Lecture Notes on Principles of Accounting Kum

CHAPTER ONE
INTRODUCTION TO ACCOUNTING
1.1-Definition
A vital element in communicating economic events is the accountant’s ability to analyse and interpret the
reported information. Analysis involves use of ratios, percentages, graphs, and charts to highlight
significant financial trends and relationships. Interpretation involves explaining the uses, meaning, and
limitations of reported data. You should understand that the accounting process includes the bookkeeping
function. Bookkeeping usually involves only the recording of economic events. It is therefore just one
part of the accounting process. In total, accounting involves the entire process of identifying, recording,
and communicating economic events.
Accounting can be defined as ‘the process of identifying, measuring, and communicating economic
information to permit informed judgments and decisions by users of the information’. This means that
accounting involves deciding what amounts of money are, were, or will be involved in transactions (often
buying and selling transactions) and then organizing the information obtained and presenting it in a way
that is useful for decision making.
Despite what some people think, accounting is not a branch of mathematics, although the man credited
with writing the first book on the subject, Father Luca Pacioli (1445–1517), was a mathematician. He
wrote on the topic ‘in order that the subjects of the most gracious Duke of Urbino [his sponsor or
benefactor] may have complete instructions in the conduct of business’, and to ‘give the trader without
delay information as to his assets and liabilities’. (‘Assets’ are things that an individual or an organization
own; ‘liabilities’ are things that an individual or an organization owe). Accounting may not require
knowledge of mathematics but you do need to be able to add, subtract, multiply and divide – things you
need to be able to do in your daily life anyway. Otherwise, you would not know how much money you
had with you, how much you would have if you spent some of it, or whether the change you received was
correct. So, let’s remove one big misconception some people have concerning accounting: you do not
need to be good at arithmetic to be good at accounting, though you will find it easier to ‘do’ accounting if
you are.
From the definition of accounting, the following can be highlighted:
Recording accounting data
However, when people talk about accounting, they are normally referring to accounting as used by
businesses and other organizations. The owners cannot remember all the details so they have to keep
records of it. Organizations not only record cash received and paid out. They will also record goods
bought and sold, items bought to use rather than to sell, and so on. This part of accounting is usually
called the recording of data.
Classifying and summarizing
When the data is being recorded it has to be organized so as to be most useful to the business. This is
known as classifying and summarizing data. Following such classifications and summaries it will be
possible to work out how much profit or loss has been made by the business during a particular period. It
Lecture notes on Principles of Accounting for ACY & BF LEVEL 100 by Kum Boris Kpwe. (670890570/693158008) page 1
will also be possible to show what resources are owned by the business, and what is owed by it, on the
closing date of the period.
Communicating information
From the data, people skilled in accounting should be able to tell whether or not the business is
performing well financially. They should be able to ascertain the strengths and weaknesses of the
business. Finally, they should be able to tell or communicate their results to the owners of the business, or
to others allowed to receive this information.
Accounting is, therefore, concerned with: recording data; classifying and summarizing data;
communicating what has been learned from the data.
1.2-The Objectives of Accounting
Accounting has many objectives; including letting people and organizations know:
 if they are making a profit or a loss;
 what their business is worth;
 what a transaction was worth to them;
 how much cash they have;
 how wealthy they are;
 how much they are owed;
 how much they owe to someone else;
 enough information so that they can keep a financial check on the things they do.
However, the primary objective of accounting is to provide information for decision making. The
information is usually financial, but can also be given in volumes, for example the number of cars sold in
a month by a car dealership or the number of cows in a farmer’s herd. So, for example, if a business
recorded what it sold, to whom, the date it was sold, the price at which it was sold, and the date it
received payment from the customer, along with similar data concerning the purchases it made, certain
information could be produced summarizing what had taken place. The profitability of the business and
the financial status of the business could also be identified, at any particular point in time. It is the
primary objective of accounting to take such information and convert it into a form that is useful for
decision making.
1.3 Functions of Accounting
The earliest roles of accounting information were to measure and record financial transactions and
provide information for stewardship purposes. At present, accounting is generally viewed as serving the
following functions:
• Recording: accounting systems supply a means of recording data so as to enable the production of
reports or for use in calculations. For example, for the preparation of financial statements, the calculation
of performance indicators on which managerial bonuses are based, or for costing inventory.
• Classification: accounting systems assist in categorizing data so as to enable the production of reports
or for use in calculations. For example, identifying whether an item is an asset or an expense, or which
costs should be included in inventory.
• Measurement: accounting systems quantify data so as to enable the production of reports or for use in
calculations. For example, determining how much profit a business has earned in a year, or the value of a
piece of machinery.
• Stewardship: accounting systems provide information which enables owners to determine how funds
entrusted to managers have been used by them, and to what ends.
• Information for decisions: accounting systems provide information which enables users to make
decisions about the future. For example, to assist investors or managers in deciding how to allocate their
limited resources.
• Monitoring and control: accounting systems provide information which enables management to
monitor performance, and take corrective action if necessary.
• Performance evaluation and compensation: accounting systems provide information on the
performance of different individuals and parts of the business in order to determine how much managers
and employees should be rewarded, according to the terms of their contracts.
• Communication: accounting systems provide a means by which information is transmitted to users.
For example, to external users via the financial statements, or to internal users via the budget-setting
process.
These functions can be divided into two types. The first three functions concern the production of
accounting information. The last five functions concern the uses of the information produced.
1.4-Users of Accounting Information

