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basic accounting notes
Books of Prime Entry
Books of prime entry: These include the sales journal, sales returns journal, purchases journal,
purchases return journal, cash book, petty cash book, and the general journal. Each book records
specific transactions before they are posted into the ledger.
Types of transactions:
Sales Journal: Records all credit sales.
Sales Returns Journal: Records returns of goods by customers.
Purchases Journal: Records credit purchases.
Purchases Returns Journal: Records returns of goods to suppliers.
Cash Book: Records all cash and bank transactions, functioning both as a book of prime entry and a
ledger.
Petty Cash Book: Operates under the imprest system and is used to record minor cash expenses.
General Journal: Used for non-regular transactions like the purchase and sale of non-current assets on
credit, and opening entries.
Contra Entries: Recorded when cash is transferred between the cash and bank accounts.
Business Documents
Invoice: A proof of credit sale or purchase, containing details like the supplier and customer names,
address, date, and details of goods.
Debit Note: Issued by the customer to the supplier in case of overcharges or faulty goods, requesting a
reduction in the invoice total.
Credit Note: Issued by the supplier to reduce the amount owed due to returned or faulty goods.
Statement of Account: A summary of all transactions for a credit customer within a month, including
the opening balance, invoices, payments, and discounts.
Cheque: A written order to pay a specified amount to a person or business.
Receipt: A written acknowledgment of money received, acting as proof of payment.
Sole Traders
Definition: A sole trader is a business owned and operated by one individual.
Advantages: Full control, retention of profits, privacy of data, ability to offer specialized services.
Disadvantages: Unlimited liability, difficulty raising finance, inability to benefit from economies of
scale, all decisions must be made by the owner.
Preparation of Financial Statements:
Income Statement: Prepared to calculate profit or loss for the year, containing the trading account
and profit & loss sections.
Statement of Financial Position: Records assets, liabilities, and capital on a specific date.
Trial Balance: The starting point for preparing financial statements, it lists all figures that will be used in
the financial statements.
Trading vs. Service Businesses: Trading businesses sell goods and manage inventory, while service
businesses offer services.
Capital and Revenue Expenditure and Receipts
Capital Expenditure: Money spent on purchasing and improving non-current assets (e.g., plant,
machinery, buildings).
Revenue Expenditure: Money spent on the day-to-day operations of a business, such as wages,
repairs, and rent.
Capital Receipts: Money received from non-trading activities, such as the sale of non-current assets or
loans.
Revenue Receipts: Money received from trading activities, such as sales and commissions.
Examples of Capital vs. Revenue Expenditure:
Capital: Purchase of machinery, cost of installing new equipment.
Revenue: Repairs to machinery, day-to-day running costs.
Effect of Incorrect Treatment: Misclassifying capital and revenue expenditure can affect profit and
asset valuation.
Accounting Principles and Policies
Depreciation: Depreciation is the allocation of the cost of a non-current asset over its useful life.
Methods of Depreciation:
Straight-line Method: Equal depreciation charged each year.
Reducing Balance Method: Depreciation is a fixed percentage of the asset’s book value, decreasing
each year.
Revaluation Method: The asset is revalued at the end of each period, and the depreciation is the
difference between the beginning and ending values.
Reasons for Accounting for Depreciation:
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To ascertain the true profit of the business.
To show a true representation of the business’s financial position.
To provide funds for replacement of assets.
Accounting for Depreciation and Disposal of Non-Current
Assets
Reasons for Depreciation: Non-current assets lose value over time due to physical wear,
obsolescence, depletion, or passage of time.
Disposal of Non-Current Assets:
Recording the Disposal: The asset’s sale proceeds are compared with its book value to determine if
there is a profit or loss.
Disposal Account: Used to record the sale of an asset.
Methods of Depreciation:
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Straight-line method: Simple and easy to calculate, but doesn’t consider asset usage.
Reducing balance method : Reflects asset usage over time but is harder to calculate.
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Revaluation method: Useful for businesses with many small assets but can be costly to
implement.