1. FINANCIAL ACCOUNTING LECTURE NOTES BY MR. S
FINANCIAL ACCOUNTING LECTURE NOTES BY MR. S. NDHLOVU TOPIC 2 RECORDING FINANCIAL TRANSACTIONS
ACCOUNTING EQUATION
In order to operate, all businesses need resources. These resources are known as assets of the business. And in order to acquire assets, a business must obtain funds.
In a new business, the owner is usually the main source of funding. In this case the funding provided by the owner is known as capital or owner’s equity. Therefore, the assets of the business will be equal to capital and It will be written as follows:
Assets = Capital
Capital invested is a form of liability, because it represents an amount that the business owes its owners. Based on this idea, that assets and liabilities are always equal, we can state the accounting equation as follows:
ASSETS = CAPITAL + LIABILITIES

2. RECORDING FINANCIAL TRANSACTIONS
ACCOUNTING EQUATION CONT,D ASSETS: These are resources owned by the business. They are resources controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. Examples of assets are : office buildings, delivery vans, plant and equipment, office furniture, inventory, cash on hand and at bank etc. CAPITAL OR EQUITY: This refers to resources or amount used to start a business. It is especial kind a liability for the business. LIABILITY: this what the business owes others. The ISASB,s Framework for the preparation and presentation of financial statements defines a liability as follows: “.A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefit.”

3. RECORDING FINANCIAL TRANSACTIONS
ACCOUNTING EQUATION CONT’D Example 1: A business buys a new machine for K50,000 Required: Show how this affects the accounting equation if the business finances the purchase by borrowing money from the bank. Solution: Assets = Capital + Liability K50, K50,000 Example 2: On 1st January 2015, Mr. Chalwe phiri started business with K25,000 . On the same day he also received K10,000 from his girlfriend as a loan. All the money was kept at the bank. Required: Show how this affects the accounting equation Solution Assets = Capital + Liabilities K35,000 = K25,000 + K10,000 (K35,000)

4. RECORDING FINANCIAL TRANSACTIONS
ACCOUNTING EQUATION CONT’D
INTRODUCTION OF PROFIT IN ACCOUNTING EQUATION
Profit belongs to the owners of a business. Therefore, as long as the business retains the profits and does not pay anything out to its owners, then the retained profits should be accounted as an addition funds to the proprietor’s capital
Example 3: on 1st July 2015 bought goods for K5,000 by cheque. And on 3rd July he sold all the goods at K7,000 on cash.
Required: Show how this transaction will affect the accounting equation.
Solution
Since Chalwe Phiri bought the goods at K5,000 and sold them at K7,000, a profit of K2000 was realized (K7,000 – K5,000). The realized profit adds to the capital of business.
Therefore, the accounting equation will be:
Assets = Capital Liabilities
K30,000 (bank) K25,000 (original investment)
K 7,000 (cash) K2,000 ( Retained profit)
K37, = K27, K10, (K37,000)

5. RECORDING FINANCIAL TRANSACTIONS
ACCOUNTING EQUATION CONT’D
INTRODUCTION OF DRAWINGS IN ACCOUNTING EQUATION
Drawings are amounts of money taken out of a business by its owners.
Since chalwe phiri has made a profit of k2,000 from the sale of goods, he may want to withdraw some money from the business. after all, business owners, like everyone else, need money to meet their living expenses. Now if chalwe phiri decides to pay himself k800 cash in wages, the k800 withdrawn by the owner should not be deducted as an expenses to arrive at net profit but be treated as follows:
Assets = Capital Liabilities
k30,000( bank) k25,000
k6,200 ( cash,k ) k1,200( retained profit,k2, )_________________
k36, = k26, k10,000

6. Assets = Capital + Liabilities
k30,000( bank) k25,000
k6,200 ( cash,k ) k1,200( retained profit,k2, )____K10,000_____________

7. RECORDING FINANCIAL TRANSACTIONS
THE DOUBLE ENTRY SYSTEM The double entry system simply requires that for every debit entry, must a corresponding credit entry or vise versa. The rule states that we debit the receiving side and credit the giving side with the same value or amount. The receiving side is called Debit (Dr) and the giving being called Credit side (Cr). Therefore, the left hand side there will be the Debit side, while the right hand side we will have the Credit Side.

8. RECORDING FINANCIAL TRANSACTIONS
SUMMARY OF THE DOUBLE ENTRY SYSTEM
Rules of Debit and Credit under Double Entry System of Accounts
The following rules of debit and credit are called the golden rules of accounts:
Classification of accounts Rules Effect
Personal Accounts Receiver is Debit
Giver is Credit Debit = credit
Real Accounts What Comes In Debit
What Goes Out Credit Debit = credit
Nominal Accounts Expenses are Debit
Incomes are Credit Debit = credit

9. RECORDING FINANCIAL TRANSACTIONS
TYPES OF BUSINESS TRANSACTIONS
The word transaction simply means the exchange of values. It is the exchange or transfer of goods, services or funds. The following are three main types of transactions
Cash transaction: this is buying and selling of goods or services on cash
Bank transaction: the buying and selling of goods or service by cheque
Credit transaction: the buying and selling of goods or services on credit i.e. payment deferred to a later date.
These three types of transactions are the ones we will meet and record in this course.

