POA EXAM REVISION
The Accounting Equations
Assets = Capital + Liabilities
1. Fixed Assets. E.g land and buildings, machinery, lorry, fixtures and fittings
2. Current Assets. E.g stocks, debtors, cash in hand, cash at bank, prepayments
Liabilities = Assets - Capital
1. Current Liabilities. E.g bank overdrafts, creditors, accruals
2. Long-term Liabilities. E.g bank loans, loans from other businesses, mortgage
Capital = Assets - Liabilities
Capital is also called the owner’s equity or net worth. It comprises the money, or any other assets
invested in the business by the owner.
Balance Sheet
A financial statement showing the financial position of a business at a point in time.
Order of Permanency: Most permanent to least permanent.
Order of Liquidity: Least permanent to most permanent. How quickly an asset turn into cash
Double Entry
A system of bookkeeping where every entry to an account requires a corresponding debit and
credit entry. The double-entry has two equal and corresponding sides known as debit and
credit.
DEBIT CREDIT
Accounts Receivable/Debtors Accounts Payable/Creditors Insurance
Loans
Rent (Expense) Sales Revenue
Discount Allowed Discount Received
Return Inwards Return Outwards
Wages (Expense) Sales
Carriage Inwards Bank Overdrafts
Carriage Outwards Rent Received
Commission Paid Commission Received
Interest Charge
Sundry
Sales Returned Purchases Returned
Balancing Off
The totalling of the debit and credit sides of an account and inserting a balance to make them
equal at the end of a financial accounting period.
Steps
1. Add up both sides
2. Find the difference (subtract)
3. Balance carried down/ forward (bal c/d)
4. Totals (should be equal)
5. Balance brought down/ forward (bal b/d)
Trial Balance
A trial balance is a list of account titles and their balances in the ledgers, on a specific date,
shown in debit and credit columns.
The Accounting Cycle
● A cycle which all transactions are recorded in a double entry set of books. ● Source
documents are written records that provide information from which accounts can be
prepared. Source documents provide evidence that a particular translation took place.
Books of Original Entry
Also known as subsidiary books, prime books, prime entry and preliminary entry. These are
books in which original transactions, that is, where the first entry of a transaction is made. There
are seven books of original entry.
Types and Source Documents
1. Purchases Book/PDB /PJ: Purchases on credit of goods E.g purchases invoice
2. Sales Book/SDB /SJ: Sales on credit of goods. E.g sales invoice
3. Return Inwards Book/SRDB /SRJ: Return of goods previously sold on credit. E.g credit note
4. Return Outwards Book/ PRDB/ PDJ: Return of goods previously purchased on credit. E.g
debit note
5. Cash Book/ Receipt and Payment: Receipts and payments affecting cash in hand and cash at
bank. E.g cash receipts, till rolls, paying-in slip counterfoils, bank statements
6. Petty Cash Book: Small payment and receipts. E.g petty cash vouchers
7. General Journal: Transactions that can not be recorded in other books of original entry. E.g
non-current assets, notes, emails
Ledgers and Discounts
There are three main types and it is where all postings take place.
Types
Sales Ledger: Records Customers/Debtors accounts.
Purchases Ledger: Records Suppliers/Creditors accounts
General Ledger: Records the rest of the double entry such as fixed assets, expenses and capital.
Types of Accounts
1. Personal: For debtors and creditors.
2. Impersonal: For real and nominal accounts. Real accounts refer to the recording of assets.
Nominal accounts are used for expense, capital and income in which they are recorded.
Types of Discounts
1. Trade Discount: A reduction in price given as a reward for buying in large quantities. 2.
Cash Discount: A reduction in amount paid by credit customers as a reward for settling the
amount due within an agreed time limit.
3. Discount Allowed: Given by a credit customer for settling their account within an agreed time
limit.
4. Discount Received: Given by a credit supplier whose account has been settled within an
agreed time limit.
Processes
Purchases invoices → Purchases Journal → Purchases Ledger → General Ledger
Sales invoices → Sales Journal → Sales Ledger → General Ledger
Debit Notes → Return Outwards Journal → Purchase Ledger → General Ledger
Credit Notes → Return Inwards Journal → Sales Ledger → General Ledger
Folios
Purchases Daybook - PL
Sales Daybook - SL
Return Outwards Day Book - PL
Return Inwards Daybook - SL
Purchase Ledger - PDB, RODB
Sales Ledger - SDB, RIDB
General Ledger - Purchase account (PDB), Sales account (SDB), Return Outwards Journal
(RODB), Return Inwards Journal (RIDB)
General Journal
A book of original entry used to make the first record of transactions, that would not be
appropriate to record in other books of original entry.
Folios: GL, SL, PL, CB
Preparing a General Journal:
Date, Details, Folio, Debit, Credit
Can be used to:
1. Opening a new set of books.
2. Recording the purchase on credit for a non-current asset.
3. Recording the correction of errors.
*Credit entries are to be indented.