Njala University Njala Campus

Department of Physics and Computer Science

Business and Information Technology

Introduction to Accounting
BIT 122

Lecture Notes
 BIT 122 (INTRODUCTION TO ACCOUNTING) | LECTURE NOTE |INTRODUCTION

Accounting is a system meant for measuring business activities, processing of information into reports and
making the findings available to decision-makers. The documents, which communicate these findings about
the performance of an organization in monetary terms, are called financial statements. Usually, accounting
is understood as the Language of Business.
However, a business may have a lot of aspects which may not be of financial nature. As such, a better way to
understand accounting could be to call it The Language of Financial Decisions. The better the understanding
of the language, the better is the management of financial aspects of living. Many aspects of our lives are
based on accounting, personal financial planning, investments, income-tax, loans, etc. We have different
roles to perform in life-the role of a student, of a family head, of a manager, of an investor, etc. The knowledge
of accounting is an added advantage in performing different roles. However, we shall limit our scope of
discussion to a business organization and the various financial aspects of such an organization. When we
focus our thoughts on a business organization, many questions (is our business profitable, should a new
product line be introduced, are the sales sufficient, etc.) strike our mind. To answer questions of such nature,
we need to have information generated through the accounting process. The people who take policy
decisions and frame business plans use such information. All business organizations work in an ever-changing
dynamic environment. Any new program of the organization or of its competitor will affect the business.
Accounting serves as an effective tool for measuring the financial pulse rate of the company. It is a continuous
cycle of measurement of results and reporting of results to decision makers.
DEVELOPMENT OF ACCOUNTING DISCIPLINE
The history of accounting can be traced back to ancient times. According to some beliefs, the very art of
writing originated in order to record accounting information. Though this may seem to be an exaggeration,
but there is no denying the fact that accounting has a long history. Accounting records can be traced back to
the ancient civilizations of China, Babylonia, Greece and Egypt. Accounting was used to keep records
regarding the cost of labour and materials used in building great structures like the Pyramids. During 1400s,
accounting grew further because the needs for information of merchants in the Venis City of Italy increased.
The first known description of double entry book keeping was first published in 1994 by Lucas Pacioli. He was
a mathematician and a friend of Leonardo Ileda Vinci. The onset of the industrial revolution necessitated the
development of more sophisticated accounting system, rather than pricing the goods based on guesses about
the costs. The increase in competition and mass production of goods led to the rise of accounting as a formal
branch of study. With the passage of time, the corporate world grew. In the nineteenth century, companies
came up in many areas of infrastructure like the railways, steel, communication, etc. It led to a rapid growth
in accounting. As the complexities of business grew, ownership and management of business was divorced.
As such, managers had to come up with well-defined, structured systems of accounting to report the
performance of the business to its owners. Government also has had a lot to do with more accounting
developments. The Income Tax brought about the concept of ‘income’. Government takes a host of other
decisions, relating to education, health, economic planning, for which it needs accurate and reliable
information. As such, the government demands stringent accountability in the corporate sector, which forces
the accounting process to be as objective and formal as possible.
DEFINITIONS OF ACCOUNTING
1. As per the American Institute of Certified Public Accountants (AICPA) – Accounting is an art of recording,
classifying and summarizing transactions and events which are in part at least of financial character, in a
significant manner and in terms of money, and interpreting the results thereof.
1
 BIT 122 (INTRODUCTION TO ACCOUNTING) | LECTURE NOTE |INTRODUCTION

