a discount when
they pay their accounts within the time limit set by the business.
 Discount received is when the business receives a discount when it pays its suppliers
(creditors) within the time limit they set.
 The discount columns are not balanced at the end of the period, but instead they are
added up and the totals are then transferred to the discount allowed and the discount
received.
NB: Cash discount encourages customers to pay their debt quickly
CONTRA ENTRIES
Contra entry is the movement of money between the cash account and the bank
account at the same time and date in the cash book.
Cash may be withdrawn from the bank to replenish the cash till, or surplus cash in the till
may be paid into the bank. In each case, both the debit entry and the credit entry will be in the
cash book. The entries are as follows:
20

Cash withdrawn from the bank and placed in the cash till
Debit Cash account
Credit bank account
 Surplus cash in the cash till paid into the bank
Debit Bank account
Credit Cash account
These entries are known as contra entries which mean the movement of money between the
cash and bank account. The double entry is completed in one book that is both the debit and
the credit entries happen in the same book (cash book).
BANK OVERDRAFTS
 The bank may allow a business to overdraw, which means the business is allowed to
spend more than it has in its account. The overdraft will be liability of the business, as
it is money owed to the bank.
 The credit side will show the larger amount, so the balance carried down will appear
on the debit side, and the balance brought down will appear on the credit side.
PETTY CASH BOOK
This is a cash book that is used to record the receipts and payment of small expenses in the
business. Like the cash book, the petty cash book serves two purposes. It is a record small
expense and also helps the business to analyse it expenses and keep better financial control of
the business.
PETTY CASH
Money used to pay small expenses E.g. stationery, postages, office expenses, motor expenses
travelling expenses, window cleaning, and wages.
SOURCE OF DOCUMENTS FOR RECORDING IN THE PETTY CASH BOOK
Document used to complete the petty cash are as follows: vouchers, receipts, invoices, cash
register rolls and tickets.
THE LAYOUT OF A PETTY CASH BOOK
A petty cash book resembles a ledger account which has several extra columns on the credit
side as shown below.
DR
PETTY CASH BOOK
CR
Total
Date
Details Voucher
Total paid ANALYSIS COLUMNS
received
no
(P)
(P)
(P)
(P)
(P)
(P)
WRITING UP A PETTY CASH BOOK
Applying the usual rules of double entry, the petty cash book is debited with amounts
received. The credit entry will be in the main cash book or the account where the cash came
from e.g. account of a debtor. Any money paid out is entered on the credit side under the total
21
paid column, and it is also shown in the column for that particular expense, e.g postages,
travelling expenses etc.
The entries made at the end of the period may be summarised as(a)Add up the total payments column
(b)Total each of the analysis columns. If these totals are added across horizontally, they
should agree with the figure in the total paid column.
(c)Balance the petty cash book and carry down the balance. The analysis columns are
complete, so the total received and the total paid columns are balanced in the same way as an
ordinary ledger account.
(d)Debit the petty cash book with the amount received to restore the imprest.
(e)Complete the double entry for the payments from the petty cash book by debiting the
relevant expense accounts in the nominal ledger with the total of each analysis column.
USES OF THE COLUMNS OF THE PETTY CASH BOOK
RECEIPTS COLUMN
 Record amounts received by the business.
DATE
 The date of each transaction.
DETAILS
 The description of each transaction.
VOUCHER NO
 The reference number of the voucher used to make payment.
TOTAL PAYMENT
 Amount paid for expenses.
ANALYSIS COLUMNS
 Analysis columns are used to break down payments into different categories. These
columns shows the total petty cash spent on each main type of expense. The totals of
these columns are posted to the ledger.
THE IMPREST SYSTEM OF PETTY CASH
 The imprest is used for most petty cash. The petty cashier starts each period (e.g.
week, month e.t.c) with a certain amount of money-the imprest amount or float.
Payments are made out of this amount during the period and recorded in the petty
cash book.
 At the end of the period, when the petty cash book is balanced, the chief cashier will
give the petty cashier enough cash to restore the balance remaining to imprest amount.
