AS Level and A Level Accounting Zimsec
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The document provides an overview of accounting at AS and A Level, including: - An introduction to double-entry bookkeeping, ledger accounts, debits and credits, and recording cash transactions. - Financial accounting topics such as sole trader accounts, accounting principles, accruals/prepayments, depreciation, bad debts, and bank reconciliation. - Partnership, company, and not-for-profit organization accounts. - Elements of management accounting such as costing, budgeting, standard costing, and investment appraisal.
AS Level and A Level Accounting Zimsec
- 1. Accounting: AS Level and A Level
- 3. AS Level and A Level Accounting Harold Randall
- 4. PUBLISHED BY THE PRESS SYNDICATE OF THE UNIVERSITY OF CAMBRIDGE The Pitt Building, Trumpington Street, Cambridge, United Kingdom CAMBRIDGE UNIVERSITY PRESS The Edinburgh Building, Cambridge CB2 2RU, UK 40 West 20th Street, New York, NY 10011-4211, USA 477 Williamstown Road, Port Melbourne, VIC 3207, Australia Ruiz de Alarcón 13, 28014 Madrid, Spain Dock House, The Waterfront, Cape Town 8001, South Africa http://www.cambridge.org © Cambridge University Press 2005 This book is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2005 Printed in the United Kingdom at the University Press, Cambridge A catalogue record for this book is available from the British Library ISBN 0 521 53993 5 paperback ACKNOWLEDGMENTS Cover image © Philip James Corwin/CORBIS Past examination questions are reproduced by permission of the University of Cambridge Local Examinations Syndicate.
- 5. Contents v Preface vii Topics grid ix I The accounting system 1 1 Double-entry bookkeeping: cash transactions 2 2 Double-entry bookkeeping: credit transactions 7 3 Books of prime (or original) entry 12 4 Balancing accounts 19 5 The classification of accounts and division of the ledger 21 6 The trial balance 23 II Financial accounting 27 7 Trading and Profit and Loss Accounts for sole traders 28 8 Balance Sheets for sole traders 36 9 Accounting principles or concepts 39 10 Accruals and prepayments (the matching concept) 43 11 Provisions for the depreciation of fixed assets 48 12 Bad and doubtful debts 56 13 Bank reconciliation statements 62 14 Control accounts 66 15 Suspense accounts 76 16 Incomplete records 84 17 Non-profit-making organisations (clubs and societies) 94 18 Departmental accounts 103 19 Manufacturing Accounts 110 20 Valuation of stock 117 Contents
- 6. 21 Partnership accounts 125 22 Partnership changes 133 23 An introduction to the accounts of limited companies 148 24 Cash flow statements 164 25 Limited companies: more about share capital and debentures; capital reductions and reconstructions 181 26 Business purchase 192 27 Published company accounts 200 III Financial reporting and interpretation 209 28 Interpretation and analysis 210 29 Company financing 227 IV Elements of managerial accounting 233 30 Costing principles and systems: total (or absorption) costing 234 31 Unit, job and batch costing 245 32 Process costing 249 33 Marginal costing 255 34 Budgeting 266 35 Standard costing 277 36 Investment appraisal 288 Appendix 1: Table showing net present value of $1 295 Answers to exercises and multiple-choice questions 297 Index 353 vi Contents
- 7. Part I The accounting system
- 8. 1.1 What is double-entry bookkeeping? Double-entry bookkeeping is a system of recording transactions that recognises that there are two sides (or aspects) to every transaction. For example, you give your friend $10 in exchange for his watch. This involves you giving him $10 (one aspect) and your friend receiving $10 (the other aspect). The transfer of the watch involves him giving you the watch (one aspect) and you receiving his watch (the other aspect). Every transaction involves giving and receiving. It is important that you recognise and record both aspects of every transaction in your bookkeeping. 