2. Accounting also involves analyzing and interpreting the financial transactions and communicating the
results to the persons interested in such information.
3. Accounting is considered as an ‘Information System’, as the function of accounting is to provide
quantitative information, primarily financial in nature about the business organization.
TYPES OF ACCOUNTING
The various sub–fields of accounting are –
1. Financial Accounting: It covers the preparation and interpretation of Financial Statements (i.e., P&L
Account and the Statement of Financial Position) and communication thereof, to the User of accounts. It is
historical in nature as it records transaction which has already occurred. It primarily helps in determination
of the net result for an accounting period and the financial position as on a given date.
2. Management Accounting: It is used for internal reporting to the Management of a business unit. The
different ways of grouping information and preparing reports as desired by the Managers for discharging
their functions are referred to as Management Accounting.
3. Cost Accounting: It is the process of accounting for cost and determination of overall cost of the product
or service. The study of the behavioral pattern of cost will enable to control cost.
4. Social Responsibility Accounting: It is concerned with accounting for social costs incurred by the enterprise
and social benefits created.
5. Human Resource Accounting: It seeks to identify, quantify and report investments made in human
resources of an organization that are not presently accounted under any conventional accounting practice.
AN ACCOUNTANT’S JOB PROFILE: FUNCTIONS OF ACCOUNTING
A man who is involved in the process of book keeping and accounting is called an accountant. With the coming
up accounting as a specialized field of knowledge, an accountant has a special place in the structure of an
organization, because he performs certain vital functions. The following paragraphs examine the functions of
accounting and what role does an accountant play in discharging these functions.
An accountant is a person who does the basic job of maintaining accounts as he is the man who is engaged
in book keeping. Since the managers would always want to know the financial performance of the business.
An accountant prepares profit and loss account which reports the profits/losses of the business during the
accounting period, Balance Sheet, which is a statement of assets and liabilities of the business at a point of
time, is also proposed by all accountants. Since both statements are called financial statements, the person
who prepares them is called a financial accountant.
Accounting information serves many purposes. Apart from revealing the level of performance, it throws light
on the causes of weakness and deviation from plans (in any). In this way an accountant becomes an important
functionary who plays a vital role in the process of management control, which is a process of diagnosing and
solving a problem. Seen from this point of view, an accountant can be referred to as a management
accountant.
Tax planning is an important area as far as the fiscal management of a company is concerned. An accountant
has a suggestive but very specific job to do in this regard by indicating ways to minimize the tax liability

2
 BIT 122 (INTRODUCTION TO ACCOUNTING) | LECTURE NOTE |INTRODUCTION

through his knowledge of concessions and incentives available under the existing taxation framework of the
country.
An accountant can influence a company even by not being an employee. He can act as a man who verifies
and certifies the authenticity of accounts of a company by auditing the accounts. It is a strictly professional
job and is done by persons who are formally trained and qualified for the purpose. They have an educational
status and a prescribed code of conduct like the Chartered Accountants in India and Certified Public
Accountants in USA.
USERS OF ACCOUNTING INFORMATION
The preceding section has just brought out the importance of information. Effective decisions require
accurate, reliable and timely information. The need for quantity and quality of information varies with the
importance of the decision that has to be taken on the basis of that information. The following paragraphs
throw light on the various users of accounting information and what do they do with that information.
Individuals may use accounting information to manage their routine affairs like operating and managing their
bank accounts, to evaluate the worthwhileness of a job in an organization, to invest money, to rent a house,
etc.
Business Managers have to set goals, evaluate progress and initiate corrective action in case of unfavorable
deviation from the planned course of action. Accounting information is required for many such decisions—
purchasing equipment, maintenance of inventory, borrowing and lending, etc.
Investors and creditors are keen to evaluate the profitability and solvency of a company before they decide
to provide money to the organization. Therefore, they are interested to obtain financial information about
the company in which they are contemplating an investment. Financial statements are the principal source
of information to them which are published in annual reports of a company and various financial dailies and
periodicals.
Government and Regulatory agencies are charged with the responsibility of guiding the socio-economic
system of a country in such a way that it promotes common good. For example, the Securities and Exchange
Board of India (SEBI) makes it mandatory for a company to disclose certain financial information to the
investing public. The government’s task of managing the industrial economy becomes simplify if the
accounting information such as profits, costs, taxes, etc. is presented in a uniform manner without any
manipulation or ‘window dressing’.
Employees and trade unions use the accounting information to settle various issues related to wages, bonus,
profit sharing, etc.
Consumers and general public are also interested in knowing the amount of income earned by various
business houses. Accounting information helps in finding whether or not a company is over charging or
exploiting the customers, whether or not companies are showing improved business performance, whether
or not the country is emerging from the economic recession, etc.
All such aspects draw heavily on accounting information and are closely related to our standard of living.

3
 BIT 122 (INTRODUCTION TO ACCOUNTING) | LECTURE NOTE |INTRODUCTION

LIMITATIONS OF FINANCIAL ACCOUNTING

1. SUPPLIES INSUFFICIENT INFORMATION: financial accounting provides the information about the financial
activities as a whole and not individual-wise, i.e., it does not record information relating to product-wise,
department-wise etc.

2. CONTROLLING COST NOT POSSIBLE: In financial accounting, control of cost is not possible since the costs are
known at the end of the financial year or a specified period of time whether the expense or cost has already
been incurred, i.e., nothing can be done to control either the account of expense or cost. In other words, if it
is even found that a particular cost is more, it is not possible to control it.