10. RECORDING FINANCIAL TRANSACTIONS
DOCUMENTATION OF BUSINESS TRANSACTIONS AND DEFINITIONS
Whenever a business transaction takes place, involving sales or purchases, receiving or paying money or owing or being owed money, it is usual for the transaction to be recorded on a document.
These documents are a source of all the information recorded by a business.
The following are some of the documents used to records business transactions in books of accounts:
Quotation: A document sent to a customer by a company stating the fixed price that would be charged to produce or deliver goods or services.

11. RECORDING FINANCIAL TRANSACTIONS
DOCUMENTATIOM OF BUSINESS TRANSACTIONS AND DEFINITIONS
Purchasing order: A document of the company that details goods or services which the company wishes to purchase from another company.
Sales Order: A document of the company that details an order placed by a customer for goods or services. The customer may have sent a purchase order to the company from which the company will then generate a sales order.
Goods Received Note: A document of the company that lists the goods that a business has received from a supplier. It is prepared by the officers who receives the goods.

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DOCUMENTATIOM OF BUSINESS TRANSACTIONS AND DEFINITIONS CONT’D
Goods Dispatched Note: A document of the company that lists the goods that the company has sent out to a customer. A customer will compare the goods dispatched note against the goods that have been received.
Invoice : A document which relates to sales order or purchase order. It is a request for the customer to pay what he owes.
When a business sells goods or services on credit it sends out an invoice. Also when a business buys goods or services on credit it receives an invoice from the supplier. The details on the invoice should match the details on the sales order or purchases order.

13. RECORDING FINANCIAL TRANSACTIONS
DOCUMENTATIOM OF BUSINESS TRANSACTIONS AND DEFINITIONS
The invoice shows the name and address of the seller and the purchaser, date of sale the sale, description of what is being sold, quantity and price of what has been sold e.g. 20 boxes of biscuits at K60 per box; details of trade discount, if any e.g. 10% reduction in cost if buying over 80 boxes. Other details are total amount of the invoice as well the date when payments are due, and other terms of sale.

14. RECORDING FINANCIAL TRANSACTIONS
DOCUMENTATIOM OF BUSINESS TRANSACTIONS AND DEFINITIONS CONT’D
Statement of Account: a document sent out by a supplier to a customer listing all invoices, credit notes and payments received from the customer.
Credit Note: a document sent by the supplier to a customer in respect of goods returned or overpayment made by the customer. It is a negative invoice and is mostly printed in red to distinguish it from other documents.
Debit Note: a document sent by a customer to a supplier in respect of goods returned or overpayment made. It is a formal request for the supplier to issue a credit note.

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DOCUMENTATIOM OF BUSINESS TRANSACTIONS AND DEFINITIONS CONT’D
Remittance Advice: a document sent to supplier with a payment, detailing which invoices are being paid and which credit notes offset. It is document which enables the supplier to update the customer’s records to show which invoices have been paid and which are still outstanding. It also confirms the amount paid, so that any discrepancies can be easily identified and investigated.
Receipt: A written confirmation that money has been paid or received. This is usually in respect of cash sales e.g. a till receipt from cash register.

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BOOKS OF ORIGINAL ENTRY
These are books in which we first record business transactions. The books are also known as books of prime entry, subsidiary books, journal or day books.
Each kind of a transactions discussed above will be recorded in separate book. For example, all cash or bank sales and purchases will be recorded in Cash Book, credit sales and purchases will be recorded in Sales and Purchases Journal or Day Book.
The following are the commonly used books of original entry.
Sales day book(Sales journal)- used to record credit sales. It uses duplicate invoice note.
Purchases day book(Purchases journal) used to record credit purchases. It uses original invoice note

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BOOKS OF ORIGINAL ENTRY CONT’D
Sales returns (Returns inwards Journal) – for returns inwards or goods sold on credit and have now been returned by the customer. It uses duplicate credit note
Purchases returns( Returns outwards journal)- for returns outwards or goods returned by the business to its suppliers. It uses original credit note.
The Cash book- for recording receipt and payments of cash and cheque
Petty cash book: for recording cash transactions of small amount e.g. purchase of stationery, postage, tax fares, refreshments etc. The petty cashier is given the starting sum of cash known as float or imprest.

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BOOKS OF ORIGINAL ENTRY CONT’D
General journal or Journal- used to records transaction which can not be recorded in the above books. It is used to record the double entries which do not arise from other books of prime entry, e.g. if the errors have been made and need correction, the journal would be used.
Now we can look at recording of transactions in each of these books of prime entry. Examples and exercise to be given in word not power point presentation.

19. RECORDING FINANCIAL TRANSACTIONS