LETIURES NOTES ON GENERAL ACCOUNTING HND

BY PENN COLLINS AWAH

675931381

CHAPTER ONE

ACCOUNTING BACKGROUND

1.0 INTRODUCTION

The importance of accounting cannot be over emphasized in business. Every businessman must

keep tracks of every transaction carried out, because they will help to provide information for

decision making. The businessman must keep records of all income generated, all expenditures

incurred, so as to be able to determine whether a business is making profit or not.

Accounting is practiced in all the domains of business and life as a whole. Accounting is a

simple subject based on principles which must be well understood. It is a practical subject and

therefore, at any point in time, we must relate it to practical business situations. In accounting,

always put yourself in the shoes of the business because the business keeps tracks of all the

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parties involved in the business, for example customers (debtors), creditors (suppliers or

payables).

1.1 WHAT IS ACCOUNTING?

It is defined as a process of identifying, recording, summarizing, interpreting and

communicating financial information relevant to the various users, for valid economic

decisions. There is a difference between accounting and bookkeeping or a bookkeeper and an

accountant. Bookkeeping deals with identification and recording financial information, whereas

an accountant does all the processes above. From above, it is seen that accounting is an

information system that identifies, records, summarizes, interprets and communicates the

economic events of an organization to interested users.

1.2BRANCHES OF ACCOUNTING

There are 3 branches of accounting:

 Financial Accounting: It deals with the preparation of financial statements. The financial

statements prepared are: income statements, balance sheet, cash flow statements, etc.

Financial accounting respects international and local laws. This means that the ways the

financial statements are prepared are unique to all the organizations (the same). This means

that financial accounting respects international accounting standards (IAS), Generally

Accepted Accounting Practices (GAAP), OHADA/OHBLA (Organization for the

Harmonization of Business Law in Africa). OHADA is used by 16 countries in Africa that

includes the CEMAC region. Financial accounting information is mainly for external use. It

can also be used for internal use.

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 Management Accounting: It deals with the preparation of management accounting

information relevant for the day to day decision making. This means that the day to day

decision making in a business rests of a management accounting information.Management

accounting information does not follow any laws. This means that every organization and

business has its own ways to present management information, there is no unique method.

Management information is mainly for internal use.It does not respect international

accounting standards (IAS).

 Cost Accounting: It is an integral part ofmanagement accounting. Cost accounting deals

with the provision of cost accounting information relevant for the day to day decision

making. The information is mainly for internal use. It does not follow IAS.

1.3 USERS OF ACCOUNTING INFORMATION

The purpose of financial information is to provide inputs for decision making.

Financial information is needed by a host of people in a system with different interests. Financial

information is needed by stakeholders, both internal and external. A stakeholder is any person

who has vested interest in a business. A corporate stakeholder is any person that can affect or be

affected by the actions of the company as a whole. The only external stakeholders are the

government, community, competitors and the rest are internal stakeholders.Internal users

are people who work for the business, managers who plan, organize, and run the business.

External users work outside of the business and include investors who use accounting

information for their stock decisions; creditors who evaluate the risk of lending to and the credit-

worthiness of business borrowers; taxing authorities which review compliance with tax laws;

regulatory agencies which review compliance with prescribed rules; customers; labour unions

and economic planners.

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Donot be confused between shareholders and stakeholders. Shareholders are the real owners

of the company and their stakes in the company are measured in terms of the number of shares

the shareholders have.

Stakeholders can primary stakeholders, that is, those that are engaged in economic transactions

with the business, e.g. stockholders, customers, suppliers, creditors, and employees and

secondary stakeholders, who are not engaged in direct economic exchange with the business,

are affected by or can affect its actions.The following stakeholders are interested in financial

accounting information.

(1) Management: They will need this information to see whether they have performed well or

not. That is whether they have made profit or losses. If the company has made profit, it means

that the future is bright. That is, the business will continue in operation for the foreseeable future.

(2) Employees: They need this information for their job security. That is to see whether the

company will continue to pay their salaries and maintain their jobs for the foreseeable future.

Simply they are concerned with the rates of pay, job security, compensation, respect, and truthful

communication.

(3) Banks (financiers): They need this information to see whether the company will be able to

pay its loans and interest.

(4) Debtors or Customers: They need this information to see whether the company will

continue to supply goods and services to them. They need this for value, quality, customer care,

and ethical products.

(5) Creditors or Payables: They need this information to see whether the company will be able

to pay for the goods and services provided to it. They are in charge of providers of services and

products used in the end products for the customers, and equitable business opportunities.

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(6) Government: she will use this information to be able to tax the company and see whether it

is operating following the laws in place, to protect her citizens, especially in line with labour

codes. She is concerned with taxation and VAT policies, legislation, employment, truthful

reporting, diversity, legalities and externalities.

(7) Community: They need this information to see whether the company is carrying out its

corporate social responsibility. She alsoneeds the information to see whether the company has

the ability to provide` jobs to job seekers. Simply, they are concerned with jobs, involvement,

environmental protection, shares, and truthful communication.

(8) Competitors: They need this information to able to compete with the company effectively.

It should be noted that if you do not know somebody well, you cannot compete with him well.

This is one of the reasons why keep information secret from outsiders and maintain a lot of

confidentiality.

(9) Trade unions

They need this for quality, workers protection and jobs.

(10) Shareholders (owners or investors)

They need this for succession planning, raising capital, growth, and social goals. Investors need

this information to see whether their return on investment and income are maximized.

Test Your Understanding

1. What is accounting?

2. Distinguish between accounting and bookkeeping.

3. Discuss the various branches of accounting

4. Explain the use of financial accounting information by the various stakeholders.

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 CHAPTER TWO

BUSINESS UNITS AND BUSINESS ACTIVITIES

2.0 INTRODUCTION

It is important to identify who is who in the business environment. Businesses operate in an

open system. They exist within and interact with the following interdependent environments:
economic, legal-political, social-cultural, physical and technological environments. There are
three different legal forms of business organizations; the sole traders, partnerships, and
corporations. They are all profit making organizations. Their main objective is to maximize
profits and the wealth of shareholders. Others can be classified as non-for-profit organizations,
such as government, hospitals, NGOs, Clubs, Churches, schools, etc. Their main objective is not
to make profit, but to maximize the value for money, that is, economy, efficiency and
effectiveness (3Es).Do not make a mistake to say that churches are out to make profit, but you
can say that churches are making excesses over expenditure or deficits over expenditure. This
is why these organizations do not prepare income statements and balance sheets; they prepare
the income and expenditure accounts or the receipts and payments accounts. Their own
balance sheets are called statement of affaires. Some of them may have some units in the
organizations that are making profits and in these cases, we must prepare income statements
to measure profits or losses, e.g. some schools have canteens and some hospitals have
pharmacies that make profits from sales.

The ways these business entities will prepare and keep their accounts will be different from each
other. The financial statements of a sole trader will be different from those of a partnership and
of the company. The financial statements of a sole trader and a partnership are mostly for
internal used, while those of the company are mostly for external used. Therefore, the methods
of presentation are different.

2.1 BUSINESS ACTIVITIES

There are three types of business activities that accounting information system tracks, which are:
financing activities, investing activities and operating activities.

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 Financing activities deal with the ways in which a business raises funds (money) for
operations. The two primary sources of outside funds are borrowing and selling shares of
Stock.A Company may borrow money by taking out a loan at a bank, issuing debt securities,
or purchasing goods on credit. It may also sell shares of stocks to investors. Reminder that a
stockholder is the owner of the business and receives payments in the form of dividends.
Their claims are secondary to those of the creditors.
 Investing activities deal what the company does with the financing it receives. A new
business must purchase assets such as Property, plant and Equipment.
 Operating activities are just the various operation of the company. A paper company may
produce and sells papers; a diary company produces and sells milk. The main output from
operation is revenues or losses. Revenues are the increases in assets arising from the sale of
a product or service.

2.2 SOLE TRADER

A sole trader is a business unit that is owned and controlled by one individual, even though
he/she may recruit few persons, usually family members. The sole trader is the most common
type of business organization, usually known as the sole proprietor. This is the simplest type of
business to start and it is the least regulated form of organization. Many businesses that later
become large, started as sole traders. The main objective of the sole trader is to make profit and
he keeps all the profits. The profits may used as drawings and as retention of profits which will
be used to finance the business in future. He/she finances the business alone and bears all the
risks. He/she is a single decisions maker which may be fast but may be good or bad. The
financial statements of the sole trader are; the income statement and the balance sheet which are
usually not made public.