1.2 Ledger accounts Transactions are recorded in ledger accounts. An account is a history of all transactions of a similar nature. A ledger is a book that contains accounts. An account separates what is received from what is given. For example, a Cash account records cash received and cash paid, as shown: Cash Debit Credit $ $ Mar 1 Cash received Mar 2 Cash paid from customers 240 to suppliers 80 Mar 4 Cash received Mar 3 Wages paid 116 from customers 118 The left-hand side of the account is called the debit side and is used to record cash received (that is, coming into the account). The right-hand side of the account is the credit side and shows cash paid (that is, going out of the account). All accounts have a debit side on the left to record what is received, and a credit side on the right to record what is given. In practice, the words ‘debit’ and ‘credit’ are not shown because bookkeepers do not need to be reminded of them. 1.3 How to record cash transactions Bookkeeping treats businesses as ‘persons’ with separate identities from their owners. For example, if Abdul is a trader, all his business transactions are recorded as those of the business and not as Abdul’s own transactions. In the example that follows, some transactions are recorded in ledger accounts. Make sure you understand the bookkeeping entries, and observe the wording carefully. This is important as you must be able to record transactions in ledger accounts correctly. Example (Here all transactions are recorded from the point of view of Abdul’s business, not from the point of view of the people with whom the business deals.) Transaction 1 April 1. Abdul starts business as a trader by paying $10 000 into a Bank account which he opens for the business. Abdul gives, and the business receives, $10 000. An account for Abdul will be opened (his Capital account) and credited with his ‘capital’. The business Bank account will be debited. Abdul – Capital $ $ Apr 1 Bank 10000 Bank $ $ Apr 1 Abdul – Capital 10 000 2 Double-entry bookkeeping: cash transactions1 In this chapter you will learn: • that every transaction has two aspects • that double-entry bookkeeping records both aspects of a transaction • what ledger accounts are • the meanings of the terms ‘debit’ and ‘credit’ • how to record cash transactions in ledger accounts. The accounting system
- 9. Note. Each entry is dated and shows the name of the other account in which the double entry is completed. Make sure you show these details for every entry you make in a ledger account. Entries in ledger accounts are known as postings, and bookkeepers are said to ‘post’ transactions to the accounts. Transaction 2 April 2. Abdul buys a motor vehicle for the business and pays $2000 from the business Bank account. A Motor Vehicles account must be opened. Bank $ $ Apr 1 Abdul – Capital 10 000 Apr 2 Motor Vehicles 2000 Motor Vehicles $ $ Apr 2 Bank 2 000 Transaction 3 April 3. Abdul buys stock (goods which he will re-sell in the normal course of trade) for $3000 and pays by cheque. Bank $ $ Apr 1 Abdul – Capital 10 000 Apr 2 Motor Vehicles 2000 Apr 3 Purchases 3000 Purchases $ $ Apr 3 Bank 3 000 Note. Purchases of stock are always debited to a Purchases account. An account called Stock account is used for a special purpose, which will be explained in chapter 7. Transaction 4 April 4. Abdul sells a quantity of stock for $800 and banks the cash. Bank $ $ Apr 1 Abdul – Capital 10000 Apr 2 Motor Vehicles 2000 Apr 4 Sales 800 Apr 3 Purchases 3000 Sales $ $ Apr 4 Bank 800 Sales of stock are always credited to Sales account, never to Stock account. Transaction 5 April 7. A customer returns some goods and receives a refund of $40. Bank $ $ Apr 1 Abdul – Capital 10000 Apr 2 Motor Vehicles 2000 Apr 4 Sales 800 Apr 3 Purchases 3000 Apr 7 Sales Returns 40 Sales Returns $ $ Apr 7 Bank 40 Note. Goods returned are not debited to Sales account but to Sales Returns account. This account is also known as Goods Inwards account. Transaction 6 April 8. Abdul returns some goods costing $100 to a supplier and receives a refund. Bank $ $ Apr 1 Abdul – Capital 10000 Apr 2 Motor Vehicles 2000 Apr 4 Sales 800 Apr 3 Purchases 3000 Apr 8 Purchases Returns 100 Apr 7 Sales Returns 40 Purchases Returns $ $ Apr 8 Bank 100 Note. Goods returned to a supplier are credited to Purchases Returns account. This account is also known as Goods Outwards account. Transaction 7 April 10. Abdul buys another motor vehicle for the business and pays $4000 by cheque. Bank $ $ Apr 1 Abdul – Capital 10000 Apr 2 Motor Vehicles 2000 Apr 4 Sales 800 Apr 3 Purchases 3000 Apr 8 Purchases Returns 100 Apr 7 Sales Returns 40 Apr 10 Motor Vehicles 4000 Motor Vehicles $ $ Apr 2 Bank 2 000 Apr 10 Bank 4 000 3I Double-entry bookkeeping: cash transactions
- 10. Note. As explained in §1.2, an account is a history of all transactions of a similar nature. Therefore it is not necessary to open another account for the second motor vehicle. Similarly, all purchases of office equipment are posted to Office Equipment account, and all purchases of office furniture are posted to Office Furniture account. You will encounter other examples such as plant and machinery, and fixtures and fittings. Transaction 8 April 11. Tania lends the business $5000. Bank $ $ Apr 1 Abdul – Capital 10000 Apr 2 Motor Vehicles 2000 Apr 4 Sales 800 Apr 3 Purchases 3000 Apr 8 Purchases Returns 100 Apr 7 Sales Returns 40 Apr 11 Tania – Loan 5000 Apr 10 Motor Vehicles 4000 Tania – Loan $ $ Apr 11 Bank 5000 Transaction 9 April 12. Abdul pays rent on a warehouse by cheque, $1000. Bank $ $ Apr 1 Abdul – Capital 10000 Apr 2 Motor Vehicles 2000 Apr 4 Sales 800 Apr 3 Purchases 000 Apr 8 Purchases Returns 100 Apr 7 Sales Returns 40 Apr 11 Tania – Loan 5 000 Apr 10 Motor Vehicles 4000 Apr 12 Rent Payable 1000 Rent Payable $ $ Apr 12 Bank 1 000 Transaction 10 April 14. Abdul sublets part of the warehouse and receives $300 rent. Bank $ $ Apr 1 Abdul – Capital 10000 Apr 2 Motor Vehicles 2000 Apr 4 Sales 800 Apr 3 Purchases 3000 Apr 8 Purchases Returns 100 Apr 7 Sales Returns 40 Apr 11 Tania – Loan 5 000 Apr 10 Motor Vehicles 4000 Apr 14 Rent Receivable 300 Apr 12 Rent Payable 1000 Rent Receivable $ $ Apr 14 Bank 300 Note. Rent receivable is not posted to the Rent Payable account. It is important to keep income and expenditure in separate accounts. Transaction 11 April 15. Abdul pays wages by cheque, $1200. Bank $ $ Apr 1 Abdul – Capital 10000 Apr 2 Motor Vehicles 2000 Apr 4 Sales 800 Apr 3 Purchases 3000 Apr 8 Purchases Returns 100 Apr 7 Sales Returns 40 Apr 11 Tania – Loan 5000 Apr 10 Motor Vehicles 4000 Apr 4 Rent Receivable 300 Apr 12 Rent Payable 1000 Apr 15 Wages 1200 Wages $ $ Apr 15 Bank 1200 Transaction 12 April 16. Abdul withdraws $600 from the business Bank account for personal use. Bank $ $ Apr 1 Abdul – Capital 10000 Apr 2 Motor Vehicles 2000 Apr 4 Sales 800 Apr 3 Purchases 3000 Apr 8 Purchases Returns 100 Apr 7 Sales Returns 40 Apr 11 Tania – Loan 5 000 Apr 10 Motor Vehicles 4000 Apr 14 Rent Receivable 300 Apr 12 Rent Payable 1000 Apr 15 Wages 1200 Apr 16 Drawings 600 Drawings $ $ Apr 16 Bank 600 Note. Money drawn out of a business by the owner for personal use is debited to a Drawings account, not to the owner’s Capital account. 4 The accounting system
- 11. Exercise 1 Open the necessary ledger accounts and post the following transactions to them. May1 Martine started business as a florist by paying $3000 into a business Bank account. 2 Charline lent the business $1000. Martine then had the following transactions. 3 Paid rent, $100. 4 Purchased shop fittings, $400. Purchased stock of flowers $300. 5 Received refund of $20 for flowers returned to supplier. 6 Sold some flowers and received $40. 7 Paid wages, $60. 