Thus the amount with which the petty cashier starts each new period is always equal
to the imprest amount.
TRIAL BALANCE
A trial balance is a list of the balances of accounts contained in the ledger/list of balances of
accounts arranged according to whether they are debit or credit balances. It is prepared on a
certain date, and the date must be included as part of the heading of the trial balance. The
name of each account is shown and whether the balance of the account is a debit or credit.
Notes: A trial balance is not part of the double entry system.
22
REASONS FOR PREPARATION OF A TRIAL BALANCE
 A trial balance is drawn up periodically to check the arithmetical accuracy of double
entry bookkeeping. It can assists in locating errors and also a convenient list from
which to prepare final accounts.
PREPARATION OF A TRIAL BALANCE
 Before the trial balance is extracted all the accounts in the ledger are balanced. The
difference, or balance on each account is entered in either the debit column or credit
column.
 If the ledger account has a debit balance (where the debit side of the account shows a
greater amount than the credit side) the amount is entered in the debit column of the
trial balance. If the ledger account has a credit balance (where the credit side of the
account shows a greater amount than the debit side) the amount is entered in the credit
column of the trial balance.
 The two columns are then totalled. If they agree, it proves the arithmetical accuracy
of the double entry bookkeeping.
Debit balances may be summarised as assets and expenditures, and credit balances may be
summarised as liabilities and income. The following lists expand this basic definition.
Debit balances
Assets e.g. cash, stock, premises, debtors etc
Expenses e.g. rent, insurance, salaries, wages, electricity etc
Drawings
Purchases
Sales returns
Credit balances
Liabilities e.g. loans, creditors etc.
Income e.g. commission received, rent received, discount received etc.
Capital
Sales
Purchases returns
Notes: The bank account can have either a debit balance (if there is money in the bank) or a
credit balance (if there is a bank overdraft).
TRADING, PROFIT AND LOSS ACCOUNT
TRADING ACCOUNT
This account deals with trading-buying and selling. It shows calculations of the profit earned
on goods sold i.e. the difference between the selling price and the cost price. This is known as
the Gross Profit. The basic formula isSales - Cost of Goods Sold = Gross Profit.
A Trading Account must always have a heading, which state the period of time covered by
the account, and it is also usual to include the name under which the business operates.
23
John Lee
Trading Account for the year ended 30 June 2009
Sales
Sales returns
Less Cost of Goods sold:
Opening Stock
Purchases
Less Purchases returns
Add Carriage inwards
Goods available for sale
Less Closing Stock
Gross Profit
Add other Incomes (e.g. rent received, discount received e.t.c)
Total Income
P
xxx
xxx
P
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
COMPONENTS OF TRADING ACCOUNT
The Trading account consists of the following components:
SALES
 Goods sold to customers by the business over specific period of time.
SALES RETURNS/RETURN INWARDS
 Goods returned to business by a customer. Sales returns are deducted from sales
figure to calculate net sales.
PURCHASES
 Goods bought for resale by business over a specific period of time.
PURCHASES RETURNS/RETURNS OUTWARDS
 Goods returned to the supplier by a business. Purchases returns are deducted from
purchases figure to calculate net purchases.
OPENING STOCK
 Goods available at the start of the trading period.
CLOSING STOCK
 Unsold goods that the business have at the end of trading period.
CARRIAGE INWARDS
 The cost of purchasing goods. It occurs when a business has to pay for purchased
goods to be delivered to its premises. Carriage inwards are added to purchases.
GOODS AVAILABLE FOR SALE
 The total amount of stock that was available to a business to sell during the trading
period.
COST OF GOODS SOLD
 Cost of items or services sold to customers
GROSS PROFIT/LOSS
24

The difference between the net sales (selling price) and cost of goods sold (cost price)
PROFIT AND LOSS ACCOUNT
This account deals with profits and losses, gains and expenses. It shows the calculation of the
final, true, profit. This the profit the business has earned after taking into consideration all
running expenses and any other items of income. This is known as Net Profit. The basic
formula isGross Profit + Other income – Expenses = Net Profit
A Profit and Loss Account must always have a heading, which should state the period
covered by the account, and also usual to include the name under which the business trades.