Some of examples of sole trader businesses in Cameroon are:

 Cosmetic stores owner  Restaurants  Car washing points

 Provision stores owner  Garages  Hair dressing salons
 Private primary schools owners  Small plantations  Barbing salons
 Most private secondary schools.  Driving schools  Call boxes

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 Fish mongers  Off licenses  Carpentry workshops
 Some private hospitals, e.t.c  Plumbering  Decorations
 Mobile Hairdressers  Electricians  Chiropodists
 Window cleaners.  Constructions units

2.2 ADVANTAGES OF SOLE TRADER

The sole trader has advantages that can be distinguished as follows:

 Ease and speed of formation

There are fewer formalities and legal restrictions. Sole traders require little or no government
approval and you may need to spend some 72 hours in Cameroon to obtain a relatively
inexpensive business license.

 Reduce expenses.
The sole trader is less expensive to set up than either a partnership or a corporation. This is
because of the minimal license fees and legal help needed to set up this type of business
organization.

 Complete control
The sole trader does not consult anybody when taking decisions and therefore, he has absolute
control over the whole business. There is no board of directors or any other boss except the
customers to direct who can identify your errors.

 Termination
Termination is very easy with the sole trader. He can sell his assets and pay his debts, turn out
his light and operation completely shut down. With the sole trader it is easy to get out of business
as it is to get into the business.

 Sole owner of profits

He is not required to share profits with anyone. All the profits belong to him/her.

 Relative freedom from government regulations and taxes.

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For tax purpose, the sole trader pay income tax and the government treats you and your business
as one. Your taxes are considered as drawings from the business.

 Layout of accounts and audit

There are no real legal requirements governing the layout of the accounts, that is, the income
statement and balance sheet. The annual accounts do not have to be audited.

 Quick decisions
Decisions can be made quickly since only one individual is involved. The owner has the
freedom to run the business in his or her own way.

 Many sole traders may be entitled to some form of government supports in the form of
grants.
 The sole trader can determine the hours of work, take holidays when desired and operate the
business around other commitments.
 The sole trader can have a close relationship with customers, providing quality personal
services to them and supplying exactly the kind of products and services that they require.
2.2.1 DISADVANTAGES OF A SOLE TRADER

There are some disadvantages that the sole trader may encounter:

 Unlimited liabilities.
The sole trader has unlimited liabilities, in the sense that he is responsible for the total amount
of his business debts, which could exceed the total investment in the business. The liabilities
extend to all personal assets. The liabilities will extend even to personal assets such as the car
and home.

 Total responsibility
Since it is a one man show, you are limited to and by your own skills and capabilities. All the
load of the business rest one the owner, even in illness or in his absence.

 Difficulty with capital.

Capital is limited to the owner’s savings or profits or any other money he or she can borrow.

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It may be difficult to raise additional finance for the business, especially when there are not
enough assets to give as security for loans. The owner is the sole provider of finance for the
business. The bottom line is that the sole trader is the most difficult business structure for
which to obtain financing.

 Restricted growth potentials

Many sole traders have operated for many years at the same size and no change in the level of
operations. It operates the same office it started and remains with it for very many years. Skills,
KOB and capital may be the basic limiting factors for growth.

 Sickness or death of owner may mean end of business.

When the sole trader dies, the CPU of the business is gone and hence, the business is gone,
especially when there was no successor trained to take over the business. In Africa, succession
planning is absent in many businesses and as such sole proprietorship usually exist for limited
time in their scenes.

 There is no separation between the sole trader and his business.

It is difficult to separate the activities of the business owner and those of the business and this
makes it difficult to account for the business. This simply means that there is no separate
legality. For nay business to succeed there must be separation in ownership and control. This is
the business entity concept.

2.3 PARTNERSHIPS

A partnership is an association that subsists (exists) between two or persons who come together
to make business for profits. It is a natural progression of a sole trader. A partnership is formed
as a way to overcome the problems a sole trader may have in raising capital. It is financed and
controlled by the partners. The partnership and the partners are the same, there is no separate
legality. This means that the owners and the management are the same. The rules that govern the
partnership are found in the partnership deed or agreement.

In general partnership, all the partners share all the profits and losses and they all have unlimited
liabilities for all the partnership debts, and not just some particular debts. In limited partnership,
one or more general partners will run the business and have unlimited liabilities, but there will be

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one or more limited partners who will not actively participate in the business. A limited partner’s
liabilities are limited only to the amount contributed. Some options may allow a partnership to
have limited liability for some members of the partnership; this is called a limited partnership.

Some examples of partnership businesses in Cameroon are:

 Some private schools.

 Hotels.
 Supermarkets.
 Private Universities and.
 Others, as seen under the sole trader.
Some characteristics distinguish a partnership for a sole trader as follows:

 There is co-ownership of the assets.

 Limited life of the partnership.
 Mutual agency.
 Share in management of the partnership.
 Share in partnership profits.
 Unlimited liabilities of at least one partner.
2.3.1 TYPES OF PARTNERS IN A PARTNERSHIP

There can be many types of partners in a partnership based on their different responsibilities in
the business:

 Active partner
This is one who is active in running the activities of the business (partnership).

 Dominant partner
This one who is not active and not known or held out as a partner.

 Limited or special partner

This is a partner who risks only his/her agreed investment (capital) in the business.

 Nominal partner

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He/she is not a partner in the sense of being a party to the partnership agreement, but he/she
represents him-herself as a partner or permits others to make representation by the use of his or
her name. Therefore, under the law, a nominal partner is as liable as if he or she were a partner
to another party who has acted on the reliance on the truth of the true partnership.

 Ostensible partner
This is an individual who is active and is known as a partner

 Secret partner
This is a partner who is active but is not known to be a partner.

 Silent partner
This is one who is not active but is known to be a partner.

 Sub partner
This is an individual who is not a member of the partnership but contracts with one of the
partners and participates in the interest of the partner in the firm’s business and profits.

2.3.2 ADVNTAGES OF A PARTNERSHIP.

The following advantages can be distinguished for a partnership:

 Ease of formation
The legal formalities and expenses are not much as in a corporation. It is easy to start up than a
corporation.

 Relatively stable business life

There is more stability built into a partnership structure than into that of a sole trader. This is
because the resources applied to solve problems are doubled than in a sole trader.

 Relative freedom from government control and special taxation

There is a minimum amount of paperwork associated with a partnership as opposed to a
corporation. The taxes are in the form of drawings and are based on income.

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 Help in decision making
It is often said that two heads are better than one and many hands do light work. Decision
making will be better than in sole proprietorship, even though will be slow.

 Additional capital to start your business.

The partners are a source of additional capital to the business and so capital can easily be raised
for expansion.

 Share in profits of the business.

All the partners, to a greater or lesser degree, are motivated to apply their best abilities and put
in the time by direct sharing of the profits from the business.

 Flexibility
Like a sole proprietorship, a partnership is reasonably flexible in that it can respond rapidly to
changing conditions of the business. On the other hand, because more than one individual is
involved, the decision-making process is less flexible than that of the sole trader.

2.3.3 DISADVNTAGES OF A PARTNERSHIP.

Some of the disadvantages of a partnership are:

 The actions of one partner can hold others bound.

This is a major demerit of a partnership. Partners are liable for the actions and commitments of
one partner. A single partner can expand the company’s resources in a business commitment
and all partners are liable to that commitment, whether they agree or not.

 Organizational problems.
Each partner in a partnership has his/her interest and their methods of doing things are different
even if functions are clearly defined in the deed. It is very difficult to see partnership businesses
succeeding in Africa as a whole and Cameroon as a nation. In some extreme cases some
partners may lose their lives because of witch-hunting, especially when there is expansion in the
business.

 Unlimited liabilities of the partners.

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In the case of bankruptcy, the partners will lose the capital contributed and their personal
property.

 Difficulty in obtaining capital.

Finance can obtained more easily for a partnership than a sole trader but more difficult to obtain
finance for a partnership than a corporation.

 Disposing of partnership interest.

Buying out one partner may be very difficult unless the terms have been started in the written
agreement contained in the articles that formed the partnership.

