Financial Accounting

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3 3 Designed to give you knowledge and application of: Section C: The Use of Double-entry and Accounting Systems C1. Double-entry book-keeping principles including the maintenance of accounting records and sources of information C2. Ledger accounts, books of prime entry and journals

4 4 Learning outcomes C1: Double-entry book-keeping principles including maintenance of accounting records & sources of information  Identify and explain the function of the main data sources in an accounting system. [1]  Outline the contents and purpose of different types of business documentation, including: quotation, sales order, purchase order, goods received note, goods despatched note, invoice, statement, credit note, debit note, remittance advice, receipt. [1]  Understand and apply the concept of double-entry accounting and the duality concept. [1]  Understand and apply the accounting equation. [1]  Understand how the accounting system contributes to providing useful accounting information and complies with organisational policies and deadlines. [1]  Identify the main types of business transactions e.g. sales, purchases, payments, receipts. [1]

5 5 Types of source documents Business documents Quotation Sales Order Purchase Order GRN GDN Invoice Statement of account Cr Note Dr Note Remittance advice Receipt

6 6 Double Entry Accounting Asset What we own today Liability What we owe today Income Increase in economic benefits Expense Decrease in economic benefits Equity Owner’s contribution

7 7 Increase Decrease Equity Decrease IncreaseExpenses Increase Decrease Income Increase DecreaseLiabilities DecreaseIncrease Asset Credit Debit Principles of Double-entry Book-keeping

8 8 The Book-keeping Flow Identify the two aspects of the transaction Classify the items into assets, liabilities, income, expenses or equity Apply the debit-credit rule Record the transaction Debit Credit Refer to Test Yourself 3 on page 92

9 9 The Accounting Equation Refer to Example on page 99 Capital + Liabilities = Assets Owners equity = Net Assets Net Assets = Assets - Liabilities OR

10 RECAP  Identify and explain the function of the main data sources in an accounting system?  Outline the contents and purpose of different types of business documentation, including: quotation, sales order, purchase order, goods received note, goods despatched note, invoice, statement, credit note, debit note, remittance advice, receipt?  Understand and apply the concept of double-entry accounting and the duality concept?  Understand and apply the accounting equation?  Understand how the accounting system contributes to providing useful accounting information and complies with organisational policies and deadlines?  Identify the main types of business transactions e.g. sales, purchases, payments, receipts?

11 C2: Ledger Accounts, Books Of Prime Entry And Journals  Identify the main types of ledger accounts and books of prime entry, and understand their nature and function. [1]  Understand and illustrate the uses of journals and the posting of journal entries into ledger accounts. [1]  Identify correct journals from given narrative. [1]  Illustrate how to balance and close a ledger account. [1] Learning outcomes

12 Ledger - It is a book containing accounts. An account is a record that is used to collect and store information related to an individual element of financial statements. Types of ledger Receivables ledger Payables ledger Includes all ledgers other than receivable and payables Nominal / general ledger Includes all ledger accounts of customers Includes all ledger accounts of suppliers Includes ledgers for expenses, assets etc. Types of ledger and books of primary entry

13 Sales day book / sales register to record all credit sales Purchase day book / purchase register to record all credit purchases Cash book to record all cash & bank transactions Journal to record all transactions not recorded in any of the above books Books of prime entry - All transactions are first recorded into these books

14 The following is an illustrative list of transactions that are usually recorded in a journal.  Entries for depreciation of non-current assets  Accrual entries e.g. to record expenses incurred but not yet paid  Rectification entries i.e. to correct errors made in accounting  Transfer of profit / loss to capital  Purchases & sales of non-current assets on credit  Opening entries when we prepare new set of books in the next accounting period  Entries for closing ledger account  Exchange entries e.g. exchange of assets Journal Journal entry : A journal entry is an interpretation of a financial transaction showing dual effect of each transaction Note - Do not confuse a journal entry & a journal.

15 Steps in preparing ledger Post the transactions from journal to ledger 3 Prepare a ledger account 2 Make a journal entry 1 4 Balance the ledger

16 01/01/20X9 DrCash / Bank account$2,000 Cr Capital account $2,000 Being initial capital introduced in business Journal entry Ledger Prepare a ledger Post the journal entry in the ledger Make a journal entry Making and posting of journal entries Example: Bob opened a flower shop on 1 January 20X9 and brought in $2,000 as capital. $Date$ Books of Bob Capital A/c CrDr Balance the ledger /01/20X /01/20X9 Balance c/f Total Bank A/c

17 In the books of Bob Bank A/c 600 Rent a/c 31/12/20X9 2,000Capital A/c 2,000 Total2,000Total 1,400 Balance c/f31/12/20X9 $Date$ Dr Cr 01/01/20X9 In the books of Bob Rent A/c 600Total600Total 600Balance c/f 31/12/20X9 600 Bank $Date$ 31/12/20X9 Cr Dr Making and posting of journal entries

18 Steps in balancing a ledger Total the debit and credit sides Calculate the difference between the two sides Find the balancing figure If the debit side exceeds the credit side then it is a debit balance Debit balance - write on credit side If the credit side exceeds the debit side then it is a credit balance Credit balance - write on debit side

19 Carry over the balance to the next accounting period If it is a credit balance: while carrying over to next accounting period, write it to the credit side in the first row of the ledger If it is a debit balance: while carrying over to the next accounting period, write it to the debit side in the first row of the ledger Tips At the end of the financial year – All income and expense accounts, i.e. accounts appearing in the income statement (or the part of SOCI that calculates profit for the year), are closed All asset and liability accounts, i.e. accounts appearing in the statement of financial position, are carried forward to the next accounting year. Refer to page 125 for an example Carry over to next accounting period

20  Identify the main types of ledger accounts and books of prime entry, and understand their nature and function?  Understand and illustrate the uses of journals and the posting of journal entries into ledger accounts?  Identify correct journals from given narrative?  Illustrate how to balance and close a ledger account? RECAP