3. HISTORIC IN NATURE: since financial accounting records all transactions relating to a particular period, it is
rather historic in nature. In short, present financial information relating to a past period and not for the future
although all the financial decisions are taken on the basis of past financial data.

4. RECORDING ACTUAL COST: financial accounting records the actual cost only, the historic cost of the asset.
The value of the assets may be changed, but record only the cost of acquisition of such assets. In other words,
financial accounting does not record the price fluctuations or change in price level. As a result, it does not
present the correct information.

5. TECHNICAL SUBJECT: Since financial accounting is a technical subject, it is not possible for a common man to
understand it. Without the proper knowledge of principles and conventions of accounting it is not possible
to analyze the financial data to take any financial decision. Naturally, it has got little value to a person who is
not conversant with the subject.

6. UNANIMITY ABOUT ACCOUNTING PRINCIPLES: Although there is IASC (International Accounting Standards
Committee), the accountants differ in their opinions on the application of accounting principles in the same
matter. For example, some accountants prefer to use FIFO method of valuing inventory whereas others
prefer to use LIFO method; or some accountants prefer to use Straight line method of depreciation but others
prefer to use Diminishing Balance method.

7. MAY BE MANIPULATED: financial accounting may be manipulated, i.e., it may be presented as per the desire
of the management. For example, profit sometimes may be reduced in order to evade tax and to avoid bonus
to the employees. On the contrary more profit may be shown in order to raise fresh equity shares or to pay
more dividend to attract the shareholders and others.

4
 BIT 122 (INTRODUCTION TO ACCOUNTING) | LECTURE NOTE |INTRODUCTION

LECTURE NOTES TWO AND THREE

DEFINITION OF KEY ACCOUNTING TERMS
Sales revenue is income generated from the trading activities of the business.
Assets: These are items of value owned by the business. They are found on the balance sheet and include
current assets like cash in the bank accounts, cash in petty cash box, debtors and fixed assets like equipment,
land and building, vehicles etc.
Fixed Assets (non-current assets): an asset which is to be used for the long term in the business and not resold
as part of the trading activities, for example the purchase of a delivery van.
Current asset – a short-term asset of the business which is to be used in the business in the near future i.e.,
cash or something that will soon be converted into cash.
Liability is an amount owed by the business, i.e., an obligation to pay money at some future date. It is found
in the balance sheet. Liabilities are made up of debts that the company owes to other businesses and includes
creditors, loans and credit card balances.
Long term liability (non-current liability) – an amount owed by the business and due to be paid in the longer
term (after 12 months).
Current Liability: an amount owed by the business and due to be paid in the shorter term (less than 12
months).
Capital: is the amount which the owner has invested in the business; this is owed back to the owner and is
therefore a special liability of the business.
Drawings: are amounts withdrawn by the owner for their own personal use: drawings may be of cash or items
of inventory.
Account: the place where financial entries of similar nature are recorded, for example the ‘sales’ account is
where the business income goes, the ‘stationery’ account is where all pens, paper, staplers etc. go. A List of
account names is called Chart of Accounts.
Accountant: the person who sorts and enters data to the bookkeeping system. People often inter-change
bookkeeper and accountant to mean the same thing.
Balance Sheet: a balance report shows the business owners and managers how much equity is in the business,
how many assets the business owns and what the business owes in liabilities. The balance sheet falls in line
with the accounting equation.
Bookkeeper: a trained and qualified individual who does the bookkeeping process mentioned above.
Bookkeeping: the process of collating, recording and reporting on the financial transactions carried out by the
business.
Cash book: the main book in which transactions is recorded and all the funds moving in and out of the business
through the bank account. The cash book always contains the following information for all these transactions:
date, amount, and description of transaction.
Cash Accounting: recognized income and expenses when they are paid for, not when they are incurred.
Example, Mr. Y. Ibrahim buys a book in December and only pays the bill in January. In the accounts, the
purchase is recorded and shown on the income statement in January – the date of payment.
Bank: the secure financial institution where businesses deposit their earnings and from which they pay their
bills. Banks provide business advice and can give out loans to businesses for growth.
Bank statement: a report which the bank produces listing in date order all the money received and all the
money paid out of the bank account, ending with the balance of cash in the account. The difference between
‘cash’ and ‘bank’
5
 BIT 122 (INTRODUCTION TO ACCOUNTING) | LECTURE NOTE |INTRODUCTION