2.3.4 REASONS WHY PARTNERSHIPS MAY NOT SUCCEED IN CAMEROON

Partnerships may exist in theory and in real life situation; it is very difficult for partnerships to
succeed, especially in Cameroon. There are many reasons why this may be so:

 There is no separation between ownership and management.

 The role of the law is present but impaired by corruption. The legal system is weak and
laws are on papers but application is not there.
 Tribalism. Cameroon has too many tribes and if one or two persons from different tribes
come into a partnership, there is a likelihood that the acts of tribalism must be shown, at the
level of some recruitment.
 Human greed.
 Power mongers.
 Lack of capital.
 Lack of the knowhow.
 Taxation policy.
 The level of technology.
 Absence of succession planning.
 Inadequate financial reporting(maintenance of incomplete records)

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2.3.4 CORPORATION OR CAMPANY

A corporation is a business entity that is owned by shareholders and managed by the BODs.
This is a business created as a distinct legal entity composed of one or more individuals or
entities in order to make profits from their dealings. A corporation is created by law and thus is
a legal entity with most of the rights and privileges of a person. The owners of the company are
called shareholders and the management is the BODs. The BODs is elected by the shareholders.
This means that a corporation is a legal person separated and distinct from its owners and it has
many of the rights, duties and privileges of actual person. Corporation can borrow money and
own property, can sue and be sued and can enter into contracts.

The corporation is financed by money contributed by shareholders in the form of shares. Their
returns come in the form of dividends distributed from the profits generated at the end of the
year. There are four characteristics which distinguish limited companies from other entities:

 The legal nature of the business (separate legal existence). This means that a corporation
acts under its own name and has most of the same rights as does a person. It may buy, own,
or sell property, borrow money, enter into contracts, and sue and be sued.
 Limited liabilities of the shareholders.This means that the liabilities of shareholders are
limited to the amount of capital or investment fully paid, but unlimited to the amount
partially paid.
 Separation of owners from management. This means that shareholders are different from
the management (BODs), even though many shareholders fight nowadays to members of the
board. The shareholders indirectly management the company though the board of directors.
 Statutory rules governing the form and contents of published accounts.There are legal
requirements that are needed to incorporate a company and their financial statements must
be audited and published, especially when the company is a quoted company.
 Continuous life. This means that the life of a company is not affected by the withdrawal,
death, or incapacity of a shareholder, employee, or officer. There is succession planning.
When the sole trade dies, it entity comes to an end and when the main partner in the
partnership dies, it may certainly comes to an end.

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 The ability to acquire capital. This may result from the issuance of its stocks or shares. A
company may sell ownership rights in the form of shares of stocks, and if it has only one
class of stock, then that class is common stock or ordinary share

2.3.5TYPES OF LIMITED COMAPNIES

Corporations may be classified into two ways: by purpose, such as for-profit or not-for-
profit(charitable or medical organizations), and by ownership(publicly held, which may have
thousands of shareholders, and privately held, which have few shareholders and general do not
offer stock for sale to the public.

There are four types of limited companies, as seen below:

 Private companies
These must be made up of one or more shareholders and may not offer shares to the public at
large. Their names always end with the word “Limited” or “Ltd”. The authorized capital is
1,000,000Frs with a nominal value of 5,000Frs per share.

 Public companies
These are companies limited by shares which must have at least two members and an authorized
capital of at least 10,000,000Frs with a nominal of 10,000Frs per share. There is no maximum
number of shareholders prescribed and the companies can offer their shares to the general public.
Their names will end with the word “Public Limited Company” or “PLC”

 Quoted companies or listed companies

These are companies whose shares are bought and sold on an organized stock exchange market.
They must be public companies, even though not all public companies will have a stock
exchange listing.

 Unquoted companies or unlisted companies

These are companies which do not have a listing on a recognized stock exchange market. An
unquoted company may be a private or a public company.

2.3.5 ADVANTAGES OF A COMPANY

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The following are some advantages of a company:

 Limited liabilities of shareholders. In the event of liquidation, shareholders will lost only the
amounts fully contributed.
 Ease in securing capital.
 Increased resources available.
 They are entities for investments because there is a lot of regulation and control.
 Corporate benefits.
 Permanent existence/succession planning. When a shareholder dies, the company will
continue.
2.3.6 DISADVANTAGES OF A COMPANY

The following are some disadvantages of a company:

 Too much paperwork. The volume of transactions is very high and hence, a large volume of
paper work is involved.
 There are rigorous government regulations.
 Inability to take losses as deductions
 Lessened controlled
 They pay corporate taxes and these may be expensive and hence, they will erode (reduce) the
profits of the companies.
Test Your Understanding

1. Who is a sole trader?

2. What is a partnership?
3. Discuss the types of partnerships.
4. Explain why partnerships may not succeed in Cameroon.
5. State the characteristics of a sole trader, a partnership and a company.
6. Discuss the merits and the demerits of a sole trader, partnership and a company.
7. Identity and explain the types of limited companies and give two advantages of each type.
8. Explain how a company is different from other business entities.

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 CHAPTER THREE

THE ACCOUNTING EQUATION

3.0 INTRODUCTION

The accounting equation is very important in the understanding of financial accounting. It is the

accounting alphabet as the English alphabet is to English language. It is also called the balance

sheet equation. The accounting equation states that:

ASSETS = CAPITAL + LIABILITIES

3.1 ASSETS

An asset is a resource controlled by a business as a result of a past event from which economic

benefits are expected to flow into the business and the benefits must be measured reliably. It is

simply a resource controlled by the business.

Do not use the word “owned” or “own” to define an asset.

Examples of assets include: land, building, cash, plant and machinery, etc. Assets are classified

into two broad types.

(a) Intangible Assets

These are assets that do not have a physical substance, but are used in the path of goods and

services. They are rights, privileges, and competitive advantages that result from the ownership

of long-lived assets that do not possess physical substance. Examples are goodwill, trademarks,

patents, copyrights, masthead, franchises, licenses and brand names. Intangible assets may arise

from government grants, purchase of another business, and private monopolistic arrangements.

They are usually recorded at cost and the cost is impaired or amortized, depending on the type,

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in a rational and systematic manner over the useful life of the intangible asset. Impairment is

the fall in the value of intangible assets that do not have any definite life span, e.g. goodwill,

while amortization is the fall in the value of intangible assets with definite useful life span, e.g.

loans. Also remember that depreciation deals with the fall in the value of fixed assets with

definite useful life span, e.g. buildings, motor vehicles, plant, etc. Do not be confused between

these three terms. The examples are explained as followed:

1. Patent right.

This an exclusive right issued by a company to another company to manufacture, sell, or

otherwise control an invention for a period of time from the date of the grant. The initial cost of

a patent is the cash or cash equivalent price paid to acquire the patent. If the owner of a patent

successfully defends the patent in a lawsuit, then the costs of the lawsuit are debited to the patent

account and amortized over the remaining life of the patent.

2. Trademark or trade name.

This is a word, phrase, jingle, or a symbol that distinguishes and identifies a particular enterprise

of product. Trademarks and trade names have tremendous value to companies and are

vigorously defended. The legal life of these intangibles is long, e.g. 20 years in the US, and they

are renewed indefinitely as long as they are in use. If they are purchased, then, the cost is the

purchase price. It they are developed, then the cost includes attorneys’ fees, registration fees,

design costs, successful legal defense costs, and other such expenditures.

3. Franchise agreement

This is a contractual agreement under which the franchisor grants the franchisee the right to sell

certain products, to render specific services, or to use certain trademarks or trade names, usually

within a designated geographical area. Another type of franchise is granted by a governmental

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body and permits an enterprise to use property in performing its services. This operating right is

called a license. Both the franchises and licenses may be granted for a definite period of time, an

indefinite period, or in perpetuity. The initial costs associated with the acquisition are added or

debited to the asset account, after that, annual recurring costs are recorded as operating expenses.

4. Copyright

This a right granted by the owner of an artistic or published book. The works used are usually

those of public figures or names that are reputable, that are sellable names.

5. Goodwill

Goodwill is simply the reputation that the business has made over time. Reputation cannot be

valued and this is why this is called non-purchased goodwill and is not recorded in accounting

books. What we are interested here is purchased goodwill which comes as a result of a

purchased transaction, e.g. when there is the purchase of an entire business. It arises only when

one business purchases another. It is defined as the excess of cost over the fair market value

of the net assets acquired (assets less liabilities). The factors that may result into goodwill

include: excellent management, quality of employees, customer relations, quality of

products, and location of the company. These assets appear on the balance sheet on the section

entitled Intangible assets.