John Lee
Profit and Loss Account for the year ended 30 June 2009
P
Gross Profit
Rent received
Discount received
Total Income
Less Expense:
Motor Expenses
Electricity
Wages and Salaries
Discount Allowed
Carriage Outwards
Loan Interest
General expenses
Stationery
Postage
Rent
Net Profit /Loss
P
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx xxx
xxx
COMPONENTS OF PROFIT AND LOSS ACCOUNT
The profit and loss account consists of the following components:
GROSS PROFIT/LOSS
 This is the difference between the net sales (selling price) and cost of goods sold (cost
price).It is calculated in the trading account and brought down on the credit side of the
profit and loss account.
EXPENSES
 Expenses refer to the cost of running a business. Expenses are deducted from the
gross profit or added to gross loss.
NET PROFIT/LOSS
 This is the difference between the gross profit and the total expenses.
25
John Lee
Trading, Profit and Loss Account for the year ended 30 June 2011
P
P
xxx
Sales
Sales returns
xxx
Less Cost of Goods sold:
Opening Stock
xxx
Purchases
xxx
Less Purchases returns
xxx
xxx
Add Carriage inwards
xxx
xxx
Goods available for sale
xxx
Less Closing Stock
xxx
Gross Profit
Add other Incomes (e.g. rent received, discount
received e.t.c)
Total Income
Less Expense:
Motor Expenses
xxx
Electricity
xxx
Wages and Salaries
xxx
Discount Allowed
xxx
Carriage Outwards
xxx
Loan Interest
xxx
General expenses
xxx
Stationery
xxx
Rent
xxx
Net Profit /Loss
NB:All the business revenue are added to the gross profit
P
xxx
xxx
xxx
xxx
xxx
xxx
xxx
BALANCE SHEET
Is a statement of the financial position of business on a certain date. It shows what the
business owns, and amounts owing to the business- the assets, and what the business owesthe liabilities, and the capital. A balance sheet must always have a heading, which should
include the date on which the balance sheet applied and also the name under which the
business trades.
The balance sheet consists of the following components:
FIXED ASSETS
 The Balance Sheet starts with fixed assets. Fixed assets are long term assets which are
acquired for use in the business, not for sale. They are arranged in order of
26
permanency. This is the arrangement in order of how long the assets will be used in
the business. The list of fixed assets begins with those that will keep the longest,
down to those that will not keep very long.
Example: premises, machinery, fixtures e.t.c
CURRENT ASSETS
 Current assets are recorded nextT.These are short term assets which are constantly
changing. The list begins with the assets that are furthest away from being turned into
cash, and ends with cash ie in order of permanence (e.g Stock,
Debtors,Bank,cash).When arranged in order of liquidity ,we start with those which are
easy to turn into cash (e.g Cash,Bank,Debtors,Stock).
CURRENT LIABILITIES
 These are amount owed by the business which is due for repayment within the next 12
months. Current liabilities arise from the normal trading activities, so they are
constantly changing.
Example: Creditors, bank overdraft
LONG TERM LIABILITIES
 These are amount owed by the business which does not have to be paid within the
next 12 months.Current liabilities can be added to capital or deducted from total net
assets.
Examples:bank loan,mortgage and loan from other businesses.
DRAWINGS
 The amount of drawings is subtracted from the owner’s capital after adding the net
profit.
NET PROFIT OR LOSS
 The net profit or loss is transferred from the profit and loss account.Net profit is added
to capital while net loss is subtracted.
CAPITAL
 Money invested into the business by the owner and at times equipment brought into
the business.
