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

2. 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.

3. 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.

4. 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

5. 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

6. 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.

7. 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.

8. 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.

9. 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

10. 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

11. 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

12. 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

13. 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.

14. 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

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

16. 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

17. 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
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MIS Notes

18. 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

19. 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.

20. 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

21. 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