(b) Tangible Assets

These are assets that have a physical substance i.e. they can be seen and touched and used in the

production of goods and services e.g. land, buildings, cash, etc. Assets can further be classified

into two types:

a) FIXED ASSETS

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They are also called long-term assets or non-current assets. These are assets that are bought to

be used in the business for a period longer than one year (above 12 months). These assets can

only be converted into cash after 12months. They assets are subjected to fall in value in the

process called depreciation. These assets are arranged on the balance sheet based on their

durability (how long they will stay in the business). Examples are:

- Land (premises)

- Building - Plant and machinery

- Fittings and fixtures, etc.

All these assets classified under PPE (plant, property, and Equipment). Land is always joined to

buildings and therefore, one amount can be stated for both, but their respective amounts will be

indicated.

b) CURRENT ASSETS

They are also called short-term assets. These are assets that are purchased to be said by the

business to make profit. These assets can be converted into cash, within 12months. The assets are

arranged on the balance sheet based on their liquidity nature. The highest liquidity assets are

found at the bottom e.g. cash in hand. An asset is said to be liquid if it can easily be converted in

to cash orit is cash. The highest liquid asset is cash. Examples of current assets are:

 Stock or inventory (made up of work in progress or process, finished goods, and raw

materials).

 Receivables or debtors- sundry and trade debtors (the business sells to them on credit).

 Marketable securities (short-term liquid securities e.g. T-bills).

 Accrued income (income earned but not yet received).

 Prepayments (advances).

23
 Cash at bank (amounts in the current accounts).

 Cash in hand (made up of coins and notes).

Stock is the least liquid assets.

From above,

Total assets = Tangible + Intangible Assets or

Total Assets = Fixed Assets + Current Assets.

3.2 CAPITAL

It is the amount of money that the business owes the owner. To a layman on the street, capital is

the amount of money that is used to start a business.

3.2.1 TYPES OF CAPITAL

There are three types of capital:

 Working Capital

This is also called net current asset. Working capital is capital required in the running of the

day-to- day activities of the business. It is the difference between current assets and current

liabilities.

That is Working Capital = Current Assets –Current Liabilities.

 Capital Employed

This is also called net assets. It is the difference between total assets and current liabilities. That

is

Capital Employed = Total Assets – Current Liabilities

 Capital Invested

This is also called Net Worth. It is the difference between total assets and total liabilities. That is:

Capital Invested (CI) = Total Assets – Total Liabilities

24
3.3 LIABILITIES

A liability is a present obligation as a result of a past event, the settlement of which will lead to

an outflow of economic benefits and these benefits must be measured reliably.

3.3.1 TYPES OF LIABILITIES

There are two types of liabilities:

 Long-term Liability: They are also called non-current liabilities. These are liabilities

that must be settled after one year or 12 months. They are simply obligations that are

expected to be paid after one period e.g. long term bank loans, loan notes, deferred taxes,

bonds, etc.

 Current Liabilities: They are also called short-term liabilities.These are liabilities that

must be settled within one year. These are debts that are reasonably expected to be paid

from existing current assets or through the creation of other current liabilities within one

year or the operating cycle, whichever is longer. Examples are:

 Creditors or accounts payables-sundry and trade payables(the company purchases from

them on credit),

 Notes payables,

 Bank overdrafts,

 Income taxes,

 Accruals or dues or outstanding expenses or arrears.

 Prepaid incomes or unearned revenues (income received but not yet earned).

Test Your Understanding

1. State the accounting equation.

25
2. What is an asset?

3. Give an account of the classification of assets.

4. What is an intangible asset, give an explain examples.

5. What is a liability?

6. Give the classification of liabilities.

26
 CHAPTER FOUR

ACCOUNTING CYCLE

4.0 INTRODUCTION

It is important to know the origin of accounting information and the endpoint of that information.

Accounting information originates from the source documents, to the books of prime entry, to

ledger accounts, to the trial balance, to stock valuation, to adjustments, and the preparation of

financial statements. Accounting trainers must follow this cycle for the trainees to be able to

understand this subject. The accounting cycle is drawn as below:

Source Documents

Books of Prime Entry

Financial Statements

Adjustments Ledgers

Stock Valuation Trial Balance

4.1 SOURCE DOCUMENTS

These are pieces of papers which prove that accounting transactions have taken place and which

form the basis for entries in the accounts. A source document is a document that shows that a

business transaction has taken place. Source documents are the origins of accounting

information.

27
4.1.1 TYPES OF SOURCE DOCUMENTS

 Receipts: When we sell goods or services for cash, we are given receipts to prove the

occurrence of the transaction. When we pay expenses, such as rents, electricity, bills, etc, we

are given receipts.

 Invoice: An invoice is a document that accompanies goods sold on credit, prepared by the

sellers, showing details of the goods and the date and method of payment. There are two

types of invoices: sales invoice and purchase invoices. A sales invoice is an invoice

prepared by the seller for goods sold on credit, and sent to the purchaser. The purchaser will

call this same invoice as the purchases invoice. It is the same piece of document seen by the

two opposite people.

 Credit Note (C/N):It is a document sent to the customer by the business for the amount of

goods returned to the business by the customer (return inwards or sales returns). In practice,

C/Ns are always used.

 Debit Note(D/N): It is a formal request for a credit note. A debit note is also a document sent

by the business to the creditor for goods returned by the business to the creditor (return

outwards). This document is sent to ask for a credit note from the creditor. This means that it

is prepared by the purchaser and it is very closely related to the invoice. It is usually not

used, since phones can be used to inform the seller.

 Remittance Advice: This is a document that follows payments to creditors.

28
 Vouchers: Any payment involving salaries, petty cash expenses must be recorded in

vouchers. An example is petty cash voucher.

 Cheque counterfoils. They are evidences of cheques paid out by the firm.

 Pay-in-slip counterfoils. They are evidence of cheques received and banked by the

business.

 Till rolls. They are the evidence of cash taken by a shop, for example.

 Bank statements. These are received from the business’s bank giving information on

amounts paid out and deposited as well as on items such as standing orders, direct debits,

credit transfers, bank charges, etc.

4.2 RELATIONSHIP BETWEEN SOURCE DOCUMENTS AND BOOKS OF PRIME

ENTRY

Information moves from: To the

 Receipts

 Vouchers

 Till rolls
Cash book
 Bank statements

 Cheque counterfoils

Sales invoices Sales day book

Purchases invoices Purchases day book

Credit notes Returns inwards day book.

Debit notes Returns outwards day book

29
 Petty cash vouchers Petty cash book

Receipts

Invoices
Journal

Test Your Understanding

1. What are source documents?

2. State some source documents and explain their functions.

3. Link the respective source documents with the books of prime entry.

CHAPTER FIVE

BOOKS OF PRIME ENTRY

5.0 INTRODUCTION

Information from source documents is transferred to books of prime entry or subsidiary books.

Books of prime entry are books in which transactions are recorded for the first time. They are

also called books of original entry. There are seven books of original entry.

 Cash Book(main cash book)

 Sales Day Book (sales journal)

30
 Purchases Day Book(purchases journal)

 Returns Inwards Day Book or sales returns day book.

 Returns Outwards Day Book or purchases returns day book.

 Petty Cash Book(smaller cash book- part of the main cash book)

 General or main journal

5.1 BOOKS OF ORIGINAL ENTRY

The following books of prime entry can be distinguished:

1) Cash Book

It is a book of prime entry that is used to record the payments and receipts of cash and bank

(cheque). This means that any transaction involving cash and bank is recorded in the cash book.

Many transactions of the business are in cash and cheques and this is why the cash book is an

integral part of the financial accounting system. The cash book has two functions:

 It is a book of prime entry

 It serves as a double entry ledger account.

5.1.2 TYPES OF CASH BOOKS

There are three types of cash books

 One column cash book(made up the cash or the bank column only)

 Two column cash book( made up of the cash and the bank columns)

 Three column cash book (made up of the cash, bank and discount columns).

The three column cash book is usually recommended for the examinations.