A possible confusion in terminology is caused by the apparent interchangeable use of the words ‘cash’ and
‘bank’. The normal use of the words suggests that a bank account operates by paying money out of the
account with a cheque and paying either cash or cheques into the account. In practice you cannot pay ‘cash’
out of a bank account.
However, accounting terminology does not stick to this distinction, and the terms cash and bank are for the
most part, interchangeable. Thus, the bank account is often referred to as the ‘cash book’. Similarly, we will
often refer to someone ‘taking cash out of the bank’ or we will say things like
‘John bought a car for £5,000 cash’, whereas in reality John would have paid for the car using a cheque.
For the early part of your studies all movements of cash/cheques shall be made through the bank account and
references to ‘cash’ or ‘cheques’ effectively mean the same thing.
Transaction: this is the transfer of funds from one account to another.
Cheque: a special pre-printed slip of paper in book format produced by a bank. It is used by businesses to pay
their bills in place of cash or instead of internet banking.
Contra: if a payment is made into a bookkeeping account, and then that same payment is paid out of the
account for a reason, it is called a contra- the two figures contra each other out of the account. Example, Le240
was paid into the sales account. The bookkeeper realized that he should have used a different account so he
pays the Le240 out of the sales account. This is contra.
Cost of goods sold: also known as cost of sales. This is the cost to the business of any parts or stock that are
sold to customers. This can also include the manufacturing costs of such products.
Credit: credits can be found on the right-hand side of the double entry method of bookkeeping. A credit entry
decreases assets and expenses, and increases income, liabilities and equity. Also, money that is owed by a
business to a supplier/ vendor is called credit.
Credit Note: a document that provides a refund to a customer for goods returned or sold at the wrong price.
Used to correct any overcharge that may have taken place.
Debit: a debit balance is found on the left-hand side of double entry bookkeeping. A debit entry increases
assets and expenses and decreases income, liability and equity.
Debit note: - a document used to correct an undercharge that may have taken place to inform the debtor to
pay more. It therefore acts as an additional invoice.
Capital expenditure is the purchase of, or improvement of, noncurrent assets.
Revenue expenditure is the day to day running costs of the business.
Capital income is income from the sale of capital assets of the business.
Revenue income is income generated from the sale of goods or services
Equity: equity is the net asset of a business- or in other words- Assets minus Liabilities equals Equity. The
equity section is found on the balance sheet and it includes how much the business owner has contributed to
the business from personal funds (capital) and how much they have withdrawn from the business for personal
use (drawings).
Expense: most purchases made by a business are called expense. Expenses are found on the profit and loss
account and can be used to reduce the amount of tax owed to the government.
Financial statements: are reports that are produced by accountants at the end of the financial year based on
all the data entered to the bookkeeping system by the bookkeeper. These reports indicate how well the
business is or is not doing, what the business is worth, and are used to calculate income tax due to be paid to
the government.
6
 BIT 122 (INTRODUCTION TO ACCOUNTING) | LECTURE NOTE |INTRODUCTION