The information that a user of financial information needs depends upon the kinds of decisions the user
makes. There are two broad groups of users of Accounting information: internal users and external
users.
Internal users
Internal users of accounting information are those individuals inside a company who plan, organize, and
run the business. These include marketing managers, production supervisors, finance directors, and
company officers. In running a business, internal users must answer many important question, as shown
below
 Is cash sufficient to pay dividends to stockholders (Finance)
 What price for the company’s products will maximize the company's net income? (Marketing)
 Can we afford to give employees pay raises this year? (Human Resource)
 Which product line is the most profitable? Should any product lines be eliminated? (Management)
To answer these and other questions, internal users need detailed information on a timely basis.
Managerial accounting provides internal reports to help users make decisions about their companies.
External users
External users are individuals and organizations outside a company who want Accounting information
about the company. The two most common types of external users are investors and creditors. Investors
(owners) use accounting information to make decisions to buy, hold, or sell ownership shares of a
company. Creditors (such as suppliers and bankers) use accounting information to evaluate the risks of
granting credit or lending money. Some of the questions that investors and creditors ask include the
following
- Is company earning satisfactory income? how does company A compare in size and profitability with
company B (Investors)
- Will company C be able to pay its debts as they come due? (creditors)
Financial accounting answers these questions. It provides economic and financial information for
investors, creditors, and other external users. The information needs of external users vary considerably.
Tax authorities want to know whether the company complies with tax laws. Regulatory agencies, such as
the Securities and Exchange Commission, want to know whether the company is operating within
prescribed rules. Customers are interested in whether a company will continue to honour product
warranties and support its product lines. Labour unions want to know whether the owners can pay
increased wages and benefits.
1.5 Branches of Accounting and Types of Accountants
1.5.1 Branches of Accounting
a) Financial accounting
it is concerned with the preparation of accounting information for the needs of users who are mostly
external to the business. Financial accounting is therefore part of financial reporting. Other aspects of
financial reporting include the timing and manner in which the information is communicated. Companies
publish their financial accounting information in the form of financial statements. Other forms of business
do not need to publish their financial statements but are usually required to provide them to the
government for taxation purposes.
In general, financial accounting information tends to be:
• Prepared on a periodic basis (most companies publish their financial statements only once a year, in
their annual report).
• Based on past events and historic data
• Comprised solely of financial information
• Governed by rules and regulations.
b) Management accounting
It is concerned with the preparation of accounting information for the needs of users who are most often
internal to the business. In general, management accounting tends to be:
• prepared frequently, as and when it is needed (most large businesses will prepare some information on
a monthly basis and many use daily accounting information)
• more likely to contain forward-looking information (such as forecasts and budgets)
• more likely to incorporate non-financial information (such as quantities of products sold or numbers of
customer complaints)
• not regulated (managers are free to produce whatever information they need in whatever format is most
helpful to them, subject to available data and technology).
c) Cost Accounting
the main function of cost accounting is to ascertain the cost of a product or a service purchased,
manufactured or rendered by the enterprise in order to help management in the control of cost and in
pricing products and services.
d) Governmental Accounting
otherwise known as Public Sector accounting, it is a field that relates to financial management of the
federal, state or regional governments. It is concentrated more on providing data management services
instead of earning profits. The public sector uses accounting information in order to deliver services
efficiently, economically, and effectively. An accountant in this sector usually looks after the audits,
budgeting and financial management of government facilities.
e) Fiduciary Accounting
The task of fiduciary accounting is normally handed over to a trustee or an administrator in a non-profit
organization or a specific community. It is usually administered or initiated by the court. A fiduciary
accountant performs traditional accounting duties like record maintenance, financial assessment and even
asset management.
f) National Income Accounting
National Income Accounting is associated with the social and economic factors of a nation, unlike just
the financial management in a company. It covers a much broader scope which eventually gives out
results such as the purchasing capacity of a country per year, and the market value of goods and services
manufactured in the country for a specific period of time.
g) Project Accounting
project accounting is very much similar to management accounting; but for the fact that project
accounting is concerned with the financial advancement of a particular project. It is believed to be a very
effective tool in project management. This helps organizations to schedule the deliverables in accordance
with the project progress report.
h) Forensic Accounting
it is a branch of accounting that deals with gathering of evidence to be used in the law court for
accounting malpractices or fraudulent activities.
i) Tax Accounting
It deals with the interpretation and application of the tax law preparation of income tax returns for
businesses, planning taxes and tax consultancy services. T tax accountant must be aware of the rules and
regulations pertaining to tax policies.
1.5.2 Types of Accountants
Generally, types of Accountants include; Auditors, Forensic Accountants, Public Accountants, Tax
Professional, Financial Advisor, Consultants etc.
Auditors
Auditing is an intensive study of the records and reports of a company by an accounting specialist.
Auditors help to ensure firms’ efficiency by keeping public records accurate and confirm payment of
taxes properly and on time. Auditors analyze and communicate financial information for various entities