5.1.3 KEY TERMS ASSOCIATED WITH THE PREPARATION OF CASH BOOK

a) Discount Allowed: A discount allowed is a deduction made on the amount of goods sold to

debtors on credit, to motivate them pay promptly. It is always subtracted from debtors

31
(credited). It is an expense in the income statement. Discount allowed is recorded on the receipt

side of the cash book (debited) or left hand side.

b) Discount Received: It is a deduction made on the amount of goods purchased by the

business, to motivate the business pay on time. It is always subtracted from payables (debited).

It is an income in the income statement and therefore, is added to gross profit. A discount

received is treated on the payment side of the cash book (credited) or right hand side. It should

be noted that discount allowed (DA) and discount received (DR) are cash discounts. Simply a

cash discount is a deduction and made for prompt payment.

c) Trade Discount: These are deductions given for buying in large quantities. They are also

called Bulky discounts. They are usually subtracted before any other discounts. Trade discount is

not considered in accounting books and it only appears on the invoice.

Example

TEGWI LTD sold goods to Lucy 400,000Frs at a trade discount of 4% with a cash discount of

5%. How much will be paid by Lucy after taking into account the discounts?

Solution

Frs
Gross amount 400,000
Less trade discount(4% x 400,000) (16,000)
384,000
Less cash discount(5% x 384,000) (19,200)
Net amount 364,00
Example

Njang PLC sold goods to Muna 600,000Frs at a trade discount of 3% and a cash discount of

5%. Njang purchased goods and was allowed a trade discount of 4% and a cash discount of 2%

on a list price of 500,000Frs. How much money will Njang receive from customers?

Solution

32
 Frs
Gross amount 600,000
Less trade discount(3% x 600,000) (18,000)
582,000
Less cash discount(5% x 582,000) (29,100)
Net amount 552,900

d) Contra Entry: It is an amount in the receivables ledger that will off-set or cancels an amount

in the payables ledger. It is recorded on both sides of the cash book (same amount). It is

recorded on the debt side of the payables account and on the credit side of the receivables

account. (Control account).

e) Folio Column: It is a reference column to indicate the origin of the transaction, which is the

ledger account in which the transaction is recorded.

For examples: PL = purchases ledger, SL = Sales ledger, GL = General ledger.

5.1.4 TYPES OF LEDGERS

There are three types of ledgers

 Sales ledger: It is a ledger used to record credit sales. It contains the accounts of the debtors

or receivables.

 Purchases ledger: It is used to record credit purchases and it contains the account of

creditors or payables.

 General ledger: it contains all other accounts that cannot go into (a) and (b) above. For

example capital account, expenses accounts, other incomes, etc.

5.1. 5 TYPES OF ACCOUNTS

There are two types of accounts.

a) Personal Accounts: These are the accounts of debtors and creditors.

33
b) Impersonal Accounts: These are not the accounts of debtors and creditors. They are divided

into two:

 Real Accounts: These are accounts in which real property are recorded for example land,

buildings, etc, all fixed assets.

 Nominal Accounts: All other items are recorded in the nominal account. E.g. expenses,

capital, etc.

Illustration on Cash Book

On 1st January 2013, Mami continued business with a cash balance of 500,000frs and a bank

balance of 400,000frs.

The following transactions took place during the month.

2/ 01/2013: sold goods to Lum 100,000frs cash.

5/01/2013: purchased goods 70,000frs by cheque.

7/ 01/2013: paid rent 9000frs by cash and 10,000frs by cheque.

10/01/2013: received 300,000frs from a customer with a discount of 5%.

15th/01/2013: sold goods 150,000frs by cheque and 120,000 cash.

20th/01/2013: paid a creditor 140,000frs with a discount of 3%

23rd/01/2013: banked cash 200,000frs

26th/01/2013: withdrew cash from bank 80,000fres

28th/01/2013: withdrew 10,000frs for personal use

28th/01/2013: paid insurance by cheque 20,000frs

29th/01/2013: paid wages and salaries 60,000frs by cheque and 50,000frs cash.

29th/01/2013: bought a computer 60,000frs cash

30th/01/2013: receive a loan of 180,000frs cash

34
30th/01/2013: sold goods 190,000frs cash and 101,000frs cheque

Required: Prepare a cash book for the month ended

31/01/2013 and balance the cash book

Solution

Calculation of the discounts and net sales

10th 5% x 300,000 = 15,000 300,000-15,000 = 285,000Frs

20th 3% x 140,000 = 4,200 140,000-4,200 = 135,800Frs

Cash Book

Details Folio Disc .All Cash Bank Details Folio Dis. Re Cash Bank
2013 Jan F(000) F(000) F(000) 2013 Jan. F(000) F(000) F(000)
1 b/d 500 400 5 purchase PL 70
2sales SL 100 7 rent GL 9 10
10sales SL 15 285 20 PL 4.2 135.8
Purchases.
15 sales SL 120 150 23 bank C 200
23 cash C 200 26 cash C 80
26bank C 80 28drawings GL 10
30loan G.L 180 28th GL 20
insurance
30sales S.L 190 101 29 wages GL 50 60
29 comp. GL 60
31 C/D 990.2 611
15 14.55 851 4.2 14.55 851
1/ 2 c/d 990.2 611
Note the following:

 The total cash under the Dr Side will always be more than that on the Cr side. If not check,

you have made an error.

 In a normal situation, the total amount of bank on the Dr Side is more than the amount on the

Cr side like above.

 When the Cr side is more than the Dr Side of the bank total, the balance c/d for bank will be

on the Dr Side. In this case, there is an overdraft.

35
 Generally, when the cash bank (bank column) has a credit balance, then there is an overdraft.

 An overdraft occurs when we withdraw money from our account more than what was

deposited.

4.1.6 SALES DAY BOOK

It is a book of prime entry used to record only credit sales. A sales book does not undergo

double entry like the cash book.The total of the sales day book is transferred to the general

ledger, where it is recorded in the sales account.The individual debtors amounts are posted to

the sales ledger where they are recorded in the individual debtors’ accounts (debited). All the

debtors are found in the sales ledger.

Example

A business records the following transactions for the month of January 2013.

1st January: sold goods 6000frs on account to Sam

10th January: sold goods to Susan 8000frs

21st January: sold goods to Lum 5000frs on account

29th January: sold goods to Joe 12000frs on credit

Required: Prepare the sales daybook and the relevant ledger account.

Solution

Sales Day Book

Date Jan 2013 Details Foli Invoice No Amount

o (F)
1st Jan Sam S.L 001 6,000
10th Jan Susan S.L 002 8,000
21st Jan Lum S.L 003 5,000
29th Jan Joe S.L 004 12,000
31st Jan transferred to the General Ledger 31.000

36
 SALES LEDGERS

Dr. Sam’s Account(receivable) Cr.

FCFA FCFA

Sales 6,000

Dr. Susan’s Account(receivable) Cr.

FCFA FCFA

Sales 8,000

Dr. Lum’s Account(receivable)Cr.

FCFA FCFA

Sales 5,000

Dr. Joe’s Account(receivable) Cr.

FCFA FCFA

Sales 12,000

GENERAL LEDGER

Dr. Sales Account Cr.

37
 FCFA FCFA

Receivables 31,000

The overall double entries are:

Dr. Receivable Account 31,000

Cr. Sales Account 31,000.

5.1.7 PURCHASES DAY BOOK (PDB)

It is a book of prime entry that is used to record only credit purchases. It does not undergo

double entry like the cash book. The total of the P.D.B is transferred to the general ledger,

where they are recorded in the purchases account. The individual creditors’ amounts in the

P.D.B are transferred to the purchase ledger where they are recorded in their individual

creditor’s account (credited).

Generally, when goods are purchased on credit, the double entries are:

Dr Purchases Account

Cr Payables or creditors account, with the total.

Example

The following transactions belong to Pan Ltd for Jan 2013.

1st Jan – purchased goods from Mirielle 6,000frs on account.

2nd Jan – Mbi sold goods to us 7,000frs on account

25th Jan – we received an invoice from Sam worth 3,000frs of goods purchased.

Required: Prepare a PDB and the relevant ledger account.