8 Withdrew $100 for personal use. Exercise 2 Complete the entries for the following table. The first item has been done for you. Debit Credit account account 1. Noel pays a cheque into his business Bank Noel – Capital Bank account as capital 2. Purchases some stock and pays by cheque 3. Sells some stock and banks the takings 4. Pays rent by cheque 5. Purchases shop fittings and pays by cheque 6. Cashes cheque for personal expenses 7. Pays wages by cheque 8. Returns stock to supplier and banks refund 9. Receives rent from tenant and banks cheque 10. Refunds money to customer by cheque for goods returned 11. Motor vehicle purchased and paid for by cheque 12. Pays for petrol for motor vehicle and pays by cheque 1.4 Examination hints • All transactions are recorded from the point of view of the business, not from those of its customers and suppliers. • When recording transactions think very carefully about which account ‘gives’ and which account ‘receives’. Credit the account that ‘gives’ and debit the account that ‘receives’. • Make sure you complete the double entry for every transaction before starting to record the next one. • Date every entry and enter the name of the other account in which the double entry is completed in the details column. • If you make a mistake in an exercise, study the answer given at the end of the book and make sure you understand what you should have done and why. 1.5 Multiple-choice questions 1 Joel occupies part of Natasha’s business premises. Which entries in Natasha’s books record the rent Joel pays her? Debit account Credit account A Bank Rent Payable B Bank Rent Receivable C Rent Payable Bank D Rent Receivable Bank 2 Yasmina purchased some office equipment for use in her business. The equipment was faulty and she returned it to the supplier who refunded the cost to Yasmina. Which entries in Yasmina’s books record the return of the equipment? Debit account Credit account A Bank Purchase Returns B Bank Office Equipment C Purchases Returns Bank D Office Equipment Bank 3 A trader withdraws money from his business Bank account for personal expenses. Which entries record this in his books? Debit account Credit account A Bank Capital B Bank Drawings C Capital Bank D Drawings Bank 5I Double-entry bookkeeping: cash transactions
- 12. 4 A trader returns goods to the supplier and receives a refund. Which entries record the refund in the trader’s books? Debit account Credit account A Bank Purchases B Bank Purchases Returns C Purchases Bank D Purchases Returns Bank 1.6 Additional exercises 1 Open the necessary ledger accounts and post the following transactions to them. June 1 Farook commenced business by paying $15 000 into his business Bank account. Amna lent the business $5000. Farook then had the following business transactions: 2 Purchased premises and paid $8000. 3 Bought office furniture for $2000 and paid by cheque. 4 Paid $5000 by cheque for goods for re-sale. 5 Sold some goods for $1500 and banked the proceeds. 6 Paid insurance premium by cheque, $600. 7 Bought motor van and paid $3000 by cheque. 8 Drew cheque for $50 to pay for petrol for motor van. 9 Bought some goods costing $2000 for re-sale and paid by cheque. 10 Sold goods for $2400 and banked the proceeds. Drew cheque for wages, $400. 11 Repaid $1200 by cheque to customers for goods returned. 12 Received a refund of $900 from suppliers for goods returned. 13 Received a refund of insurance of $100. Withdrew $200 from business bank account for personal expenses. 14 Returned some office furniture that was damaged and received a refund of $800. 15 Repaid $1000 of the loan from Amna. 6 The accounting system Debit account Credit account 1. Local taxes paid by cheque 2. Bank pays interest to trader 3. Sundry expenses paid by cheque 4. Postage and stationery paid by cheque 5. Telephone bill paid by cheque 6. Carriage inwards* paid by cheque 7. Carriage outwards** paid by cheque 8. Interest paid by cheque to brother in respect of a loan received from him 9. Interest paid to bank * Carriage inwards is the delivery cost added to the price of goods by the supplier. ** Carriage outwards is the cost of delivering goods to a customer. 2 Complete the entries for the following table with information taken from the accounts of a trader.
