Sources and the Recording Data
Double Entry – Bookkeeping
It is extremely complicated to prepare a balance sheet after every single transaction and so a double-entry system of bookkeeping is used to record day to day transactions. It is termed as double entry as giving and receiving, both ends of the transaction, are being recorded in the ledger. Each type of asset, expense, liability, and income for each individual creditor and debtor are maintained in a distinct ledger account. Transaction to each item and person is recorded in the ledger account. A book that is bound and every paper contains a separate account is traditionally called a ledger.The layout of the ledger account is as follows:Debit................................................................................................................................................................................................................................................................................................................................................................Credit| Date | Details | $ | Date | Details | $ |
| XX/XX/XXXX | XXXXXX | XXXXXX | XXXXXX | XXXXXX | XXXXXX |
HOW TO RECORD TRANSACTIONS IN THE LEDGER:
(1) The proprietor started a venture by depositing $100,000 in its bank account.
The owner puts in $100,000 in his Business Bank account and hence is debited. The Capital account is credited when it increases in value, and it is considered as an investment and thus the debit entry is followed by an equal amount of credit entry.
(2) Bought furniture worth $7000 paying by cheque.
Furniture account is debited because it is an asset account & is gaining value, while the bank account is losing value and will be credited, thus the debit entry is followed by an equal amount of credit entry.
(3) Brought motor vehicle on credit from General Motors Ltd. worth $6000
The motor vehicle is received and so the account is debited but since the payment hasn’t been made the account for GM motors has been credited for the same amount. Debit entry is followed by an equal amount of credit entry.
(4) Transfer $2000 from the business bank account to the cash till
The Bank account is credited as cash is taken out and Cash account is debited as the till is gaining cash. Debit entry is followed by an equal amount of credit entry.
(5) Paid rent by cash $800
The cash account is credited as the business is losing cash and that amount is going for rent and so the rent account is debited for the same amount. Debit entry is followed by an equal amount of credit entry.
(6) Paid wages worth $1500 by cheque
The bank account is credited as cash is taken out of the bank and used to pay the wages and so wages account is debited as it is gaining the subsequent cash.
(7) Received commission $200 by cash
The cash account is debited as it is receiving value with commission received account debited, for the value comes from that account.
(8) Received rent worth $500 by cheque
The bank account is debited as cash is received in form of rent money and the rent received account is credited for the equal value.
(9) Took a loan from Alex worth $5000 by cash
The cash account is debited as cash is received and the loan account in the name for Alex is credited as value is coming from this account.
The following transactions are available in the books of the trader.
1st Jan: Proprietor started his venture by putting $100,000 in the business bank account and $20,000 as cash.
3rd Jan: Bought motor vehicle worth $80000 paying by cheque.
5th Jan: Paid rent $12000 by cheque.
8th Jan: Bought furniture worth $30000 on credit from Interwood Ltd.
10th Jan: Received commission worth $3000 by cash.
13th Jan: Took a loan from Abdul worth $35000 by cheque.
15th Jan: Repaid $30000 to Interwood Ltd. by cheque.
18th Jan: Bought machinery worth $50000 on credit from Machine Suppliers Ltd.
20th Jan: Paid utility bills worth $8000 by cash.
25th Jan: Received rent $6000 by cash.
28th Jan: Paid wages worth $15000 by cash.
ACCOUNTING TERMINOLOGIES
1) Sales: are goods sold that were previously bought with the intention of resale. Anything other than goods when sold will not be considered as sales. (REVENUE)2) Purchases: are goods bought with the intention of resale, if something else is bought other than goods they will not be purchases. (EXPENSES)3) Sales Return: when the customers of business return goods to the business that were previously sold on credit are called Sales Returns. (CONTRA REVENUE)4) Purchase Returns: when the business returns goods to its supplier that were previously bought on credit is referred to as Purchase Returns. (CONTRA EXPENSE)5) Goods: all those things that a business trades in. (ASSETS)6) Stocks of Goods: are those goods that were bought with the intention of resale yet unsold. They are also called inventory. (ASSETS)7) Drawings: whenever the owner withdraws anything from the business entity for his personal use, it is called drawings. (CONTRA CAPITAL)8) Carriage inwards: are the transportation charges incurred by the business at the time of buying the goods. (EXPENSE)9) Carriage Outwards: are the transportation charges incurred when the business provides delivery of goods to its customers. (EXPENSE)10) Freight Charges: are the transportation charges incurred when the goods are imported. (EXPENSE)
Purchases
1. Goods purchased for cheque or cash
When a business purchases goods, the purchase account is debited as the business is gaining goods. The double entry for credit would either be in cash or bank account depending on the term of payment made, which could be in cash or cheque.