Funds: the money or value of money involved in all business transactions within the business or at the bank.
Gross profit: this is calculated by taking the business income and deducting the cost of sales. If the cost of
sales is more than the income a gross loss result.
Loss: a loss occurs when the gross profit of a business is less than the expenses the business has to pay to keep
the business running. This is usually called a net loss.
Debtor/receivable: is an example of a current asset. A receivable is someone who owes the business money
i.e., a credit customer.
Creditor/payable: is an example of a liability. A payable is someone the business owes money to i.e., a credit
supplier.
Sundry income: other types of income that aren’t generated by the primary trading activities of the business.
Expenses: are the day to day running costs of the business.
Net profit or loss: the profit or loss remaining after expenses have been deducted.
Cash sales: A cash sale occurs when goods are sold (or a service provided) and the customer pays immediately
with cash, cheque or credit card. A receipt is issued for the amount of cash received.
Credit Sales: A credit sale occurs when goods are sold (or a service provided) and the customer does not have
to pay immediately but can pay after a specified number of days. An invoice is issued to request that the
balance owed is then paid.
Cash purchases: cash purchase occurs when goods are bought (or a service received) and the customer pays
immediately using cash, cheques or credit cards. A receipt is issued for the amount of cash paid.
Credit Purchases: credit purchase occurs when goods are bought (or a service received) and the customer
does not have to pay immediately but can pay after a specified number of days. An invoice is then issued to
request that payment is made.
The accounting equation
By adding up what the accounting records say belongs to a business and deducting what they say the business
owes, you can identify what a business is worth according to those accounting records. The whole of financial
accounting is based upon this very simple idea. It is known as the accounting equation.
It can be explained by saying that if a business is to be set up and start trading, it will need resources. Let’s
assume first that it is the owner of the business who has supplied all of the resources. This can be shown as:
Resources supplied by the owner = Resources in the business
In accounting, special terms are used to describe many things. The amount of the resources supplied by the
owner is called capital. The actual resources that are then in the business are called assets. This means that
when the owner has supplied all of the resources, the accounting equation can be shown as:
Capital = Assets
Usually, however, people other than the owner have supplied some of the assets. Liabilities is the name given
to the amounts owing to these people for these assets. The accounting equation has now changed to:
Capital = Assets + Liabilities
This is the most common way in which the accounting equation is presented. It can be seen that the two sides
of the equation will have the same totals. This is because we are dealing with the same thing from two
different points of view – the value of the owners’ investment in the business and the value of what is owned
by the owners.
Unfortunately, with this form of the accounting equation, we can no longer see at a glance what value is
represented by the resources in the business. You can see this more clearly if you switch assets and capital
around to produce the alternate form of the accounting equation:
7
 BIT 122 (INTRODUCTION TO ACCOUNTING) | LECTURE NOTE |INTRODUCTION

Assets = Capital + Liabilities

This can then be replaced with words describing the resources of the business:
Resources: what they are = Resources: who supplied them (Assets) (Capital + Liabilities)
It is a fact that no matter how you present the accounting equation, the totals of both sides will always equal
each other, and that this will always be true no matter how many transactions there may be. The actual assets,
capital and liabilities may change, but the total of the assets will always equal the total of capital + liabilities.
Or, reverting to the more common form of the accounting equation, the capital will always equal the assets
of the business minus the liabilities.
Assets consist of property of all kinds, such as buildings, machinery, inventories (stocks) of goods and motor
vehicles. Other assets include debts owed by customers and the amount of money in the organization’s bank
account.
Liabilities include amounts owed by the business for goods and services supplied to the business and for
expenses incurred by the business that have not yet been paid for. They also include funds borrowed by the
business.
Capital is often called the owner’s equity or net worth. It comprises the funds invested in the business by the
owner plus any profits retained for use in the business less any share of profits paid out of the business to the
owner.
Complete the gaps in the following table:
NO ASSETS (LE) LIABILITY (LE) CAPITAL (LE)
a. 20,000 3,400 ?
b. 23,000 8,800 ?
c. 19,200 ? 3,200
d. 8,100 ? 6,500
e. ? 7,900 17,300
f. ? 18,500 51,900

Complete the gaps in the following table:

NO ASSETS (LE) LIABILITY (LE) CAPITAL (LE)

a. 55,000 16,900 ?
b. ? 17,400 34,400
c. 36,100 ? 28,500
d. 119,500 15,400 ?
e. 88,000 ? 62,000
f. ? 48,000 110,000

Which of the items in the following list are liabilities and which of them are assets?
(a) Loan from A. Sangster (b) We owe a supplier (c) Equipment (d) Bank overdraft (e) Inventory of goods held
for sale (f) Loan to F. Wood
Classify the following items into liabilities and assets:
(a) Motor vehicles (b) Premises (c) Accounts payable for inventory (d) Inventory (e) Accounts receivable
(f) Owing to bank (g) Cash in hand (h) Loan from D. Jones (I) Machinery