27
TAU BALANCE SHEET AS AT 31 DECEMBER 2008
DETAILS
PULA
PULA
FIXED ASSETS
Buildings
20000
Motor van
30000
Machinery
5000
CURRENT ASSETS
Stock
10000
Debtors
3000
Bank
15000
Cash
2000
CURRENT
LIABILITIES
Creditors
7000
Bank overdraft
3000
55000
30000
10000
WORKING CAPITAL
TOTAL NET ASSETS
20000
75000
FINANCED BY:
CAPITAL
73000
NET PROFIT
8000
DRAWINGS
PULA
81000
6000
75000
28
EFFECT OF PROFIT, LOSS AND DRAWINGS ON THE BALANCE SHEET
NET PROFIT
EFFECT ON CAPITAL
Increase
Increase
Decrease
Decrease
NET LOSS
EFFECT ON CAPITAL
Increase
Decrease
Decrease
Increase
DRAWINGS
EFFECT ON CAPITAL
Increase
Decrease
Decrease
Increase
29
FORM 3
NON PROFIT MAKING ORGANISATION
A non profit making organisation is an organisation whose aim is not to make a profit but to
provide certain facilities to its members.
The main aim of a trading organisation is to make or earn profit, whereas, clubs, associates
and other non profit making organisations their aim is to provide facilities to its members.
DIFFERENCES BETWEEN NON PROFIT MAKING ORGANISATION AND
PROFIT MAKING ORGANISATION
PROFIT MAKING
NON PROFIT MAKING
Keep records in double entry system.
Keep records in single entry system.
Keep subsidiary books, general ledger, sales Keep only the receipts and payments
ledger and purchases.
accounts.
Prepares the trial balance to check the Do not prepare a trial balance so they
accuracies of posting.
accuracy of profit is not checked.
The purpose of the final accounts is to The purpose of the final accounts is to
determine net profit or net loss of the determine surplus or deficit
of the
business
organisation
The business is financed by capital
In a non profit making organisation they
calculate accumulation fund.
SIMILARITIES NON PROFIT MAKING ORGANISATION AND PROFIT MAKING
ORGANISATION
PROFIT MAKING
NON PROFIT MAKING
Prepares a trading account to show gross Prepares a trading accounts also if they are
profit/loss
buying and selling (running a bar, selling
replica jerseys
A balance sheet is prepared to show assets, They prepare a balance sheet as well to show
liabilities and capital of the business.
accumulate funds, assets and liabilities of the
organisation.
30
SOURCES OF INCOME FOR NON PROFIT MAKING ORGANISATION
1.
2.
3.
4.
5.
6.
7.
8.
Subscriptions
Donations
Fund raising
Sales of refreshment
Sales of tickets’
Membership fees
Life membership
Sales of tickets
RECEIPTS AND PAYMENTS ACCOUNT
This is a summary of the cashbook for the financial period. Any money received during
the period is debited and any money paid during this period is credited. The account is
then balanced in the usual way. The balance is carried down and becomes the opening
balance for the next financial year. This balance maybe money in the bank, actual cash, or
a combination of the two debit balance represents, money owned and is an asset, and a
credit balance is represents a bank overdraft and is a liability. This account records all
money paid and received during the period.
The following information relates to Notwane sports club for the year ended 31 st
December 2009
Cash in hand (balance b/d)
P2800
Donations
P3060
Sales of raffle tickets
P4300
Subscription received
P5750
Gate takings
P6320
Travelling expenses
P400
Purchases of prizes
P1800
Stationery
P320
Sports equipment
P740
31
NGOTWANE SPORTS CLUB
RECEIPTS AND PAYMENT FOR THE YEAR ENDED 31 DEC 2009
RECEIPTS
P
PAYMENTS
P
Balance b/d
2 800
Travelling expenses
2 400
Donations
3 060
Purchase of prizes
1 800
Sales of Raffle Tickets
4 300
Stationary
320
Subscription Received
5 750
Sports Equipment
740
Gate Takings
6 320
Balance c/d
22 230
16 970
22 230
CAPITAL AND REVENUE EXPENDITURE
Capital Expenditure
It is the money spent on the purchase (or improvement) of fixed assets, such purchases or
improvements are permanent in nature, and can be used over and over again in the
organisation.
Examples
a. Purchases of motor van, machinery, furniture, fixtures and fittings etc
B. Extension of buildings.
C. Installations and additional fixtures to premises.
D. Legal cost involved in the purchase of the buildings.
REVENUE EXPENDITURE
It is the money spent on the purchases of services needed in the daily running of the business
during a particular period or on the purchase of an asset which can only be used once.