Solution

38
PURCHASES DAY BOOK

Date (Jan. 2013) Details Folio Invoice No Amount

1 Jan
st
Mirielle PL 003 6,000
2nd Jan Mbi PL 004 7,000
25 Jan
th
Sam PL 005 3,000
31 Transferred to the General ledger
st
16,000

PURCHASE LEDGERS

Dr. Miriele’s Account(payables) Cr.

FCFA FCFA

Purchases 6,000

Dr. Mbi’s Account (Payable) Cr.

FCFA FCFA

Purchases 7,000

Dr. Sam’s Account(payable)Cr.

FCFA FCFA

Purchases 3,000

39
GENERAL LEDGER

Dr. Purchases Account Cr.

FCFA FCFA

Creditors or payables 16,000

The overall double entries are:

Dr Purchases A/C 16,000

Cr Payables A/C 16,000

5.7 RETURNS INWARDS DAY BOOK (R.I.D.B)

This is a book of prime entry that is used to record sales returns. That is, goods returned by

debtors or customers. Returns inwards go with credit notes. The total of this book is transferred

to the general ledger where it is recorded in the returns inwards account on the Dr Side. The

individual debtor’s amount returned are transferred to the Sales Ledger, where they are recorded

in the individual debtors account (Cr).

Return inwards are usually subtracted from sales in the income statement (Dr 1/S).

Example

Jerry Ltd recorded the following transactions for the month of December 2013.

1st Dec: Received goods from Ateba 5,000frs as returns.

5th Dec: Theo returned goods worth 4,000 frs for wrong size.

22nd Dec: Lum returned goods worth 3,550frs for wrong quality.

Required: Prepare a R.I.D.B and the relevant ledger

Solution

Return Inwards Day Book

Date(Dec.2013) Details Folio Invoice No Amount (F)

40
1st Dec Ateba S.L 001 5,000
2 Dec
nd
Theo S.L 002 4,000
22 Dec
nd
Lum S.L 003 3,550
31st Dec Transferred to the General Ledger 12,550

SALES LEDGER

Dr. Ateba’s Account(receivable) Cr.

FCFA FCFA

Returns Inwards 5,000

Dr. Theo’s Account (receivable)Cr.

FCFA FCFA

Returns Inwards 4,000

Dr. Lum’s Account(receivables)Cr.

FCFA FCFA

Returns Inwards 3,550

GENERAL LEDGER

Dr. Returns Inwards accountCr.

41
 FCFA FCFA

Receivables 12,550

The overall double entries are:

Dr Return Inwards Account 12,550Frs

Cr Receivables debtor Account 12,550Frs

5.8 RETURNS OUTWARDS DAY BOOK (R.O.D.B)

It is also called the Purchases Returns Day Book. It is used to record goods returned to creditors

by the business. It is subtracted from purchases in the income statement.

This means they are credited in the income statement. The total of the purchases returns day

book is transferred to the general ledger, where they are recorded in the return

outwardsaccounts (Cr). The individual creditor’s amount in the purchases ledger is posted with

the amount of the purchases ledger (Dr).

Example

The following transaction belong to Drena Ltd for June 2022

1st – return goods to baby and co. 8,000frs

16th – Samba received goods from us 6,000frs as returns

28th – we returned goods to Lucy 2,000frs

Required: Prepare the purchases returns day book and the relevant ledger accounts.

Solution

R.O.D.B

Date 6/ 2013 Details Folio Invoice No Amount (F)

42
1st June Baby P.L 001 8,000
16 June
th
Samba P.L 002 6,000
28 June
th
Lucy P.L 003 2,000
31st June transferred to General Ledger 16,000

PURCHASES LEDGER

Dr. Baby’s Account(payable)Cr.

FCFA FCFA

Returns Outwards 8,000

Dr. Samba’s Account(payable) Cr.

FCFA FCFA

Returns Outwards 6,000

Dr. Lucy’s Account(payable) Cr.

FCFA FCFA

Returns Outwards 2,000

GENERAL LEDGER

Dr. Returns Outwards Account Cr.

FCFA FCFA

Payables 16,000

The double entries are:

43
Dr. Payables Account 16,000Frs

Cr. Returns Outwards Account 16,000frs

5.9 Petty Cash Book (PCB)

This is a book of prime entry that is used to record small payments, such as payments for

biscuits, transport, papers, etc. A petty cash book is a division of the main cash book. The person

who handles this small payment is called the petty cashier or petty cash custodian. The amount

of money given to the petty cashier is called the float. The best way of dealing with the float is to

operate an imprest system.

An imprest system is defined as a system in which a refund is made on the amount paid out by

the petty cashier. When a float is given to a petty cashier, the total amount in the main cash book

will reduce (Cr main cash book). The amount in the petty cash book will increase (Dr petty cash

book). Any amount paid out and the expenses paid would be Dr. Any payment out of this book

must be authorized. A petty cash book has two sides, a smaller debit side and a larger credit side.

Example.

A company main cashier gave 50,000Frs as the float to a cash custodian and he paid 45,000Frs

as expenses for the period. How must will be reimbursed to the petty cashier?

Solution

FCFA
Float 50,000
Amount spent (45,000)
Balance 5,000
Reimbursement 45,000
Float 50,000
The amount paid out is the same amount refunded, that is, 45,000Frs..

Example

The following transactions belong to Elvira PLC for the month of July 2022.

44
 Month July 2022 Description F (000)
1st July Petty cash in hand 20
Reimbursement of petty cashier 80
2nd July Paid for postages 6
Paid for office cleaning 10
3rd July Paid taxes fair 4
Paid for telegrams 2
Paid for typing paper 7
Paid for pencil and blue pen 3
4 July
th
paid for minor repairs 5
Paid for bus fair 1
5 July
th
Loan to Linda 15
6th July Purchases of goods 20
7 July
th
Paid for charity 5
Paid for office tea 3
Required: Prepare a petty cash book and the relevant ledger accounts.

Solution

Receipts Date Details V. No. Payment Posture Stat. Tr. exp. S. exp.
F(000) July Bal b/d F(000) F(000) F(000) F(000) F(000)
202
2
20 1 Bal b/d
80 1 Bank
2 Postage 1 6 6
2 Office 2 10
cleaning
3 Tax fare 3 4 4
3 Telegram 4 2 2
3 Typing 5 7 7
paper
3 Pencil pen 6 3 3
4 Repairs 7 5
4 Bus fare 8 1 1
5 Loan 9 15 15
6 Purchase 10 20 20
7 Charity 11 5
7 Tea 12 3
Total 58 8 10 5 35
31st Bal c/d 48

100 100
48 31st bal b/d
58 1 bank

45
Dr. CASH BOOK Cr.

FCFA FCFA
Float 80,000

The individual total of the petty cash book are transferred to the general ledger where they are

posted to individual expenses account.

GENERAL LEDGER

Dr. Petty Cash book Cr.

FCFA FCFA
Balance b/d 20,000
Cash book 80,000 Balance c/d 100,000
100,00 100,000
0
Balance b/d 100,00
0

Dr. Postage Account Cr.

FCFA FCFA
Petty cash book 8,000

Dr. Stationery Account Cr.

FCFA FCFA
Petty cash book 10,000

Dr. Travelling Expenses Account Cr.

FCFA FCFA
Petty cash book 5,000

Dr. Sundry Account Cr.

FCFA FCFA

46
 Petty cash book 35,000

Dr. Sam’s Account Cr.

FCFA FCFA
Sales 6,000

5.9 JOURNAL

It is a book of prime entry that records non-routine transactions. It records the transactions that

do not occur very often.

Uses of the Journal

 It is used to correct errors in the ledgers.

 It is used to record the disposal (sale) of non- current assets.

 It is used to write off bad debts or irrecoverable debts.

 It is used to record opening entries.

 It is used to record purchase of non- current assets.

The Structure of a Journal

JOURNAL ENTRIES

Date Details Dr. Cr.

FCFA FCFA
Account to be debited XX
Account to be credited XX
Narrative

Example

The following transactions belong to Mami Limunga for September 2022

Date(September 2015) Details Amount FCFA)

1st Sept. Bought land 500,000F cash
5th Sept. Wrote off bad debts worth 70,000F

47
 21st Sept Sold motor vehicles 95,000F by cheque

Required: Prepare journal entries for the above transactions

Solution

JOURNAL ENTRIES

Date Details Dr Cr.