such as companies, individual clients, the state and local government. Other than carrying out the
fundamental tasks of the occupation, they provide information to clients by preparing, analyzing and
verifying financial documents.
Forensic Accountants
Forensic accounting is a special area of practice in accountancy where accounting, auditing and
investigative skills are used to assist the court in legal matters. Forensic accountants are also known as
forensic auditors or investigative auditors. They investigate white-collar crimes including issues like
securities fraud, embezzlement and bankruptcies.
Public Accountants
A public accountant is a general accountant who either works for an accounting firm or has his or her
own private practice. Public accountants’ daily tasks are of a wide range that include; auditing, tax and
financial planning, and consulting and providing advice about compensation and benefits. Certified
Public Accountant is the statutory credential provided for qualified accountants in the U.S for persons
who have passed the Uniform Certified Public Accountant Examination.
Tax Professional
A tax professional is specifically trained in the field of taxation.
Financial Advisor
A financial advisor is a person who provides investment advice and financial planning services to
individuals, organizations and the government. Usually, a financial advisor consults with clients with an
intention to better their financial situation.
Accounting Consultants
Accounting consultants are persons with high subject matter expertise in preparing financial reports. Pro-
forma financial statements and repor6ts. They also analyze, interpret and evaluate financial statements
and reports for various regulatory and statutory authorities and internal management of organizations.
Accounting consultants can help a business with all of its financial needs.
CHAPTER TWO
BUSINESS ORGANIZATIONS
2.1 Introduction
A business organization is an individual or group of persons that collaborate to achieve commercial
goals. Some business organizations are formed to earn profit for owners. Other business organizations,
called non-profits, are formed for public purposes. These businesses often raise money and utilize other
resources to provide or support public programs. For the purpose of this course, emphasis is on profit
making businesses.
A business organization also known as an enterprise is a financially independent organisation that
produces goods and services for the market with the objective of maximising profits.
2.2 Classification of Business Organizations
Business organizations can be classified according to; size, sector of operation and ownership.
According to size, businesses are classified into Small, Medium and Large businesses. This will depend
on their annual turnover, number of employees and the profits earned.
According to the sector of operation, we can classify businesses as follows:
Primary sector: It is comprised of businesses that extract raw materials from the land or sea ready to be
use by other industries. For example, CDC, Oku Honey etc.
Secondary Sector takes the raw materials and transforms them into a product. For example; tea
production from coffee.
Tertiary sector sells the finished products and services to the consumer.
According to ownership, a business can be owned by one person, two or more persons. Businesses can
also be state owned or privately owned. Private businesses can take the following forms:
2.2.1 Forms of Business Organisation
There are three main types of business organisation within the private sector.
Sole traders
A sole trader is a one-person business (the business is owned by one person but others can be employed
to work within the business). The sole trader is an unincorporated business organisation. This means that
the legal status of the business is no different to that of the owner. If the business cannot pay its debts,
then it would be up to the owner to clear the debts even if this meant selling personal (non-business)
assets to clear the business debt. Sole traders are generally small organizations but are very common
mainly due to the ease of setting up as a sole trader.
Partnerships
Partnerships are also unincorporated businesses. Historically, a partnership was owned by between two
and twenty partners, although the limit on the maximum number of partners was relaxed in 2002. A
greater number of owners potentially allow a greater contribution of capital into the business thus
increasing the chances of success and minimizing risk of failure. However, partners may still have to sell
their own possessions to clear the debts of the partnership in certain circumstances.
A limited partnership allows some (but not all) partners to enjoy limited liability, which meant that they
avoid the risk of selling personal possessions.
Limited companies
A company has undergone the process of incorporation. This means a company exists separately from
those who own the company. This means that the company will carry on independently from the owners.
The owners of limited companies are known as shareholders.
There are two types of limited company: public limited companies and private limited companies. They
are run by directors elected by the shareholders. It is appropriate to talk of a ‘separation of ownership
from control’ since it is the shareholders who own the company, but it is the directors and managers who
actually run the company. This can potentially cause a conflict of interest as the two groups may have
differing objectives. This conflict highlights the importance of having clearly presented and
understandable financial statements for user groups to examine and assess.
2.3 The Operating Cycle of a Business
The operating cycle is the average period of time required for a business to make an initial outlay, of cash
to produce goods, sell the goods, and receive cash from customers in exchange for the goods.it it also
known as the cash-to-cash cycle, the net operating cycle or the cash conversion cycle. This is useful for
estimating the amount of working capital that a company will need in order to maintain or grow its
business.
A company with an extremely short operating cycle requires less cash to maintain its operations, and so
can still grow while selling at relatively small margins. Conversely, a business may have fat margins and
yet still require additional financing to grow at even a modest pace, if its operating cycle is unusually
long. If a company is a reseller, then the operating cycle does not include any time for production; it is
simply the date from initial cash outlay to the date of cash receipt from the customer. The operating cycle
of a business can be pictured as follows:
CASH
RAW MATERIALS
WAGES,
DEBTORS EXPENSES
STOCK
REVENUE
(SALES)
WORK IN PROGRESS
FINISHED
GOODS/SERVICES
2.3.1 Various components of the operating cycle