E.g. (a) Purchase of stationery, stamps for office use
(b)Purchase of goods for resale, packaging materials for goods for sale.
(c)Payments of rent, wages, interest, repairs expenses
32
(d)Depreciation on fixed assets
The revenue expenditure incurred for a particular period, whether paid for or not, will be
charged against one of the following:
1. Trading account
2. the profit and loss account
3. The income and expenditure accounts of a non-profit making organisation.
CAPITAL AND REVENUE RECEIPTS
Capital Receipts
This is money obtained from sources, other than the normal activities of the organisation.
Examples of capital receipts for clubs and associations are:
a. Sale of club fixed assets such as equipment, fridges e.t.c
b. Donations received for the purposes of purchasing a new asset or improve an existing
asset
c. Legacies.
REVENUE RECEIPTS
These are receipts which are received in the normal activities or operations of the
organisation.
Examples of revenue receipts for clubs and association are:
a. Annual subscriptions
b. Membership fees
c. Receipts for locker fees and other clubs for use of premises
d. Gain from sale of assets.
INCOME AND EXPENDITURE ACCOUNT
INCOME
Income of a non-trading organisation refers to revenue, gains or money generated by
organization for its operating activities and it may include subscriptions, sales of refreshment,
fundraising, raffles, entrance fees, gate taking etc
EXPENDITURE
Expenditure of non profit organisation refers to cost of operating the organization and may
include things such as wages, rent, stationary, transport for the teams, hire of grounds,
purchase of refreshments, etc.
This is similar to the Profit and Loss account for a business. It list all the expense of the
organization and all the gains.
33
Where the expenses are lower than the gains, the difference is referred to as the deficit of
excess of expenditure over income. A business refers to this difference as a net loss.
In preparing a profit and loss account for trading business the matching concept is applied
and expenses are adjusted for accruals and prepayment. This is applied when an income and
expenditure account is prepared. Any non monetary expenses, such as depreciation, are also
taken into account in the income and expenditure account. Capital receipts and capital
expenditure do not appear in Profit and Loss account nor in an income and expenditure
account.
The income and expenditure account of a non profit trading organization is prepared from
receipts and payment account, together with information about accruals, prepayments,
depreciation, profits and losses on sales of fixed assets, and any profit or losses from any
trading activities.
SURPLUS AND DEFICIT
SURPLUS
This is excess of income over expenditure that is when income is more than expenditure. For
example if income is P10 000 and expenditure is P7 000 then surplus is P3 000, (P10 000 –
P7 0000= P3000)
DEFICIT
This is the excess of expenditure over income that is when expenditure is more that income.
For example, if expenditure is P14 000 and income is P9000 the deficit is P5000.
(P9000=P14000=P5000)
EXAMPLE
KABELO DRAMA CLUB
RECEIPTS AND PAYMNTS FOR THE YEAR ENDED 31 DEC. 2011
RECEIPTS
P
Payments
P
Balance 1 January 11
Subscription
Sales of dance tickets
Entrance fees
2 050
4 870
3 000
1 300
Cost of dance
Rent of hall
Printing and stationary
Transport cost
Equipment
Balance c/d
1 500
400
780
1 400
890
6 250
11 220
11 220
34
You are required to :
a) Prepare an income and Expenditure Account for the year ended 31 Dec 10
Kabelo Drama Club
INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 31 DEC 10
INCOME
Subscription received
Sales of dance tickets
Entrance fees
Total income
EXPENDITURE :
Cost of dance
Rent of hall
Printing and stationary
Transport cost
P
4 870
3 000
1 300
P
9 170
1 500
400
780
1 400
4 080
Surplus (excess of income over expenditure)
5 090
ACCUMULATED FUND
The members of a non trading organisation do not invest in the organisation with a view to
earning a profit, therefore, the surplus accumulated within the organisation form a capital
fund, known as the accumulated fund.
