FUNDAMENTALS OF ACCOUNTING I The Book- Keeping Process& Double entry

Chapter Objectives Identify the various types of business records Appreciate the accounting cycle Explain the double entry system Record transactions in the various books of original entry Draw sales, purchases and ledger entries Draw a basic cashbook.

Introduction Financial information is recorded in a systematic order. The process follows the procedural rules of double entry records, which form the accounting system. Business accounting requires the books of accounts to be maintained in a systematic manner.

Accounting cycle The process of accounting involves records drawn at successive stages and typically involves four levels. Transaction documents Journals(daybooks) Ledgers Trial balance Financial statements

Transaction documents These are records used to capture and store information about business events. The recording of transactions accurately is vital because usually transactions are too many to be memorized. transaction documents can be used as defense in case of differences in the future. E.g. cash receipts, invoices, goods received notes, salary slip, cheque. Transaction documents capture the following information: Date of transaction Details of transaction Type of transaction Reference number Beneficiary of transactions Mode of payment Execution officer Authorization officer

Journals These are books of original entry in which transactions are captured on a day to day basis. They are day books a.k.a books of prime entry. and they capture transactions directly from the transaction documents. There are four main types as discussed below: Sales journal, purchase journal, general journal, cashbook 1) Sales Journal A book of original entry which records credit sales as they are made. Ideally a sales journal should be recorded and summarized on a daily basis.

Format of sales journal Sales Day Book Date Invoice Number Details Folio Amount   Folio: A key or page reference. Book keeping involves a lot of cross referencing and therefore, a key or page is very useful in this respect. Note: The sales daybook summarizes total credit sales for a given day (period) through the sequence of the invoice numbers. However, it doesn’t summarize the sales and payments by individual credit customers and this is captured in a separate record, the sales ledger.

Example 2.2 (Fundamentals of Accounting by D. Wang’ombe) ABC ltd made the following sales on credit as follows. On 1/1/04 Invoice no. 251 sales to Macharia KShs 5,000,000 On 2/1/04 Invoice no. 252 sales to Akinyi KShs 2, 000,000 On 3/1/04 Invoice no. 254 sales to Mutua KShs 1,000,000 On 3/1/04 Invoice no. 253 sales to Abdi KShs 2, 500,000 On 5/1/04 Invoice no. 255 sales to Macharia KShs 3,000,000. On 6/1/04 Invoice no. 256 sales to Abdi KShs 4,000,000 Required: Draw the sales day book.

It records the summary on a daily basis Format of purchase journal 2) Purchases Journal This is a book of original entry where credit purchases are recorded as they are made. It records the summary on a daily basis Format of purchase journal Purchases Day Book Date Invoice Number Details Folio Amount  

Example 2.3 (Fundamentals of Accounting by D. Wang’ombe) ABC bought goods on credit as follows: Invoice no. 005 purchases from Bamburi Ltd. KShs 5, 000, 000 on 1/1/2011 Invoice no. 201 purchases from mumias Ltd. KShs 10, 000,000 on 2/1/ 2011 Invoice number 352 purchases from Athi River Miners Ltd. KShs 4,000,000 on 3/1/2011 Invoice number 020 purchases from Bamburi Ltd. KShs 2,000,000 on 4/4/2011 Invoice number 221 purchases from Unga Group Ltd KShs 2,000,000 on 5/ 1/2011 Required: Draw the purchases day book

3) General Journal (journal proper) records all other transactions not included in the sales or purchases journal. 4) Cashbook This is the accounting book which documents both cash receipts and payments. Its objective is to record cash transactions on a daily basis. It contains all the transactions that relate to various cash transactions

A collection of books of account. Ledgers A ledger is a register having number of pages which are sequentially numbered and each page allocated to a specific account. A collection of books of account. Account is a record of a business event that forms part of the accounting system. An account has two sides: Debit: Left hand side Credit: Right hand side

Thus credit account that receives and debit the account that gives. When account receives benefit is debited while if it gives out a benefit is credited. Thus credit account that receives and debit the account that gives. Accounts may be classified as follows. Personal account-accounts of persons Real accounts-accounts of item, land,building,mv Nominal accounts-accounts of income, expense, Ledgers may be classified as follows Sales ledger: register of individual a/cs of credit customers Purchase ledger-register of individual a/cs of credit suppliers General ledger/Nominal ledger-register of all other a/cs not captured in purchase and sales ledger.

Format of account Double entry rule The rule is: For each and every debit there should be a corresponding credit entry, and for each credit there should be a corresponding debit entry. Each transaction has a duel aspect. Double entry helps in proving the accuracy of book keeping. This implies that each and every transaction is recorded twice. One on the debit side (left) and the other on the credit side (right). Dr Name of Account Cr Date Details F Amount  

Basic double entry rules of accounts To record Entry in the account Assets An increase Debit   A decrease Credit Liabilities Capital Revenue Expenses

Accounting for Sales, Purchases, Incomes & Expenses Sales Sales are divided into cash sales and credit sales When a cash sale is made, Debit- cash at bank/in hand Credit- sales account When a credit sale is made, Debit- trade accounts receivable accounts (an asset) Credit –sales a/c For both credit and cash sales, a sales account is credited. 4/17/2017 MIS Notes

They can either be cash or on credit Purchases They can either be cash or on credit For cash purchases Debit- purchases a/c Credit –cash at bank/in hand For credit purchases Debit- purchases a/c Credit-trade a/cs payable Both cash and credit purchases are posted in the purchases a/c NOTE: no entry is made in the stock a/c 4/17/2017 MIS Notes

Income This includes other income besides that generated from trading (sales). E.g. rent received , bank interest, discount received Entries to be made when a firm receives such income Debit cash in bank /hand a/c Credit particular income a/c (Each income should have its own a/c) Essentially, income increases the value of capital & that’s why we credit incomes a/c just like we credit the capital a/c. 4/17/2017 MIS Notes

Amounts paid for services rendered other than for purchases. Expenses Amounts paid for services rendered other than for purchases. E.g. postage & stationery, salaries &wages, rent, electricity & telephone bills, motor vehicles, running expenses When a firm pays for an expense; Debit- expense a/c Credit- cash/bank a/c Each expense will have its own a/c Expenses are debited because they reduce capital.

Return Inwards/Sale Returns These are goods (from previous sales) that have been returned by customers due to various reasons e.g. The goods are of a wrong size, colour, or model, the goods are damaged, the goods are of poor quality e.t.c Effect: The asset of stock is increased by goods returned hence a debit is needed. Open returns inwards accounts and debit it. Credit trade account receivables account if it was a credit sale or credit cash a/c if it was a cash sale since the amount is refunded. 4/17/2017 MIS Notes

Returns Outwards/Purchases Returns These are goods returned to suppliers due to the same reasons given above If purchases made were cash purchases: Debit- cash at bank /in hand (cash refunded by the supplier) Credit- returns outwards amount For credit purchases Debit-trade accounts payable to reduce the liability Credit –return outwards account. 4/17/2017 MIS Notes