Sept 2015 FCFA FCFA
1 Land account 500,000
Cash account 500,000
Being land bought for cash
5 Bad debt account 70,000
Debtor account 70,000
Being bad debts written-off
21 Bank account 95,000
Disposal account 95,000
Being the sales of motor vehicle
Unless you are asked to narrate in the question, do not do so.

CHAPTER SIX

DOUBLE ENTRY BOOKKEEPING

6.0 INTRODUCTION

This is an important area for students to concentrate and understand because about 90% of

financial accounting is based on the double entry principles. This is the pillar of financial

accounting. According to the double entry principles, every business transaction must be

48
recorded two times. That is debited and credited. It simply means that for every debit entry, there

is a corresponding credit entry. This principle is called the double entry book keeping principle

or the double (dual) entity concept. The double entry bookkeeping takes place in a ledger or in

a T-account. A ledger account is like a normal ledger book where transactions of similar types

are recorded on the same page. Each ledger has pages on which accounts are recorded.

6.1 STRUCTURE OF A LEDGER ACCOUNT

The ledger account takes the form of a T-account, with the left hand side called the debit side,

denoted as Dr. The right hand side is called the credit side, denoted as Cr. The name of the

account is written at the center.

Dr. Name of the Account Cr.

FCFA FCFA

Account to be debited xx Account to be credited xx

My main problem is to know the account to be debited and credited, and the reason why it is like

that.

6.2 MEANING OF A DEBIT

A debit is an entry made on the left hand side of a ledger account. A debit signifies:

 An increase in assets(e.g. increase in land, cash, receivables, bank, stock, etc)

 An increase in expenses( e.g. increase in rent, insurance, bank interest, etc)

 An increase in drawings( cash and stock drawings)

 A decrease in capital
49
 A decrease in liabilities(e.g. payments to creditors)

 A decrease in revenue.

6.3 MEANING OF A CREDIT

A credit entry is an entry made on the right hand side of a ledger account. It is denoted as CrA

credit signifies:

 An increase in capital( e.g. started a business with cash or bank, or an asset)

 An increase in liabilities( e.g. credit purchases, accruals, loan received, etc)

 An increase in revenue( e.g. credit sales, rent received, discounts received, etc)

 A decrease in assets (e.g. sale of assets, asset destroyed, etc.)

 A decrease in drawings( rare transaction)

 A decrease in expenses.

6.4 ILLUSTRATIONS INVOLVING DOUBLE ENTRY

1) A business sold goods to Ellie at 7,000Frs on credit.

The double entries are:

Dr. Debtors (receivables) Account Ellie 7,000(To increase the account)

Cr. Sales Account 7,000(to increase the account)

2) The business bought a motor van, 200,000 FRS cash.

The double entries are:

Dr.Motor van account 200,000(to increase the account)

Cr. cash account 200,000(to decrease the account)

3) The business purchased goods 10,000Frs by cheque.

The double entries are:

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 Dr.Purchases Account 10,000(to increase the account)

Cr.bank account 10,000(to reduce the account)

4) Paid wages 7,000frs by cheque.

The double entries are:

Dr. Wages account 7,000(to increase the account)

Cr. Bank account 7,000(to reduce the account)

4) Purchased goods40,000Frs.

The double entries are:

Dr. Purchases account 40,000(To increase the account)

Cr. Payables (creditors) 40,000(to increase the account)

6) Sold goods 5,000Frs on account (on credit).

The double entries are:

Dr. Receivables (debtors) account 5,000(to increase the account)

Cr. Sales account 5,000(to increase the account)

7) Sold goods 8,000frs by cheque.

The double entries are:

Dr. Bank account 8,000(to increase the account)

Cr. Sales account 8,000(to increase the account)

8) Paid insurance 4,000Frs cash.

The double entries are:

Dr. Insurance account 4,000( to increase the account)

Cr. Cash account 4,000(to reduce the account)

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9) Received 9,000Frs cash.

The double entries are:

Dr.Cash 9,000(to increase the account)

Cr. Receivables 9,000( to reduce to account)

10) Paid Jerry (creditors) 60,000Frs by cheque.

The double entries are:

Dr. Payables (Jerry) 60,000(to reduce the account)

Cr. Bank account 60,000(to reduce the account)

11) Withdrew goods 5,000Frs from business for personal use.

The double entries are:

Dr. Drawings account 5,000( to increase)

Cr. Purchase account 5,000( to reduce)

12) Withdrew cash 5,000Frs for personal use.

The double entries are:

Dr. Drawings account 5,000( to increase the account)

Cr.Cash account 5,000(to reduce the account)

13) Received a loan 70,000Frs cash from bank.

The double entries are:

Dr. Cash account 70,000(to increase the account)

Cr Loan account 70,000(to increase the account)

14) Paid a loan50,000frs by cheque.

The double entries are:

Dr. Loan account 50,000 (To reduce the account)

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 Cr. Bank account 50,000(to reduce the account)

15) Rent paid 75,000Frs cash.

The double entries are:

Dr.Rent account 75,000(to increase the account)

Cr.Cash account 75,000(to reduce the account)

16) The business allowed a discount of 4,000Frs.

The double entries are:

Dr. Discount allowed account 4,000(to increase the account)

Cr. Receivables (debtors) 4,000(to reduce the account)

17) Receive a discount of 5,000Frs.

The double entries are:

Dr. Payable 5,000(to reduce the account)

Cr. Discount received 5,000(to increase the account)

18) Sold a motor van 600,000Frs cash.

The double entries are:

Dr. Cash account 600,000(to increase the account)

Cr. Disposal account 600,000(to reduce the account)

19) Returned goods worth 50,000Frs to Lum.

The double entries are:

Dr. Lum(payable) account 50,000(to reduce the account)

Cr. Returns outwards account 50,000( to increase).

20) Received goods returned worth 60,000frs.

The double entries are:

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 Dr. Returns Inwards account 60,000( to increase the account)

Cr. Receivables account 60,000(to reduce the account)

21) Wrote off debts worth 20,000Frs as bad debts.

The double entries are:

Dr. Bad debts expenses account 20,000( to increase the account)

Cr. Receivables account 20,000( to reduce the account)

22) Recovered 10,000Frs for debts previously written off.

The double entries are:

Dr. Cash/ bank account 10,000( to increase the account)

Cr. Bad debts written off account 10,000(to reduce the account)

23) Sold a build for 2,000,000Frs on credit.

The double entries are :

Dr. Disposal Account 2,000,000(to increase the account)

Cr. Building Account 2,000,000(to decrease the account)

Dr. Receivables account 2,000,000( to increase the account)

Cr. Disposal account (not sales a/c) 2,000,0000.

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Example

The following balances belong to John White on 31st December 2022.

F (000)
Cash 500
Bank 600
Payables – Suh 400
Receivables – Mami 600
Plant and machinery 1,000
During the month, the following transactions were recorded:

Month Description Amount (F CFA)

2nd Jan Sold goods to Mami 600,000 on account
3rd Jan Purchased goods from Suh 700,000 on account
5th Jan Received from Mami at a discount of 5% 300,000
10th Jan Paid Suh at a discount of 3% 250,000
15th Jan Bought additional plant and Machinery cash 500,000
20th Jan Bad debts written off from Mami 10,000
22nd Jan Banked cash 600,000
23rd Jan Withdrew cash from bank 300,000
24th Jan Sold goods by cheque 400,000
25th Jan Paid rent cash 75,000
26th Jan Paid insurance by cheque 15,000
28th Jan Purchased goods cash 90,000
29th Jan Received a loancash 800,000
29thJan Paid loan interest 10% cash 10%
30th Jan Paid part of the loan 100,000
30th Jan Sold goods 400,000 by cash and
600,000 by cheque
Required: Open ledger accounts to record the above transactions and balance the accounts.

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Solution

Dr. CASH ACCOUNT Cr.

F(000 F(000)

1st balance b/d 500 10th payables 242.5

5th receivables 285 15th Plant and machinery 500

23rd bank 300 22nd bank 600

29th Loan 800 25th Rent 75

30th Sales 400 28th Purchases 90

29th Loan interest 80

30th Loan payment 100

31st balance c/d 59.75

2,285 2,285

1/ 2/2022 balance b/d 59.75

Dr. Bank Account Cr.

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 F(000 F(000)

1 Balance b/d 600 23 Cash 300

22 Cash 600 26 Insurance 15

24 Sales 400

30 sales 600 31 balance c/d 1,885

2,200 2,200

1/2022 balance b/f 1,885

Dr. Sales Account Cr.