A sole trader or a partnership will have a capital account while a non profit making
organisation will have an accumulated fund. Its effect is the same as a capital account as it
lists the difference between assets and liabilities.
In a sole trader or partnership
Capital= Assets - Liabilities
In a non profit making organisation
Accumulated fund= Assets- Liabilities
35
Therefore, accumulated fund is the capital account of a non profit making organisation. To
find the value of the accumulated fund at the beginning of financial period.
Assets at the beginning - liabilities at the beginning of that financial period.
SUBSCRIPTION OWING AND SUBSCRIPTION PREPAID
Subscription owing refers the money which members have not paid for belonging to a
particular club.
Subscription prepaid refers to the money which members have paid for becoming financial
year.
Therefore, where there is no subscription owning. Or paid in advance, at the beginning and
end of financial year, then the amount shown on the credit side of the subscription account
can b transferred to the credit of the income and expenditure account.
Example 1
SUBSCRIPTION ACCOUNT
2010
DEC
P
31
Income
Expenditure
& 4 250
201
0
P
31
Bank
4 250
Dec
This shows that the amount paid is subscription for that year 2010 which is P4 250. This
amount will be recorded in the income Income and Expenditure account
Example 2
2009
DEC
P
31
Balance c/d
Income
Expenditure
250
&
3 730
3 980
201
0
Dec
P
31
Bank
3 500
31
Bal c/d
480
3 980
36
Workings on subscription
P
Subscription in the year 2010
Add subscription owing for 2010
3 500
480
3 980
Less subscription owing for 2009
250
Subscription for 2010
3 730
( the amount to be recorded in Income and Expenditure account )
INCOME AND EXPENDITURE ACOUNT FOR THE YEAR ENDED 31 DEC 2009
Income :
P
Subscription
3 730
In the last case, at the start of the year there are both subscriptions owing from the previous
year and also paid in advance.
There may also be subscription paid in the current year for the next year ( in advance );and
also unpaid (owing )at the end of the current year.
THE BALANCE SHEET
The Balance sheet of a non trading organisation is very similar to a Balance sheet of a trading
business . the main difference is that a non trading organisation has no capital.
Example
37
SECHABA TENNIS CLUB
RECEIPTS AND PAYMENTS ACCOUNT FOR THE ENDED 31 DEC
2010
Receipts
Balance b/d
Subscriptions
Entrance fees
Gate takings
Sales of refreshment
P
3 720
5 370
1 250
4 870
7 650
Payments
Refreshment
Purchase of sports equipment
Grounds men’s wages
Rent of grounds
Stationary
Balance c/d
22 860
P
3 560
2 370
1 730
1 500
370
13 330
22 860
The following information is to be taken into account
1. Balance on 1 Jan 2010:
Subscriptions
in arrears for 2009
P 1 480
Subscription received in advance for 2010
P 1 850
Equipment
P 1 670
2. On 31 December 2010 subscription received included P800 paid in advance for next
year and P560 which was owed for 2010.
Required to Prepare:
a) Income and Expenditure Account for the year ended 31 Dec 2010.
b) The balance sheet as at 31 Dec 2010
Draw up the statement of affairs at the start of the financial period in order to
calculate the accumulated fund.
SECHABA TENNIS CLUB
STATEMENT OF AFFAIRS AS AT 1 JAN 2010
P
P
Fixed Assets
Equipment
Current Assets
Bank balance
Subscription owing
Less Current Liabilities
Subscription in advance
Net Assets
Finance by:
Accumulated fund
1 670
3 720
1 480
5 200
1 850
3 350
5 020
5 020
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Determine the subscription figure which will be recorded in the Income and Expenditure
Account.
SUBSRIPTION ACCOUNT
Date
Jan 1
Dec 31
Details
Owing c/d
Income
Expenditure
Prepaid c/d
Amount
(P)
and 1 450
5 500
800
7 780
Date
Jan 1
Dec 31
Details
Prepaid b/d
Cash
Owing
Amount
(P)
1 850
5 370
560
7 780
WORKING ON SUBSCRIPTION FOR 2010
Subscriptions paid in the year 2010
Add: subscription owing for 2010
Subscription prepaid in
5 370
560
1 850
Less: : subscription owing for 2009
1 480
Subscription prepaid for 2011 800
Subscription for 2010
2 400
7 780
2 280
5 500
(The amount to be recorded in the Income and Expenditure Account).