It can be calculated as follows:
COGS
a) Inventory turnover=
Average A Inventiry
365
b) Inventory period=
Inventiry turnover
Credit sales
c) Receivable turnover=
Average receivables
d) Receivables period=
365
Receivable turnover
Operating cycle=Inventory peroid +receivables period

Cash cycle=operating cycle− payables period
365
Where payables period= and
payablesturnover
COGS
Payables turnover=
Average payables
Illustration
You are provided with the following information from Kpwe_Mbong Company Ltd:
Item Beginning Ending

Inventory 90,000FCFA 102,000FCFA
Accounts receivable 72,000FCFA 78,000FCFA
Accounts payable 49,000FCFA 55,000FCFA
Sales for the year were 510,000FCFA (assume all on credit) and the cost of goods sold was
350,000FCFA.
Required: Calculate the operating cycle and the cash cycle
2.3.2 Factors influencing the duration of the operating cycle
The following factors influence the duration of the operating cycle:
i. The payment terms extended to the company by its suppliers. Longer payment terms shorten the
operating cycle since the company can delay paying out cash.
ii. The order fulfilment policy, since a higher assumed initial fulfilment rate increases the amount of
inventory on hand, which increases the operating cycle.
iii. The credit policy and related payment terms; since looser credit equated to a longer interval
before customers pay which increases the operating cycle.
Thus, several management decisions (or negotiated issues with business partners) can impact the
operating cycle of a business. Ideally, the cycle should be kept as short as possible, so that the cash
requirements of the business are reduced.
Examining the operating cycle of a potential acquirer can be particularly useful, since doing so can reveal
ways in which the acquirer can alter the operating cycle to reduce cash requirements, which may offset
some or all of the cash outlay needed to buy the acquire.
CHAPTER THREE
ACCOUNTING CONCEPTS, THE ACCOUNTING EQUATION AND THE

FINANCIAL STATEMENTS OF THE BUSINESS
3.1 Underlying concepts and Principles of Accounting
In recording business transactions, accountants rely on certain underlying assumptions or
concepts. Both preparers and users of financial statements must understand these assumptions. These
Concepts and principles are:
 Business entity concept (or accounting entity concept)
Data gathered in an accounting system relates to a specific business unit or entity. The business entity
concept assumes that each business has an existence separate from its owners, creditors, employees,
customers, other interested parties, and other businesses.
 Money measurement concept
Economic activity is initially recorded and reported in a common monetary unit for e.g. in Cameroon the
unit of measurement is the FCFA. This form of measurement is known as money measurement.
 Exchange-price (or cost) concept
Most of the amounts in an accounting system are the objective money prices determined in the exchange
process. As a result, we record most assets at their acquisition cost. Cost is the sacrifice made or the
resources given up, measured in money terms, to acquire some desired thing, such as a new truck (asset).
 Going-concern (continuity) concept
Unless strong evidence exists to the contrary, accountants assume that the business entity will continue
operations into the indefinite future. Accountants call this assumption the going-concern or continuity
concept. Assuming that the entity will continue indefinitely allows accountants to value long-term assets,
such as land, at cost on the balance sheet since they are to be used rather than sold. Market values of
these assets would be relevant only if they were for sale. For instance, accountants would still record land
purchased in 1988 at its cost of 1000,000FCFA on the 2017 December 31, balance sheet even though its
market value may have risen to 10,000,000FCFA.
 Periodicity (time periods) concept
According to the periodicity (time periods) concept or assumption, an entity’s life can be meaningfully
subdivided into time periods (such as months or years) to report the results of its economic activities.
 Duality Concept
This is the basic concept of accounting. It states that there are two effects from any economic event.
These are reflected in accounting using the system of double-entry bookkeeping. This means that for
every debit entry, there must be a corresponding credit entry of an equivalent value.
 The realization Concept
This concept emphasizes that profit should be recorded only when realized. The question is that at what
stage profit should be deemed earned? Whether at the time of receiving the order or at the time of
executing the order or at the time of receiving the cash? To answer this question, accounting is in
conformity with the law and recognizes the principle of the law. That is the revenue is earned only when
the goods are transferred. It means that profit is deemed to have accrued when property passes to the
buyer. In other words, revenue is recognized when the earning process is virtually complete and the
exchange transaction has occurred.
 The Matching Concept
The aim of business is to make profits. In order to ascertain the profit, the expenses are matched to the
revenues. The difference between income from sales and the cost of producing the goods will be the
profit. When business is a going concern, then it becomes necessary to evaluate the performance
periodically. A correct statement of income requires a distinction between past, present and future
expenditures. The revenuers and the cost of the same period has to be matched. In other words, income
made by the business during a period can be measured only when the revenue earned during a period is
compared with the expenditure incurred for earning that revenue. The question when the payment was
received or made is not necessary.
3.2 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 or owner’s equity. 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 changes to:
OWNER’S EQUITY = 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:
ASSETS = OWNER’S EQUITY + 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, stocks of goods and motor vehicles.
Other assets include debts owed by customers and the amount of money in the organisation’s bank
account.
Liabilities include amounts owed by the business for goods and services supplied to the business and for
expenses incurred by the businesses 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.
3.2.1 Accounting for Business Transactions