- 13. The debit entry in Chin’s account shows that he is a debtor in Lai’s books; that is, Chin owes Lai $500 until he pays for the goods. In Chin’s books Debit the purchase to Purchases account and credit it to an account for Lai. Purchases $ $ May 31 Lai 500 Lai $ $ May 31 Purchases 500 The credit entry in Lai’s account shows that he is a creditor in Chin’s books. Goods returned On 4 June Chin returns some of the goods costing $100 to Lai because they are damaged. In Lai’s books Credit Chin’s account and debit Sales Returns account. Chin $ $ May 31 Sales 500 Jun 4 Sales Returns 100 Sales Returns $ $ Jun 4 Chin 100 72 Double-entry bookkeeping: credit transactions Double-entry bookkeeping: credit transactions2 In this chapter you will learn: • how to record transactions which do not involve immediate cash payments in ledger accounts • the difference between trade and cash discounts and how to treat them. 2.1 What are credit transactions? Many transactions take place without any money being paid or received at the time. For example, Lai sells goods to Chin for $500 on 31 May and gives Chin until 30 June to pay. The transaction is ‘on credit’. The sale has taken place on 31 May and must be recorded in the books of both Lai and Chin at that date. No entries to record payment are made in their books until Chin pays Lai. 2.2 How to record credit transactions In a seller’s books A sale on credit is credited to Sales account and debited to an account opened for the customer. When the customer pays, his or her account is credited, and the Bank account debited. In a customer’s books A purchase on credit is debited to Purchases account and credited to an account opened for the supplier. When the supplier is paid, his or her account is debited, and the Bank account credited. Example Lai sells goods to Chin for $500 on 31 May and gives Chin until 30 June to pay. In Lai’s books Credit the sale to Sales account and debit it to an account for Chin. Sales $ $ May 31 Chin 500 Chin $ $ May 31 Sales 500
- 14. In Chin’s books Debit Lai’s account and credit Purchases Returns account. Lai $ $ Jun 4 Purchases Returns 100 May 31 Purchases 500 Purchases Returns $ $ Jun 4 Lai 100 2.3 How to record payments for goods bought or sold on credit Trade discount Trade discount is an allowance made by one trader to another. In the above example, the goods which Lai sold to Chin may have been sold normally for $625. Lai knows that Chin, also a trader, must make a profit on the goods when he sells them. He has allowed Chin a trade discount of $125 (20% of $625) so that if Chin sells the goods for $625 he will make a profit of $125. Note. Although the normal price of the goods was $625, the transaction was for $500 only, and only $500 is entered into the books of both Lai and Chin. Trade discount is never recorded in ledger accounts. Cash (or settlement) discount Lai has given Chin one month to pay for the goods. To encourage Chin to pay by 30 June, Lai may allow Chin to pay less than the amount due. This allowance is a cash (or settlement) discount. (Notice the difference between cash discount and trade discount: trade discount is not dependent on payment being made promptly, or even at all.) Note. Cash discounts are always recorded in ledger accounts. Suppose Lai has allowed Chin a cash discount of 5% provided Chin pays by 30 June, and Chin pays Lai on 28 June. Chin owes Lai $400 ($500 – $100). 5% of $400 = $20. He will therefore pay only $380. In Lai’s books Debit the discount to Discounts Allowed account. Chin $ $ May 31 Sales 500 Jun 4 Sales Returns 100 Jun 28 Bank 380 Jun 28 Discounts Allowed 20 Bank $ $ Jun 28 Chin 380 Discounts Allowed $ $ Jun 28 Chin 20 In Chin’s books Credit the discount to Discounts Received account. Lai $ $ Jun 4 Purchases Returns 100 May 31 Purchases 500 Jun 28 Bank 380 Jun 28 Discounts Received 20 Bank $ $ Jun 28 Lai 380 Discounts Received $ $ Jun 28 Lai 20 Example Andrew had the following transactions in May. May1 Purchased goods from David. The goods cost $1000 less 10% trade discount. 2 Purchased goods from Rodney for $1600 less 15% trade discount. 3 Purchased a computer for the office on credit from Bernard for $2000. 4 Sold goods to Mario for $800. 5 Returned goods which had cost $100 after trade discount to David. 6 Purchased goods from Ludovic for $700 less trade discount of 20%. 7 Sold goods to Ravin for $500. 8 Mario returned goods which had been sold to him for $40. 8 The accounting system