SECHABA TENNIS CLUB
INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 31 2009
INCOME
Sales of Refreshment
Subscription
Entrance fees
Gates taking
LESS EXPENDITURE
Purchases of refreshment
Grounds man’s wages
Rent of grounds
Stationary
P
7 650
5 500
1 250
4 870
3 860
1 730
1 500
370
P
19 270
7 160
12 110
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SECHABA TENNIS CLUB
BALANCE SHEET AS AT 31 DECEMBER 2009
Fixed Assets
Sports Equipment (1 670 +2 370)
Current Assets
Subscription Owing
Bank balance
Less Current Liabilities
Subscription in advance
Working Capital
Net Assets
Financed by :
Accumulated fund
Add surplus of income over expenditure
P
P
4 040
560
13 330
13 890
800
13 090
17 130
5 020
12 110
17 130
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BANK RECONCILIATION STATEMENT
41
In the books of a business, funds paid into and out of the bank are entered into the bank
columns of the Cash Book. At the same time, the bank will also be recording the money
being paid into the bank account and money paid out of the business bank account.
If all the items entered in the Cash Book were the same as those entered in the records held
by the bank, the balance on the business bank account as shown in the Cash Book and the
balance on the account as shown by the bank’s records would be the same.
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Unfortunately, it isn’t usually that simple, particularly in the case of a current account. There
may be items paid into or out of the business bank account which have not been recorded in
the Cash Book. And there may be items entered in the Cash Book that have not yet been
entered in the bank’s records of the account. To see if any of these things have happened, the
Cash Book entries need to be compared to the record of the account held by the bank. Banks
usually send a copy of that record, called a bank statement, to their customers on a regular
basis, but a bank statement can be requested by a customer of the bank at any time.
Explaining the difference between records in the cash book and the bank statements is called
reconciling the two balances.
PURPOSE OF BANK STATEMENT.
Is to check if the details on the cash book and details on the bank statement match.
RELATIONSHIPS BETWEEN THE ENTRIES IN THE CASH BOOK AND ENTRIES
IN THE BANK STATEMENT.
When the bank receives money for the business it records it on the credit side, while the
business records it on the debit side of the cash book. And if the business pays out money the
bank records it on the debit of the bank statement.
Therefore, the debit side of the cash book is compared with the credit side of the bank
statement, and the credit side of the cash book is compared with the debit side of the bank
statement.
CAUSES OF DIFFERENCES BETWEEN THE CASH BOOK BALANCE AND THE
BANK STATEMENT BALANCE.
1. STANDING ORDERS. A firm can instruct its bank to pay regular amounts of money at
stated dates to persons or firms. For instance, you may ask your bank to pay P200 a month to
a building society to repay a mortgage.30.4
30.6
2. DIRECT DEBITS. These are payments which have to be made, such as gas bills,
electricity bills, telephone bills, rates, and insurance premiums. Instead of asking the bank to
pay the money, as with standing orders, you give permission to the creditor to obtain the
money directly from your bank account. This is particularly useful if the amounts payable
may vary from time to time, as it is the creditor who changes the payments, not you.
With standing orders, if the amount is ever to be changed, you have to inform the bank. With
direct debits it is the creditor who informs the bank. Just as with anything else omitted from
the Cash Book, items of these types need to be included in the reconciliation and entered in
the Cash Book before balancing it off at the end of the period.
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3. DISHONOURED CHEQUE.
When a cheque is received from a customer and paid into the bank, it is recorded on the debit
side of the Cash Book. It is also shown on the bank statement as a deposit increasing the
balance on the account. However, at a later date it may be found that the customer’s bank will
not pay the amount due on the cheque. The customer’s bank has failed to ‘honour’ the
cheque.