Accounting is based on actual transactions, not opinions or desires. A transaction is any event that affects
the financial position of the business and can be measured reliably. Transactions affect what the company
owns, owes or its net worth. Many events affect a company, including economic booms and recessions.
Accountants, however, do not record the effects of those events. An accountant records only those events
that have monetary amounts that can be measured reliably, such as the purchase of a building, a sale of
merchandise, and the payment of rent.
The balance sheet (statement of financial position) shows the financial position of an organisation at a
point in time. In other words, it presents a snapshot of the organisation at the date for which it was
prepared. When presenting a balance sheet, the assets are recorded on the right hand side while liabilities
and the owner’s equity are recorded on the left hand side. The following examples are business
transactions for a business during its first month of operation which can affect the accounting equation
Investment by Owner.
Mingo Jenifer decides to start a business and deposited 6,000,000F into a bank account opened specially
for the business. The effect of this transaction on the basic equation is:
CAPITAL = 6,000,000FCFA
CASH AT THE BANK (ASSETS) = 6,000,000FCFA
The purchase of an asset by cheque
On 3rd May 2017, Jenifer buys a small shop for 3,200,000F, paying by cheque. The effect of this
transaction is that the cash at the bank is decreased and the new asset, building, is added:
The purchase of an asset and the incurring of a liability
On 6 May 2017, Nyamkwe buys some goods for 700,000F from Conrad, and agrees to pay for them
sometime within the next two weeks. The effect of this is that a new asset, stock of goods, is acquired,
and a liability for the goods is created. A person to whom money is owed for goods is known in
accounting language as a creditor. The accounting equation becomes:
CAPITAL + LIABILITY = ASSETS
CAPITAL= 6,000,000FCFA
CREDITOR (LIABILITY) = 700,000FCFA
CAPITAL +LIABILITIES = 6,700,000FCFA
ASSETS
Building = 3,200,000FCFA
Stock of goods = 700,000FCFA
Cash at bank = 2,800,000FCFA
TOTAL ASSETS = 6,700,000FCFA
Sale of an asset on credit
On 10 May 20X7, goods which cost 60,000F were sold to Unity for the same amount, the money to be
paid later. The effect is a reduction in the stock of goods and the creation of a new asset. A person who
owes the business money is known in accounting language as a debtor. The accounting equation is
affected as thus:
Services Provided for Cash.
Jenifer receives 12000 cash from a customer for services provided. Recall that revenue increases owner’s
equity. In this transaction, Cash increases by 12000F, and revenues (specifically, Service Revenue)
increase by 12000F. The new balances in the equation are
Purchase of Advertising on Credit.
Jenifer receives a bill for 2500F from the Daily News for advertising but postpones payment until a later
date. This transaction results in an increase in liabilities and a decrease in owner’s equity. The specific
categories involved are Accounts Payable and expenses (specifically, Advertising Expense). The effect
on the equation is:
Services Provided for Cash and Credit.
Jenifer provides 3500 of services for customers. The company receives cash of 1,500 from customers,
and it bills the balance of 2,000 on account. This transaction results in an equal increase in assets and
owner’s equity. Three specific items are affected: Cash increases 1,500; Accounts Receivable increases
2,000; and Service Revenue increases 3,500. The new balances are as follows:
Payment of Expenses.
Jenifer pays the following Expenses in cash for September: store rent 6000, salaries of employees 15000,
and utilities 2000. These payments result in an equal decrease in assets and expenses. Cash decreases
23000, and the specific expense categories (Rent Expense, Salaries Expense, and Utility Expense)
decrease owner’s equity by the same amount. The effect of these payments on the equation is:
Payment of Accounts Payable.
Jenifer pays its 2500 Daily News bill in cash. The company previously recorded the bill as an increase in
Accounts Payable and a decrease in owner’s equity. This payment “on account” decreases the asset Cash
by 2500 and also decreases the liability Accounts Payable by 2500. The effect of this transaction on the
equation is:
Receipt of Cash on Account.
Jenifer receives 6000 in cash from customers who had been billed for services this does not change total
assets, but it changes the composition of those assets. Cash increases6000 and Accounts Receivable
decreases 6000. The new balances are:
Withdrawal of Cash by Owner.
Jenifer withdraws 13000 in cash from the business for her personal use. This transaction results in an
equal decrease in assets and owner’s equity. Both Cash and Capital decrease by 13000, thus:
3.3 The Financial Statements of a Business