- 15. 9 Received cheque from Ravin for amount owing, less cash discount of 5%. 10 Paid amount owing to David, less cash discount of 5%. 11 Paid amount owing to Rodney, less cash discount of 5%. Paid Bernard for computer. 12 Received cheque from Mario for amount owing, less 5% cash discount. Paid amount owing to Ludovic, less 5% cash discount. These transactions are recorded as follows. David $ $ May 5 Purchases Returns 100 May 1 Purchases 900 May 10 Bank 760 May 10 Discounts Received 40 Rodney $ $ May 11 Bank 1292 May 2 Purchases 1360 May 11 Discounts Received 68 Bernard $ $ May 11 Bank 2000 May 3 Office Computer 2000 Ludovic $ $ May 12 Bank 532 May 6 Purchases 560 May 12 Discounts Received 28 Mario $ $ May 4 Sales 800 May 8 Sales Returns 40 May 12 Bank 722 May 12 Discounts Allowed 38 Ravin $ $ May 7 Sales 500 May 9 Bank 475 May 9 Discounts Allowed 25 Purchases $ $ May 1 David 900 May 2 Rodney 1360 May 6 Ludovic 560 Purchases Returns $ $ May 5 David 100 Sales $ $ May 4 Mario 800 May 7 Ravin 500 Sales Returns $ $ May 8 Mario 40 Discounts Allowed $ $ May 9 Ravin 25 May 12 Mario 38 Discounts Received $ $ May 10 David 40 May 11 Rodney 68 May 12 Ludovic 28 Office Computer $ $ May 3 Bernard 2000 Bank $ $ May 9 Ravin 475 May 10 David 760 May 12 Mario 722 May 11 Rodney 1292 May 11 Bernard 2000 May 12 Ludovic 532 92 Double-entry bookkeeping: credit transactions
- 16. Calculations Purchases: Amount before Trade discount Cost to Andrew trade discount $ $ $ From: David 1000 (10%) 100 900 Rodney 1600 (15%) 240 1360 Ludovic 700 (20%) 140 560 Cash settlements: Amount before Cash discount (5%) Amount paid cash discount $ $ $ By Ravin 500 25 475 Mario 760 38 722 2.5 Multiple-choice questions 1 Davina bought goods on credit from Sharon for $600 less trade discount of $120. Which entries record this transaction in Davina’s books? Account to be debited Account to be credited A Purchases $480 Sharon $480 B Purchases $480 Sharon $600 Discounts Allowed $120 C Purchases $600 Sharon $600 D Purchases $600 Sharon $480 Discounts Received $120 2 Kristal bought goods on credit from Prisca. The goods had a list price of $1000 but Prisca allowed Kristal trade discount of 10% and cash discount of 4%. How much did Kristal have to pay Prisca? A $860 B $864 C $900 D $960 3 Shirley bought goods from Corrine. The goods had a list price of $800. Corrine allowed Shirley trade discount of 20% and cash discount of 5%. In Corrine’s books, which entries record the cheque she received from Shirley? Account to be debited Account to be credited A Bank $608 Shirley $640 Discounts Allowed $32 B Bank $608 Shirley $640 Discounts Received $32 C Bank $608 Shirley $760 Discounts Allowed $152 D Bank $608 Shirley $760 Discounts Received $152 Exercise 1 Post the following transactions in the books of Geraud. June 1 Purchased goods from Khor which cost $3000 less trade discount of 10%. 5 Sold goods to Lai for $600. 10 Returned goods which had cost Geraud $200 to Khor. 15 Purchased goods from Lim which cost $2800 before trade discount of 10%. 20 Sold goods to Chin for $1300. 25 Lai returned goods which had cost him $200. 30 Geraud paid Khor and Lim the amounts due to them after deducting 5% cash discount. Lai and Chin paid Geraud the amounts they owed him after deducting 5% cash discount. 2.4 Examination hints • Remember to record all transactions from the point of view of the business, not from those of its customers and suppliers. • Where trade discounts are given, record all amounts net of trade discount. • Note carefully whether cash discount is to be deducted from settlements. • Remember to complete the entries for cash discounts to the correct Discount accounts. • Be accurate in all your calculations. 10 The accounting system