8
 BIT 122 (INTRODUCTION TO ACCOUNTING) | LECTURE NOTE |INTRODUCTION

LECTURE NOTES FOUR

SOURCE DOCUMENTS
These are documents containing the information that makes basis of making entries in the books of accounts.
They act as evidence that the transaction actually took place. They include:
Cash sale receipt: - a document that shows that cash has been received or paid out of the business either in
form of cash or cheque. It is a source document that is mainly used in making records in the cash journals cash
book, cash accounts or bank accounts. If the receipt is received, it means payments has been made and
therefore will be credited in the above accounts, or taken to cash disbursement/payment journals, while when
issued, it means cash/cheque has been received and therefore will be debited in the above accounts or taken
to cash receipt journals.
Invoice: - a document issued when the transaction was done on credit to demand for their payment. If the
invoice is an incoming invoice/invoice received, then it implies that the purchases were made on credit, and
if it is an outgoing/invoice issued then it implies that sales were made on credit.
The incoming invoice will be used to record the information in the purchases journals/diary, while an outgoing
invoice will be used to record information in sales journals/diaries
Credit note: - a document issued when goods are returned to the business by the customer or the business
return goods to the supplier and to correct any overcharge that may have taken place. If it is received, then it
means part of the purchases has been returned and therefore the information will be used to record
information in the purchases return journals, while if issued then it means the part of sales has been returned
by the customers and therefore used to record the information in the sales return journals/diaries
Debit note: - a document used to correct an undercharge that may have taken place to inform the debtor to
pay more. It therefore acts as an additional invoice
Payment voucher: - a document used where it is not possible to get a receipt for the cash/cheque that has
been received or issued. The person being paid must sign on it to make it authentic. It is therefore used to
record information just as receipts.
Subsidiary books/ Books of original entries/Journals/Diaries/day’s books
JOURNAL
Journal is a historical record of business transaction or events. The word journal comes from the French word
“Jour” meaning “day”. It is a book of original or prime entry. Journal is a primary book for recording the day-
to-day transactions in a chronological order i.e., the order in which they occur. The journal is a form of diary
for business transactions. This is called the book of first entry since every transaction is recorded firstly in the
journal.
Journal Entry
Journal entry means recording the business transactions in the journal. For each transaction, a separate entry
is recorded. Before recording, the transaction is analyzed to determine which account is to be debited and
which account is to be credited.
The proforma of journal is shown as follows:
Column 1 (Date): The date of the transaction on which it takes place is written in this column.
Column 2 (Particulars): In this column, the name of the accounts to the debited is written first, then the names
of the accounts to be credited and lastly, the narration (i.e., a brief explanation of transaction) are entered.
Column 3 (L.F.): L.F. stands for ledger folio which means page of the ledger. In this column are entered the
page numbers on which the various accounts appear in the ledger.
Column 4 (Invoice number): basically, the invoice number of the transaction
9
 BIT 122 (INTRODUCTION TO ACCOUNTING) | LECTURE NOTE |INTRODUCTION

Column 5 (Amount): In this column, the amount of the transaction is written. Account is written along with
the nature of currency.
Advantages of Using Journal
Journal is used because of the following advantages:
➢ A journal contains a permanent record of all the business transactions.
➢ The journal provides a complete chronological (in order of the time of occurrence) history of all business
transactions and the task of later tracing of some transactions is facilitated.
➢ A complete information relating to one single business transaction is available in one place with all its
aspects.
➢ The transaction is provided with an explanation technically called a narration.
➢ Use of the journal reduces the possibility of an error when transactions are first recorded in this book.
➢ The journal establishes the quality of debits and credits for a transaction and reconciles any problems. If
a business purchases a bicycle, it is necessary to decide whether the bicycle represents ordinary goods
or machinery. Further any amount paid is debited to bicycle account and credited to cash account.

They are also referred to as Books of original entry or subsidiary books where the transactions are listed when
they first occur, with their entries being made on a daily basis before they are posted to their respective ledger
accounts. The information in the source documents is used to make entries in these books. The books of
original entries include:
a. Sales journals
b. Sales return journals/Return inwards journals
c. Purchases journals/creditors journals/bought journals
d. Purchases return journals/return outwards journal
e. Cash receipt journals
f. Cash payment/cash disbursement journals
g. The petty cash book
h. General journals/journal proper
a) Sales journals
This is used to record credit sales of goods before they can be recorded in their various ledgers. The
information obtained in the outgoing invoice/invoice issued is used to record the information in this journal
as the source document
The overall total in the sales journal is therefore posted in the sales account in the general ledger on credit
side and debtors account in the sales ledger as a debit entry.
Date Particulars/details Invoice no Ledger folio amount
Example:
The following information relates to Hermira Enterprises for the month of June 2010
June 1: Sold goods to Olu on credit of Le2000, invoice no 0114
2: Sold to the following debtors on credit; Donald Le4000, Frank Le3000, Olu Le3000
5: Sold goods on credit to Donald Le3000
10: Sold goods to the following on credit Kenneth Le1000, Olu Le5000, Donald Le6000
12: Sold goods on credit to Frank Le3500