4. UNPRESENTED CHEQUES – (these are cheques that the business gave to individuals
or other businesses for payment but are not yet presented for payment at the bank.)
The business enters cheques in the cash book on the day it is written, but the bank learns of
this only when a cheque is presented for payment. This will take a few days even if the
receiver pays it into his or her bank account immediately. If the receiver keeps it for a time,
this will increase the period.
5. BANK CHARGES
Banks make charges for some of their services. They do not send a bill but simply take
money out by debiting the account with the amount of the bank charges. Charges can include
interest on bank overdrafts or loans.
6. UNCREDITED CHEQUES – sometimes businesses receive cheques and take time to
deposit them into its bank account but they record them in the cash book on the same date
they received it. Or even if they deposit cheques on the same date it may be late on the
afternoon bank statement was issued. Also the cheques have to pass through bank cheque
clearing system.
7. Sometimes banks receive money on behalf of their customers; this often includes interest
from investments and money received by bank giro credit transfer system. (A giro transfer
system is a financial system in which a bank or a post office transfers money from one
account to another when they receive authorization to do so). Money received in this way will
appear on the bank statement on the date the bank receives it, but these items are not entered
in the cash book until the bank statement arrives. This items should be entered on the debit
side of the cash book.
PURPOSE OF A BANK RECONCILIATION STATEMENT.
To show whether or not errors have been made either in the bank columns of the Cash Book
or on the bank statement.
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COMPUTERIZED ACCOUNTING
-
is the recording and processing of accounting information or data by means of a
computer
Computerized accounting uses many of the same systems as manual accounting. In
manual accounting we record transactions in the books of accounts such as the
journal, ledger and cash book, using pens and pencils.
ADVANTAGES OF COMPUTERIZED ACCOUNTING
- Accounting information is handled with speed and accuracy.
- Accounting information can be stored in small space. There is no need for bulky filing
cabinets or holding records in books.
- It is easier and quicker to look for a specific account on a computerized system. In a
manual system you need to check pages in books of accounts.
- It is easier to keep accurate information and update the accounts. For example there is
no need to wait for the month end to balance each account, since at the time any
transaction the new balance is calculated.
- Work done on the computer is neater to read than work written by hand on paper.
DISADVANTAGES OF COMPUTERIZED ACCOUNTING
- Electronic damage to the storage device may result in the loss of all accounting
information.
ADVANTAGES OF MANUAL ACCOUNTING
- There is little danger of losing information in books.
- Bookkeepers and accountants do not have to go for further training in order to record
and process financial information.
DISADVANTAGES OF MANUAL ACCOUNTING
- There is a lot of work involved and this can result in a lot of mistakes.
- It is difficult to keep accurate and updated accounts. As a result actual balances for all
accounts in the books are usually done only at the end of the month.
- Space is needed to keep all books of accounts in the filing cabinets.
- It can take time to locate an account.
ACCOUNTING SOFTWARE
- An accounting software package is a program written for an accounting function.
- Accounting packages allow the computer to store and organize data on a particular
aspect of business accounting.
- The program is usually written to perform any calculations that may be required.
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OPERATIONAL STRUCTURE OF AN ACCOUNTING PACKAGE
The manual accounting system has different ledger books, for example, the sales ledger, the
general ledger and the purchases ledger. Each ledger is a separate book, known as a ledger
book. In computerized accounting each ledger is known as a ledger module. The following
are ledger modules:
-
General ledger module – this is used for recoding all real and nominal accounts, e.g.
assets, expenses or income.
Purchases ledger module – this is used for recording all debtors’ accounts (personal
accounts)
Sales ledger module – this is used for recording all creditors’ accounts (personal
accounts)
USING A SPREADSHEET APPLICATION TO DO SIMPLE ACCOUNTING
When using a computer, the ledger account has the following columns:
- the first column is used for date
- the second column is used for details
- the third column is used for debit entries
- the forth column is used for credit column
- the fifth column is used for the balance
The balance is calculated after every entry. The balance is cumulative, in other words, you do
not wait until the end of month to balance each account in the ledger.
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