- 17. 2.6 Additional exercises 1 Fleming had the following transactions. July 1 Purchased goods from Adams for $5000 less trade discount of 15%. Adams allowed Fleming 4% cash discount. 4 Purchased goods from Bond for $2500 less trade discount of 10%. Bond allowed Fleming 4% cash discount. 5 Returned goods which had cost $600 to Adams. 7 Purchased goods from Astle for $7000 less trade discount of 20%. Astle allowed Fleming 5% cash discount. 9 Returned goods which had cost $800 to Astle. 10 Purchased goods from Cairns for $4200 less 10% trade discount. Cairns allowed Fleming 5% cash discount. 14 Fleming settled all accounts owing to his suppliers by cheque, taking advantage of the cash discount in each case. Required Post the transactions listed above in Fleming’s books in good form. 2 Streak had the following transactions in March. Mar 1 Sold goods to Blignaut for $2500 less trade discount of 10%, and allowed him cash discount of 4%. 4 Sold goods to Ebrahim for $4000 less trade discount of 15%, and allowed him cash discount of 5%. 6 Ebrahim returned goods which had cost him $200. 8 Sold goods to Friend for $3200 less trade discount of 20%, and allowed him cash discount of 5%. 12 Sold goods to Flower for $2000 less trade discount of 10%, and allowed him cash discount of 4%. 14 Flower returned goods which had cost him $350. 15 Blignaut, Ebrahim, Friend and Flower settled their accounts by cheque, each taking advantage of cash discount. Required Post the transactions listed above in Streak’s books in good form. 112 Double-entry bookkeeping: credit transactions
- 18. 12 Books of prime (or original) entry 3 In this chapter you will learn: • the purpose of books of prime entry • how to enter transactions in books of prime entry • how to post transactions from the books of prime entry to ledger accounts. The accounting system 3.1 What is a book of prime entry? A book of prime entry is used to list all transactions of a similar kind before they are posted to ledger accounts. They are sometimes known as books of first (or original) entry but for convenience they will be referred to as books of prime entry in this text. Because they list transactions before they are posted to ledger accounts they are outside the double-entry model. It is important to remember that they are not part of double-entry bookkeeping. There is, however, one exception to this rule, and that is the cash book, as explained later in §3.4. The names of the books of prime entry and their uses are: Book of prime entry Use Sales journal (or sales day book) To record all sales made on credit. The entries are made from copies of invoices sent to customers. Sales returns book (or sales returns To record all goods returned from customers. When journal, or returns inwards journal) customers return goods that were bought on credit they are sent credit notes showing the amount credited to their account for the returns. The sales returns book is prepared from the copies of credit notes sent to customers. Purchases journal (or purchases To record all purchases of stock in trade (goods for day book) resale) made on credit. These are entered in the purchases journal from suppliers’ invoices. Purchases returns journal To record all goods returned to suppliers. The purchases (or purchases returns book, returns journal is prepared from credit notes or returns outwards journal) received from suppliers. Cash book To record all cash transactions. (But see §3.4.) Journal (or general journal) To record all transactions for which there is no other book of prime entry. (Also see §3.11.)