10
 BIT 122 (INTRODUCTION TO ACCOUNTING) | LECTURE NOTE |INTRODUCTION

Required:
Prepare the relevant day book for the above transactions; hence post the various amounts to their
respective individual accounts.
NOTE: Totals posted to the sales account (Cr) in the GL and (Post the rest to their individual debtors account).

b) Sales Return Journals/Return inwards journals

This is for recording the goods that the customers/debtors have returned to the business. It uses the
information in the credit note issued as a source document to prepare it. The information is therefore
recorded to the return inwards account in the general ledger, while the individual’s entries are reflected
(credited) also in their respective debtors account for double entry to be completed.
Date Particulars/details Credit note no Ledger folio Amount

For example:
Record the following transaction for the 2016 in their relevant diaries, hence post them to their respective
ledger accounts;
May 1: goods that had been sold to W. Okondo for $2600 on credit was returned to the business
2: G. Otuya returned good worth $1320 that was sold to him on credit to the business
8: the following returned goods that had been sent to them on credit to the business H. Wati
$3500, Muya $4700, M. Okondo $2900
12: G Otuya returned goods worth $5400 that were sold on credit to the business
30: Goods worth $8900 that had been sold on credit to G. Otuya were returned to the business.

NOTE: (Post the entries to the individual ledger a/c’s (Cr))

c) Purchases Journal
This is used to record the credit purchase of goods. The totals are then debited in the purchases account in
the general ledger, while the individual creditors accounts are credited. It used the invoices received/incoming
invoices as its source document.
Date Particulars/details Invoice no Ledger Folio Amount
For example:
The following information relates to Mikwa Traders for the month of April 2018. Record them in their relevant
day’s book, hence post the entries to their relevant ledger accounts.
April 2011;
2. Bought goods worth Le25000 on credit from Juma, Invoice no 3502
3. Bought goods worth Le16500 from kamau on credit, invoice no 2607
6. Bought goods worth Le12700 from Juma on credit, invoice no 3509
8. Purchased goods of Le25200 from Juma, invoice no 3605; Le17500 from Kamau, invoice no
3700; Le45000 from Wamae wholesalers, invoice no 3750
15. Purchased goods of Le9200 from Wamae wholesalers on credit, invoice no 3762
18. Bought goods of Le17000 from Kamau on credit, invoice no 3802
24. Purchased goods of Le36000 from Juma suppliers on credit, Invoice no 3812
NOTE: Totals posted to the Purchase account (Dr) and (Post the individual entries to their relevant accounts
in the ledger (crediting).

11
 BIT 122 (INTRODUCTION TO ACCOUNTING) | LECTURE NOTE |INTRODUCTION

d) Purchases Return Journals/Return outwards Journals

This is used to record goods that have been returned to the creditors by the business, reducing the value of
the goods that had been purchased. It uses the credit note received as the source documents, with the totals
being in the purchases return account while the individual creditor’s accounts are debited in their respective
ledger accounts.
Date Particulars/details Credit note no Ledger folio Amount

For example:
Record the following transaction in the purchases return day book for Joanna traders for the month of June
2015, hence post the information into their relevant ledger accounts.
June 2010;
3. Returned goods worth Le4000 that had been bought from Nairobi stores, credit note no 56
8. Return goods of Le1200 to Matayos store, Credit no 148
19. Had some of their purchases returned to the following; Njoka enterprises Le7000, credit note
no 205, Nairobi Stores Le6000, credit note no 58, Matayos store Le1000 credit note no 191
26. Returned goods worth Le1800 to Njoka enterprise credit note no 210
30. Return goods worth Le1020 to Matayos store, credit note no 200.

e) Cash receipt Diaries

This is used to record all the cash and cheques that have been received in the business. They may be many
that posting directly in the cash book may be tedious and are therefore first recorded here. It totals are posted
to the cash and bank accounts in the general ledger (Dr), while the individual accounts are credited in their
respective accounts in the ledger. It uses the cash receipt issued and bank slips received as the source
documents. It takes the following format:
Date Particulars/details Receipt no Ledger folio Disc allowed cash bank
f) Cash payment Journals
This is used to record cash and cheques that have been issued to the creditors/out of the business. Its totals
are credited (Cr) in the cash and bank account and the individual accounts are debited (Dr) in their respective
accounts It uses the cash receipt received and bank slips issued as the source documents.
It takes the following format;
Date Particulars/details Receipt no Ledger folio Disc received cash bank