The financial statements summarize the transaction data into a form that is useful for decision making.
The financial statements of a business are:
● The Statement of Comprehensive Income
● Statement of owner’s equity,
● Statement of Financial Positon and
● Statement of cash flows.
3.3.1 The Statement of Comprehensive Income
The statement of comprehensive income (also called the statement of earnings or statement of operations
or the income statement) presents a summary of a business entity’s revenues and expenses for a period of
time, such as a month, quarter, or year. The income statement is like a video, a moving picture of
operations during the period. It displays one of the most important pieces of information about a
business: Did the business make a profit? The income statement tells us whether the business enjoyed net
income or suffered a net loss. Remember,
 Net income means total revenues are greater than total expenses.
 Net loss means total expenses are greater than total revenues.
Net income is good news; net loss is bad news.
The income statement for a particular year:
 Reports the year’s revenues and expenses.
 Lists expenses in order of largest to smallest expense.
 Calculates and lists total expenses.
 Reports net income or net loss
3.3.1.1 Components of the Statement of Comprehensive Income
The statement of comprehensive income is the statement which shows the profit or loss earned by a
business for a particular period of time. The main reason why people set up businesses is to make profits.
Of course, if the business is not successful, it may as well incur losses instead. The calculation of such
profits and losses is probably the most important objective of the accounting function. The owners will
want to know how the actual profits compare with the profits they had hoped to make. The main elements
of this statement include;
i. Gross Profit
Gross profit is the excess of sales revenue over the cost of goods sold. Where the cost of goods sold is
greater than the sales revenue, the result is a gross loss. By taking the figure of sales revenue less the cost
of goods sold to generate that sales revenue, it can be seen that the accounting custom is to calculate a
trader’s profits only on goods that have been sold.
ii. Net profit
Net profit, found in the Profit and Loss Account, consists of the gross profit plus any revenue other than
that from sales, such as rents received or commissions earned, less the total costs used up during the
period other than those already included in the ‘cost of goods sold’. Where the costs used up exceed the
gross profit plus other revenue, the result is said to be a net loss.
To calculate profit we need the balances from the accounts that refer to flows of income and expenditure
look for the balances that are not dealing with assets, liability or capital these will be the balances that
we need. (The asset of inventory will be the only asset balance which is used within the statement of
comprehensive income it is needed in the calculation of the cost of goods sold.)
Trade receivables and trade payables are the names given to the totals of debtors and creditors
respectively. In the double-entry accounts these balances would appear as the name of the relevant debtor
or creditor.
In each of the ledger accounts that appear in the statement of comprehensive income the balance on the
account would be transferred to the income statement.
iii. Trading account and Profit and loss account
In the trading account we calculate the gross profit. This is calculated as the difference between sales and
the cost of goods sold. The cost of goods sold refers to the cost of any purchases made by the firm less
any closing inventory
Gross profit =Sales less Cost of goods sold
The second section of the statement of comprehensive income is sometimes referred to as the profit and
loss account. Once we have calculated the gross profit (or gross loss) of the business, it is now time to
include all the other expenses that the business has incurred so as to arrive at the net profit.
Net profit =Gross profit –Expenses
Any additional income – in this case ‘rent received’ – would be added on to the gross profit before we
deduct the total of the expenses.
Application 1
From the following trial balance of A Moore, extracted after one year’s trading, prepare a trading and
profit and loss account for the year ended 31 December 2017. A balance sheet is not required.
Trial Balance as at 31 December 2017

Debit Credit
Sales 190,576
Purchases 119,832
Salaries 56,527
Motor expenses 2,416
Rent 1,894
Insurance 372
General expenses 85
Premises 95,420
Motor vehicles 16,594
Debtors 26,740
Creditors 16,524
Cash at bank 16,519
Cash in hand 342
Drawings 8,425
Capital 138,066
345,166 345,166
Stock at 31 December 20X6 was 12,408FCFA
Application 2
Henry York is a sole trader who keeps records of his cash and bank transactions in a three-column cash
book. His transactions for the month of March were as follows
1/03 Cash in hand 100,000, Cash at bank 5,672,000F
4/03 York received a cheque for 1,246, 000F from W Abbot which was paid directly into the bank, this
represented sales.
6/03 Paid wages in cash 39, 000F
8/03 Sold goods for cash 152, 000F
10/03 Received cheque from G Smart for 315, 000F in full settlement of a debt of 344, 000F; this was
paid directly into the bank.
11/03 Paid sundry expenses in cash 73, 000F
14/03 Purchased goods by cheque for 800, 000F
18/03 Paid J Sanders a cheque of 185, 000F in full settlement of a debt of 201, 000F
23/03 Withdrew 100, 000F from the bank for office purposes
24/03 Paid wages in cash 39, 000F
26/03 Sold goods for cash 94, 000F
28/03 Paid salaries by cheque 230, 000F
31/03 Retained cash amounting to 150, 000F and paid the remainder into the bank
Required:
(a) Enter the above transactions within T-accounts and bring down the balances.
(b) Assuming no opening debtors, creditors or stock, prepare a trading and profit and loss account for the
month of March.
3.3.2 The Statement of Owner’s Equity

The statement of owner’s equity shows the changes in capital for a business entity during a time period,
such as a month, quarter, or year. Capital increases when the business has
● Owner contributions of capital, or
● A net income (revenues exceed expenses).
Capital decreases when the business has
● A net loss (expenses exceed revenues), or
● Owner withdrawals of cash or other assets (Drawing).
The statement of owner’s equity
 Opens with the capital balance at the beginning of the period (zero for a new entity).
 Adds owner contributions made during the period.
 Adds net income directly from the income statement
 Subtracts drawings (and net loss, if applicable).
 Ends with the capital balance at the end of the period.
3.3.3 The Statement of Financial Position
The statement of financial position also known as the balance sheet lists a business entity’s assets,
liabilities, and owner’s equity as of a specific date, usually the end of a month, quarter, or year. The
balance sheet is like a snapshot of the entity. It is also called the statement of financial position. The
balance sheet as at a particular date:
 Reports all assets, all liabilities, and owner’s equity at the end of the period.
 Lists assets in the order of their liquidity (closeness to cash) with cash coming first because it is the
most liquid asset.
 Reports liabilities similarly. That is, the liability that must be paid first is listed first, usually Accounts
payable.
 Reports that total assets equal total liabilities plus total equity (the accounting equation).
 Reports the ending capital balance, taken directly from the statement of owner’s equity.
3.3.3.1 Components of the Statement of Financial Position
The other main part of a set of financial statements is the statement of financial position. This is also
constructed from the balances found on the trial balance. Balances remaining unused after the
construction of the statement of comprehensive income will be used to construct the balance sheet. A
statement of financial position shows the assets of the business and how those assets were financed.
Assets can be financed by either the owner’s own resources (capital and reserves and retained earnings)
or by borrowing(liabilities)
a. Non-current Assets (fixed assets) Non-current Assets (also known as fixed assets) are those assets
which are not bought with the intention of resale. They are often bought to be used within the business,
either to facilitate production or, in the case of investments, to generate further income e.g. property,
plant and equipment.
b. Current Assets Current assets are assets which are likely to be converted into cash before the end of
the current year e.g. inventory, trade receivables, bank and cash
c. Current Liabilities In line with IAS, current liabilities would be those expected to be settled before the
date of the next statement of financial position – in other words, in the next year e.g. trade payables,
overdrafts and any other short-term borrowings.
d. Non-Current Liabilities (Long Term Liabilities) Non-current liabilities include any debts that the
business incurs which are not due for repayment until at least after the date of the next statement of
financial position e.g. non-current loans, mortgages and debentures.
e. Capital
This refers to the contributions of the owners in the business. It is increased by the net profit earned
within the year and reduced by any net loss and possible withdrawal of cash from the business for
personal use by the owners (Drawing).
 Layout of the balance sheet