2. Goods purchased on credit
Something that is also common in business transactions is purchasing on credit. The business makes the purchase and receives the goods but makes the payment on a later date. The purchases account would be debited normally, and the amount would be credited in the account of the supplier and when the payment is made later, we will credit the cash or bank account, and the supplier account would be debited.
Sales
1. Goods sold for cash or cheque
When goods are sold, they leave the business and so the sale account would be credited. With the payment method, the appropriate cash or bank account would be debited.
2. Goods sold on credit
Due to common practice, the business may sell goods on credit and in such cases, the sales account is credited as you would normally do but the debit entries would be made in the customer’s account and would be credited back when the payment is received later with debit entry made to appropriate cash or bank account.
Returns
When a business makes a purchase and isn’t satisfies with it due to any reason such as the product being faulty or damaged. It may return it back to the supplier. These goods are called purchase returns and the purchase returns/ return outward account is credited to show purchases leaving the business with debit entries in the suppliers' account to show him receiving the purchase back.
Similarly, the goods that have been sold are also returned back to the business and so these goods are recorded in a sales return or return inwards account. The account is debited showing the goods coming into the business with an entry on credit end in the customer’s account indicating the goods coming from that person.
DOUBLE ENTRY RECORDS FOR DRAWINGS:
When an owner withdraws anything out of the business account for his own use it is called drawings. This may be money, non-current assets or goods held in the inventory by the business. A drawing account records all transactions of such nature. Drawings are debited into this account and the same amount would be credited from the corresponding account. (cash, non-current assets, etc)
So, if cash is drawn, the cash or bank account would be credited. When goods are withdrawn, purchases account would be credited. Towards the end of the year, the drawings account is closed by transferring the total to the capitals account, thus reducing the amount owed by the business to the owner.
DOUBLE ENTRY RECORDS FOR CARRIAGE INWARDS AND CARRIAGE OUTWARDS:
Carriage alludes to the cost of carrying or transporting/delivering goods. Carriage inwards is the delivery cost for the purchases that the business has made to be delivered to the business. Carriage Outwards is the expense incurred when a business has to deliver goods to the customer. Carriage inwards and Carriage Outwards accounts are debited with costs incurred and relevant cash or bank accounts are credited.
DOUBLE ENTRY RECORDS FOR SALES, PURCHASES, AND RETURNS:
To record goods purchased with the purpose of resale and the goods sold by the business, accounts need to be made to record them in separate accounts due to differences in cost and selling price. So, purchase and sales accounts are used. To record the goods left at the end of the year, an inventory account is made.
BOOKS OF PRIME ENTRIES AND LEDGERS:
Before the transactions are recorded in the ledger, we need to post them in relevant books of original entries. There are six books of original entries which are as follows:
1) Cash Books: all cash and bank transactions are documented in this book. Cashbook is a ledger and at the same time a book of original entry as well. Transactions once recorded in the cash book indicates that one part of double-entry is complete.
2) Sales Day Book/ Sales Journal: All credit sales pertaining to goods are recorded in this book.
3) Purchases Day book/ Purchase Journal: All purchases on credit of goods are documented in this book.
4) Sales Returns Day Book/ Return inwards Journal: when customers send back to the business goods that were precisely sold on credit are passed through this book.
5) Purchases Return Day Book/ Return Outward Journal: When goods are returned by the business to its supplier that the business had previously bought on credit are passed through this book.
6) The General Journal/ The Journal: the transactions that were not documented in this previous book are documented in the previous books are recorded in this journal. All those transactions that neither involve goods nor involves cash are passed through this book. The purchase or sale of non-current assets on credit will be recorded in this book. Any correction of error will also be made through this book. Opening entries of an accounting period are also passed through this book.
Sometimes a seventh book of original entry is also used which is known as the PETTY CASH BOOK.