F(000 F(000)

2 Receivables 600

24 Bank 400

30 Cash 400

31 Balance c/d 2,000 30 Bank 600

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 2,000 2,000

1/02/2015 balance b/f 2,000

Dr. Discount Allowed Cr.

F(000 F(000)

5 Receivables 15 31 balance c/d 15

15 15

1/02/2022 balance b/d 15

Dr. Discount Received Cr.

F(000 F(000)

31 Balance c/d 7.5 10 Payables 7.5

7.5 7.5

1/02/2022 balance b/d 7.5

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Dr. Receivables AccountCr.

F(000 F(000)

1 Balance b/d 600 5 Discount allowed 15

2 sales 600 5 cash 285

20 Bad debts 10

31 Balance c/d 890

1,200 1,200

1/02/2022 balance b/d 890

Dr. Payables Account Cr.

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 F(000 F(000)

10 cash paid 242.5 1 balance b/d 400

10 Discount received 7.5 3 Purchases 700

31 Balance c/d 850

1,100 1,100

1/02/2022 Balance b/d 850

Dr. Plant and machinery Account Cr.

F(000 F(000)

1 Balance b/d 1,000

15 cash 500 31 Balance c/d 1,500

1,500 1,500

1/02/2022 Balance b/d 1,500

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Dr. Loan Account Cr.

F(000 F(000)

30 Cash 100 29 Cash 800

31 balance c/d 700

800 800

1/02/2022 balance b/d 700

Dr. Purchases Account Cr.

F(000 F(000)

3 Payables 700

28 Cash 90 31 balance c/d 790

790 790

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1/02/2022 balance b/d 790

Dr. Rent Account Cr.

F(000 F(000)

25 cash 75 31 balance c/d 75

75 75

1/02/2022 Balance b/d 75

Dr. Loan Interest Account Cr.

F(000 F(000)

29 Cash Paid 80 31 balance c/f 80

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 80 80

1/02/2022 balance b/f 80

Dr. Insurance Account Cr.

F(000 F(000)

26 Bank 15 31 balance c/d 15

15 15

1/02/2022 balance b/d 15

6.5 BALANCING OF LEDGER ACCOUNTS

The process of balancing the ledger account is called footings.The followings steps are involved:

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 Add the Dr side

 Add the Cr side

 Compare the totals.

 If the Dr Side is greater than the Cr side, the net difference is a balance carried down (c/d) or

(c/f) on the Cr side. This will finally be a Dr balance brought down (b/d) or (b/f).

 The reverse is true when the Cr side is more than the Dr side.

The accounts above have been balanced using a red ink.

6.6 TRIAL BALANCE

The trial balance is a list of accounts and their balances at a given time. It is not a financial

statement. It is simply a list (memorandum listing)of the ledger account balances, to see whether

total of the debt balances are equal to total of the credit balances. The trial balance is used or it is

the starting point of preparing financial statements, such as the income statement and balance

sheet. It is prepared at the end of the accounting period. The trial balance is not to measure the

mathematical accuracy of the ledger account balances. The primary purpose of the trial balance

is to prove the equality of debits and credits in the ledgers and it also helps to uncover errors in

journalizing and posting and is useful in the preparation of financial statements. This is

because the trial balance can balance but there are errors in the ledgers.

Example

From the ledger accounts balanced above, prepare a trial balance.

Solution

John White

Trial Balance for the month ended 31 December 2022

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 F(000) F(000)
Cash 59.75
Bank 1,885
Receivables 890
Payables 850
Plant /Machinery 1,500
Sales 2,000
Purchases 790
Discounts 15 7.5
Bad debts 10
Rents 75
Insurance 15
Loan 700
Loan Interest 80
Capital(balancing figure) 2,300
5,857.5 5,857.5
There is no business that can operate without capital and therefore, the missing figure on the

credit side of the trial balance is capital of 2,300,000Frs.

Examples

The following transactions belong to Daniel Ltd for the month of June 2022

June 2015 FCFA(000)

1 Cash balance 150
Bank balance 2,850
8 Cash sales to date 1,100
9 Received cheques from the under-mentioned:
John T 475
Discount allowed 25
Samuel B-on account 800
Amos F 950
Discount allowed 50
10 Paid the under mentioned creditors by bank transfer:
Che C 1,000
Pakar P 500
Sampson J 475
Discount received 25
12 Cash payments to date:
Sundry expenses 50
Office stationery 25
Wages and salaries 60
14 Banked 3,325

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 Cash sales to date 1,000
Cash purchases to date 100
Purchases paid by cheque 1,800
18 Banked 900
25 Made bank transfer for rent 150
Withdrew for office use 250
28 Paid the following amounts from cash:
Sundry expenses 40
Office stationery 10
Wages and salaries 120
Purchases 50
Required:Prepare the cash book and the respective ledger accounts.

Solution

DR. CASH BOOK DR.

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 RECEIPTS PAYMENTS
CASH(000F BANK(000F CASH(000F
Details DA(000F) ) ) Details DR(000F) ) BANK(000F)
2022 June       2022 June      
1 Balance b/d   1,500 2,850 10.Che C     1,000
8 sales   1,100   10.Pakar P     500
9 John T 25 475   10.Sampson J 25   475
Samuel B   800   12.Sundry expenses   50  
Amos F 50 950   12.Stationery   25  
14 Transfer (C.)     3,325 12.Wages & salaries   60  
Sales   1,000   14.Transfer(C.)   3,325  
18 Transfer (C.)     900 14.Purchases   100  
25 Transfer(C.)   250   14.Purchases     1,800
        18.Transfer(C.)   900  
        25.Rent     150
        25.Transfer(C.)     250
        28.Sundry expenses   40  
        28.Wages & salaries   120  
        28.Stationery   10  
        28.Purchases   50  
        30. Balance c/d   45 2,900
  75 4,725 7,075   25 4,725 7,075
July 1 Bal b/d   45 2,900        
Note that all the contra entry(C) transactions will no longer go to the ledger accounts because
they have already undergone the double entry process.
Dr. Purchases Account Dr
June 2022 F(000) June 2022 F(000)
14 Cash 100
14 Cash 1,800
28 Cash 50 30 Balance c/d 1,950
1,950 1,950
1 July balance b/d 1,950

Dr. Sales Account Dr

June 2022 F(000) June 2022 F(000)
8 Cash 1,100

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 30 balance c/d 2,100 14 Cash 1,000
2,100 2,100
1 July balance b/d 2,100

Dr. Salary and Wages Account Dr

June 2022 F(000) June 2022 F(000)
12 Cash 60
28 Cash 120 30 Balance c/d 180
180 180
I July balance b/d 180

Dr. Office stationery Account Dr

June 2022 F(000) June 2022 F(000)
12 Cash 25
28 Cash 10 30 Balance c/d 35
35 35
I July balance b/d 35

Dr. Rent Account Dr

June 2022 F(000) June 2022 F(000)
25 Cash 150 30 Balance c/d 150
150 150
1 July balance b/d 150

Dr. Sundry Expenses Account Dr

June 2022 F(000) June 2022 F(000)
12 Cash 50
28 Cash 40 Balance c/d 90
90 90
I July balance b/d 90

Dr. Discount Allowed Account Dr

June 2022 F(000) June 2022 F(000)

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 28 Sundries 75 Balance c/d 75
75 75
1 July balance b/d 75

Dr. Discount Received Account Dr

June 2022 F(000) June 2022 F(000)
30 balance c/d 25 28 sundries 25
25 25
1 July Balance b/d 25

Dr. Samuel B Account Dr

June 2022 F(000) June 2022 F(000)
9 Cash 800

Dr. Amos F Account Dr

June 2022 F(000) June 2022 F(000)
28 Cash 950
28 Discount allowed 50

Dr. John T Account Dr

June 2022 F(000) June 2022 F(000)
9 Cash 475
9 Discount allowed 25

Dr. Che C Account Dr

June 2022 F(000) June 2022 F(000)
10 Sundries 1,000

Dr. Sampson J Account Dr

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 June 2022 F(000) June 2022 F(000)
10 Cash 475
10 Discount received 25

Dr. Pakar P Account Dr

June 2022 F(000) June 2022 F(000)
10 Cash 500

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