- 19. 3.2 How to write up books of prime entry Example Jayasuriya has sent and received the following invoices and credit notes. Invoices sent to customers Amount of invoice $ May 1 Atapattu 2350 May 4 de Silva 1746 May 6 Arnold 520 Credit notes sent to customers Amount of credit note $ May 3 Atapattu 350 May 5 de Silva 146 May 7 Arnold 60 Invoices received from suppliers Amount of invoice $ May 2 Vaas 5000 May 5 Fernando 3600 May 7 Mubarak 2200 Credit notes received from suppliers Amount of credit note $ May 6 Vaas 1000 May 7 Fernando 600 The transactions will be entered in the books of prime entry as follows: Sales journal $ Sales returns journal $ May 1 Atapattu 2350 May 3 Atapattu 350 May 4 de Silva 1746 May 5 de Silva 146 May 6 Arnold 520 May 7 Arnold 60 4616 556 Purchases journal $ Purchases returns journal $ May 2 Vaas 5 000 May 6 Vaas 1000 May 5 Fernando 3 600 May 7 Fernando 600 May 7 Mubarak 2 200 1600 10 800 3.3 How to post from books of prime entry to ledger accounts Example Use the information in the books of prime entry in §3.2. Step 1 Post each item in the books of prime entry to the supplier’s or customer’s account in the ledger following the procedure already learned in chapter 2, but do not post them to the Purchases, Purchases Returns, Sales or Sales Returns accounts. Atapattu $ $ May 1 Sales 2350 May 3 Sales Returns 350 de Silva $ $ May 4 Sales 1746 May 5 Sales Returns 146 Arnold $ $ May 6 Sales 520 May 7 Sales Returns 60 Vaas $ $ May 6 Purchases Returns 1000 May 2 Purchases 5000 Fernando $ $ May 7 Purchases Returns 600 May 5 Purchases 3600 Mubarak $ $ May 7 Purchases 2200 Step 2 Post the total of each book of prime entry to the Sales, Sales Returns, Purchases or Purchases Returns accounts, as appropriate. Sales $ $ May 7 Sales journal total 4616 Sales Returns $ $ May 7 Sales returns journal total 556 133 Books of prime (or original) entry
- 20. Bank Discounts Bank Discounts Bank (allowed) (received) $ $ $ $ May 7 May 7 Attapattu 100 1900 Vaas 200 3800 May 7 May 7 de Silva 80 1520 Fernando 150 2850 May 7 May 7 Arnold 23 437 Mubarak 110 2090 203 460 14 The accounting system Purchases $ $ May 7 Purchases journal total 10 800 Purchases Returns $ $ May 7 Purchases returns journal total 1600 3.4 The cash book A cash book is the book of prime entry for all cash transactions; but we have already seen in chapter 1 that it is also an account. It is the only book of prime entry that is also part of the double-entry model. The cash book is also used as the book of prime entry for cash discounts. A column is provided on the debit side of the Bank account to record discounts allowed, and a column on the credit side to record discounts received. Bank Discounts Bank Discounts Bank (allowed) (received) $ $ $ $ The words ‘allowed’ and ‘received’ are usually omitted because bookkeepers know which is which. 3.5 How to enter discounts in the cash book When a payment is received from a customer who has deducted cash discount, enter the amount of the discount in the discounts allowed column next to the amount received in the bank column. Enter discounts received from suppliers in the discounts received column next to the amount paid in the bank column. Example All payments due from customers and all payments to suppliers in §3.2 were settled on 7 May. In each case, cash discount of 5% was allowed or received. Atapattu $ $ May 1 Sales 2350 May 3 Sales Returns 350 May 7 Bank 1900 May 7 Discounts Allowed 100 de Silva $ $ May 4 Sales 1746 May 5 Sales Returns 146 May 7 Bank 1520 May 7 Discounts Allowed 80 Arnold $ $ May 6 Sales 520 May 7 Sales Returns 60 May 7 Bank 437 May 7 Discounts Allowed 23 Vaas $ $ May 6 Purchases Returns 1000 May 2 Purchases 5000 May 7 Bank 3800 May 7 Discounts Received 200 Fernando $ $ May 7 Purchases Returns 600 May 5 Purchases 3600 May 7 Bank 2850 May 7 Discounts Received 150 Mubarak $ $ May 7 Bank 2090 May 7 Purchases 2200 May 7 Discounts Received 110