Large organizations that have lots of cash transactions make use of petty cash book. All those transactions that involve cash but are of petty amount (small amount) are passed through this book. So that the burden of the main cashier is reduced, and errors and omissions are avoided. Petty Cash Book is based on Imprest System, which means that first time a certain amount is transferred to the petty cash book from the main cash book. Then all the transactions which are lower than a certain amount is passed through the petty cash book. The total amount spent from the petty cash book is then compensated from the main cash book at the end of each month. This process of compensation is called reimbursement. compensation is done so that opening and closing balances are the same it is called maintaining the petty cash float.
Once the transactions are recorded in the books of original entries they are posted to the ledger. Ledger is divided into four categories.
CASH BOOK: is not only the book of original entry it is also a ledger. Transactions once posted in the cash book indicates one part of double-entry is complete and hence, we are not supposed to make cash and bank accounts again because they are already incorporated in the cash book.
SALES LEDGER: contains accounts of all the trade receivables.
PURCHASE LEDGER: accounts of all trade payables
GENERAL LEDGER: contains accounts of all assets, liabilities, capital and expenses and revenues other than cash, bank, receivables, and trade payables.
Source Document are the accounting documents that all businesses keep in order to have proof that transactions between two parties take place from the source documents transactions are made and then they are recorded for the whole accounting cycle to take place.
1. Request for Quotation:
When the buyer is searching for the suppliers who would provide them with the designed products, they send a request for a quotation asking them to provide details of the available products.
2. Quotation:
It is the document sent to the buyer by the seller providing details of all the products available, their prices, colour quality, model and so on.
3. Purchase order:
It is sent to the seller by the buyer whose quotation has been accepted indicating the products that are required and the quantity needed.
4. Sales Invoice:
It is sent to the buyer by the seller along with the goods supplied indicating the products that are to be sent, their quantity, price, and discounts. Payment policies are also mentioned.
5. Goods Received Note:
It is sent to the seller by the buyer notifying the goods that have been received.
6. Statement of Account:
It is a summary of transactions between seller and buyer which is always sent by the seller to the buyer indicating the outstanding balance that the buyer needs to pay and the summary of the transactions between the buyer and the seller.
7. Debit Note:
It is sent by the buyer to the seller if he wishes to return goods to the supplier and informing him that the buyer has debited the account of the seller.
8. Credit Note:
It is sent by the seller to the buyer once he has accepted the goods returned to him acknowledging his mistake and informing the buyer that his account has been credited.
9. Statement of Account:
as stated in (6)
10. Cheque/ Cheque Counter Foil:
A cheque is a document sent by the buyer to the seller in order to settle his outstanding balance and cheque counter foil is kept as a proof by the buyer that the payment has been made.
11. Receipt:
It is a document sent by the seller to the buyer acknowledging that the payment has been made.
12. Statement of Account:
as stated in (6)
DISCOUNTS
1) Trade Discount:a) Bulk Purchases
1 unit * 50 Rs.
10,000 units * 50 Rs = Rs. 500,000
Payment=450,000
Trade Discount= 50,000
b) Good Bargain position
2) Cash Payment
a) Prompt Payment
i) Discount Allowed (Expense)
ii) Discount Received (Revenue/Income)
• Trade discount is not recorded anywhere in the books of Accounts it is only present in the invoice.
• Cash Discount is recorded in the cash book and its ledgers are present in the General Ledgers.
Invoice Price – Trade Discount = Purchase Price
Purchase Price – Cash Discount = Amount Paid
• When the business allows discounts to its customers it is called Discount Allowed
• When the business receives discounts from its suppliers it is called Discount Received.
Janice uses a three-column cash book. Her ledger is divided into three parts- sales ledger, purchases ledger, and nominal ledger. You need to balance the cash book on the last day of the month. (31 January), transfer discount column to relevant accounts in nominal ledger. Balance accounts in sales and purchases ledger appropriately.
Jan 1 Janice had $60 cash balance and $1060 bank overdraft.
Jan 4 Bought goods worth $5200 on credit from Lord Traders
Jan 8 Returned goods to Lord Traders worth $200
Jan 12 Sold goods worth $770 on credit to AJ
Jan 14 Cash sales worth $680
Jan 17 Paid cash $650 to the bank account of business
Jan 21 Gets a cheque from AJ settling their account
Jan 24 Sold $1200 worth of goods to NE Stores
Jan 26 Bank returns the AJ cheque as it was dishonored
Jan 28 Paid Lord Traders through cheque the amount due with discount of 2.5%
Jan 31 NE Stores paid due amount by cheque after deducting 3% discount
Janice - Sales Ledger
Nominal Ledger