HEADING XAF XAF
Non current assets xxx xxx
Current assets xxx
Current liabilities (xxx)
Working capital xxx xxx
Non current liabilities xxx (xxx)
Net assets xxx
Capital xxx xxx
Application 3
From the following data construct a statement of financial position for D Wilson as at 30 April
2017.
XAF (000)
Fixtures and fittings 18,500
Equipment 3,400
Inventory 5,322
Trade receivables 2,324
Bank 1,122
Trade payables 3,413
Cash 98
Capital 16,000
Net profit for year 4,786
Drawings 3,433
Long-term loan 10,000
Application 4
Considering application 1 on the trading and profit and loss accounts, draw up the statement of financial
position.
 Further considerations for Trading and profit and loss accounts and balance sheets
a. Returns inwards and returns outwards
A large number of businesses return goods to their suppliers (returns outwards) and will have goods
returned to them by their customers (returns inwards). When the gross profit is calculated, these returns
will have to come into the calculations. Returns inwards should be deducted to get the correct figure for
goods sold to customers and returns outwards should be deducted to get the correct figure of purchases.
Both the returns accounts are included in the calculation of gross profit, which now becomes:
(Sales less Returns Inwards)−(Cost of Goods Sold less Returns Outwards)=Gross Profit
b. Carriage
When goods are delivered by suppliers or sent to customers, the cost of transporting the goods is often an
additional charge. In accounting, this charge is called ‘carriage’. When it is charged for delivery of goods
purchased, it is called carriage inwards. Carriage charged on goods sent out by a business to its customers
is called carriage outwards. Carriage inwards is always added to the cost of purchases in the trading
account while Carriage outwards is always entered in the profit and loss account.
Application 5
From the following trial balance of G Still, draw up a statement of comprehensive income and a
statement of Financial position for the year ended 31 December 2017.
Dr Cr
FCFA FCFA
st
Stock 1 January 2017 41,600
Carriage outwards 2,100
Carriage inwards 3,700
Returns inwards 1,540
Returns outwards 3,410
Purchases 188,430
Sales 380,400
Salaries and wages 61,400
Warehouse rent 3,700
Insurance 1,356
Motor expenses 1,910
Office expenses 412
Lighting and heating expenses 894
General expenses 245
Premises 92,000
Debtors 42,560
Creditors 31,600
Cash at bank 5,106
Drawings 22,000
Capital 68,843
484,253 484,253
Stock at 30 September 20X9 was 44,780FCFA.
G Still
Trading and Profit and Loss Account for the year ending 31st December 2017
Sales 380,400
Less Returns inward 1,540
378,860 378,860
Less Cost of goods sold:
 Opening stock 41,600
 Add Purchases 188,430
 Less Returns out 3,410
185,020 185,020
 Carriage inwards 3,700
230,320
 Less Closing stock 44,780
185,540 185,540
Gross profit 193,320
Less Expenses:
 Salaries and wages 61,400
 Warehouse rent 3,700
 Carriage out 2,100
 Insurance 1,356
 Motor expenses 1,910
 Office expenses 412
 Lighting and heating 894
 General expenses 245
72,017 72,017
Net profit 121,303
G Still
Balance Sheet as at 31st December 2019
Fixed assets:
Premises 92,000
107,300 107,300
Current assets:
Stock 44,780
Debtors 42,560
Bank 5,106
92,446
Less Current liabilities:
Creditors 31,600
60,846 60,846
168,146
Capital:
Balance at 1.01.20 68,843
Add Net profit 121,303
190,146
Less Drawings 22,000
168,146 168,146
3.3.4-Statement of Cash Flows
The statement of cash flows reports the cash coming in (positive amounts) and the cash going out
(negative amounts) during a period. Business activities result in a net cash inflow or a net cash outflow.
The statement of cash flows reports the net increase or decrease in cash during the period and the ending
cash balance.
The statement of cash flows for the month ended,
 Reports cash flows from three types of business activities (operating, investing, and financing
activities) during the month. Each category of cash flow activities includes both cash receipts
(positive amounts), and cash payments (negative amounts denoted by parentheses).
 Reports a net increase (or decrease) in cash during the month and ends with the cash balance at
the end of the month. This is the amount of cash to report on the balance sheet
To conclude, financial statements are prepared in the order below:
Statement of Comprehensive Income
Statement of Owner’s Equity
Statement of Financial Position
Statement of Cash Flows
CHAPTER FOUR
THE DOUBLE ENTRY BOOKKEEPING
4.1 The Accounting Cycle
The accounting cycle is the name given to the collective process of recording and processing the
accounting events of a company. The series of steps begin when a transaction occurs and end with its
inclusion in the financial statements.
The accounting cycle is a series of steps performed during the accounting period (some
throughout the period and some at the end) to analyze, record, classify, summarize, and report useful
financial information for the purpose of preparing financial statements. Before you can visualize the steps
in the accounting cycle, you must be able to recognize a business transaction. Business transactions are
measurable events that affect the financial condition of a business. For example, assume that the owner of
a business spilled a pot of coffee in her office or broke her leg while working. These two events may
briefly interrupt the operation of the business. However, they are not measurable in terms that affect the
solvency and profitability of the business.
Business transactions can be the exchange of goods for cash between the business and an external party,
such as the sale of a book, or they can involve paying salaries to employees. These events have one
fundamental criterion: They must have caused a measurable change in the amounts in the accounting
equation, Assets = Liabilities + Owners' Equity. The evidence that a business event has occurred is a
source document such as a sales ticket, cheque, and so on. Source documents are important because they
are the ultimate proof of business transactions.
Many companies send and receive source documents electronically, rather than on paper. In such an
electronic computer environment, source documents might exist only in the computer databases of the
two parties involved in the transaction.
The steps in the accounting cycle are:
 Analyze transactions by examining source documents
 Journalize transactions in the journal
 Post journal entries to the accounts in the ledger
 Prepare a trial balance of the accounts
 Make Adjustment Entries
 Prepare Adjusted Trial Balance
 Prepare financial statements
 Close Accounts
 Prepare a post-closing trial balance
It is important to note that firms perform the last five steps at the end of the accounting period. Step 5
precedes steps 6 and 7 because management needs the financial statements at the earliest possible date.
After the statements have been delivered to management, the adjusting and closing entries can be
journalized and posted. We can diagram the steps in the accounting cycle as follows:
STEP 1:
Analysis of
STEP 2:
STEP 9: Business
Transactions Make Journal
Post -Closing Entries
Trial Balance
STEP 3:
STEP 8: Post to Ledger