For example:
Record the following transactions into their relevant day books of Onyango traders, hence post the entries to
their respective ledger accounts and balance them off;
May 2011:
1. Cash sales amounting to Le3000, receipt no 0112
2. Paid the following creditors by cheque after having deducted a cash discount of 10% in each case; H. Mwangi
Le1500, J. MwanikiLe1600, N. Mugo Le1200
3. Receive the following Cheques from debtors in settlement of their debts after having deducted
5% cash discount in each case; Lucy Le22800 cheque no 0115, Otieno Le8550 cheque no 0011,
Martha Le1330 cheque no 0016
5. Paid for repairs in cash Le16000, receipt no 0251
12
 BIT 122 (INTRODUCTION TO ACCOUNTING) | LECTURE NOTE |INTRODUCTION

10. Paid Juma in cash Le9500, receipt no 0295

14. Cash sales Le17000, receipt no 02714
15. Banked Le6000 from the cash till
15. Received cash from Mary of Le13500, receipt no 0258
16. Cash sales of le26400 was directly banked, bank slip no 40152
20. Cash purchases of Le8920, receipt no 117
22. Cash purchases of Le15200 was paid for by a cheque, cheque no 512

g) The petty Cash book

This is used to record money that has been set aside to make payments that does not require large amounts,
such as cleaning, staff tea, posting letters, etc. it is always kept by the petty cashier, under the supervision of
the main cashier. The amount received by the petty cashier is always debited, while the payments made from
the same is credited. The credit side also contains the analytical columns for various items of expenditure. The
amount credited is also extended to the analysis column for the specific item.
At the end of the stated period, the petty cash book is balanced, and the totals are posted to their individual
accounts. The individual’s accounts are debited with the totals of the analytical columns, while the cash
account is credited by the main cashier for the total that was spent in the petty cash book.
Petty cash book can also be operated on an imprest system, where the petty cashier receives a given amount
of money at an interval (imprest) to spend, and report back to the main cashier at the end of the period on
how the money has been spent and the balance still remaining for restocking (reimbursed), and only the
amount spent can be reimbursed so that at the beginning of the period the petty cashier will always have the
full amount (cash float).
For example:
A petty cashier of sina chuki traders operate a petty cash book on an imprest of Le2500 on a monthly basis.
On 1st February 2010, she had cash in hand of Le150 and was reimbursed the
difference by the main cashier to restore her cash float. The following payments were made during the month
of February 2010
Feb; 1. Travelling expenses kshs110
2. Correcting fluid Le200
3. Sugar for staff tea Le180
4. Stamps Le255
10. Telephone Le255
15. Entertainment Le130
18. Postage stamps Le100
20. Bread for staff tea Le148
25. Fare Le200
26. Duplicating ink Le250
27. Entertainment Le400
28. Telephone Le100
28. Atieno a creditor was paid Le150
Required;
Prepare a petty cash book from the above information and post the totals to the relevant ledger accounts.

13
 BIT 122 (INTRODUCTION TO ACCOUNTING) | LECTURE NOTE |INTRODUCTION

h) The general Journal/Journal proper

This one is used to record purchases or sales of fixed assets of the business on credit. These assets do not form
part of the stock since the business does not deal in them, however the business may decide to buy or sell
them for one reason or the other.
In this journal, the account to be debited begins at the margin, while the account to be credited is indented
from the margin, with a narration below them put in brackets. The narration simply explains the nature of the
transaction that has taken place. The individual entries are then posted
to their respective accounts by either debiting or crediting depending on the transactions.
It takes the following format;
Date Particulars/details Ledger folio Dr Cr

For example;
Journalize the following transactions which took place in the business of J Opuche during the month of March
2005
March 5; purchased office furniture on credit for Le25000 from miugiza Furniture Limited
10; Sold old duplicating machine for Le15000 to samba academy on credit
15; Bought a new motor vehicle for Le800 000 from explo motors Ltd, paying Le300 000 in cash and balance
was to be settled at a later date
18; Sold old vehicle to Mara Secondary school for Le500 000 on credit
25; the owner converted personal electronic calculator valued at Le9000 into business asset
27; Sold old computers valued at Le20000 for Le15000 on credit to Mara secondary school
30; Sold old dining chairs worth Le10000 to Mandela for Le15000 on credit

Uses of general journal

➢ To record purchases of fixed assets on credit
➢ To record sales of fixed assets on credit
➢ To correct errors by checking the balances
➢ To record the opening and closing entries
➢ To write off bad debts
➢ To make end of the year adjustments for the final accounts

14