Accounts
Close
Accounts THE ACCOUNTING CYCLE
STEP 4:
STEP 7:
Prepare Trial
Prepare Balance
Financial STEP 5:
STEP 6:
Statements
Make
Adjusted Trial
Adjusting
Balance
Entries
You can perform many of these steps on a computer with an accounting software package. However,
you must understand a manual accounting system and all of the steps in the accounting cycle to
understand what the computer is doing. This understanding removes the mystery of what the computer is
doing when it takes in raw data and produces financial statements.
4.2 The Double Entry Principle

Business transactions are recorded in accounts. The maintenance and recording of transactions within
these accounts is known as double-entry bookkeeping. The ‘double-entry’ term is used because each
transaction can be seen to have two separate effects on the business. This will be recorded in the ledger
accounts concern.
4.2.1 The Ledger Account
It is a table on which business transactions are recorded. It is divided into two sides; the left hand side
called the Debit side and the right hand side called the credit side. This nomenclature has nothing to do
with debtors and creditors. It is simply an internationally accepted convention. Each specific element of a
business has its own account in which everything concerning that element is entered. They are four
different layouts of the ledger account as shown below:
4.2.1.1 Account with separate Description Columns
Dr. Cr.
Date Description Amount Date Description Amount
This is the most commonly used format of an account.

4.2.1.2 Account with Combined Description Column
Date Description Amount

Dr. Cr.
4.2.1.3 Account with Moving Balances

Date Description Amount
Dr. Cr. Dr. Cr.
This format is mostly used by financial institutions especially those using softwares and excel programs.
4.2.1.4 The “T” Account
Account name
Debit side (Dr) Credit side (Cr)
Date Account Details Amount Date Account details Amount
This account format is mostly used in academics. Its name is derived from its letter T shape.
4.2.2-Rules for the Double Entry
It is vital that transactions are recorded correctly. For this we need to establish on
which ‘side’ of the account each transaction needs to be recorded – i.e. should we
‘debit’ or ‘credit’ an account? This will depend on the type of account that we are
dealing with.For assets, liabilities and capital, the rules for recording the double-entry transactions are as
follows:
All assets and expenses accounts

Debit Credit
Increase Decrease
Example 1:
On 3 November, machinery is purchased for 2,000, 000F payment made by cash. Record this transaction
in the appropriate ledger accounts.
All liability and revenues accounts

Debit Credit
Decrease Increase
Example 2:
On 31st December, Ndifon Co ltd received electricity bill from ENEO amounting to 70,000 for the
month. Record this transaction in the appropriate ledgers.
All capital accounts
Debit Credit
Decrease Increase
Example 3:
On 1 November, the owner of a business places 5,000,000F of her own money into the bank account of
the new business.
4.2.3 Accounting for Inventory
Goods that are bought with the intention of being sold are referred to as inventory.
Inventory is an asset and will therefore follow the rules of an asset account. However,
bookkeeping for inventory is a little complex. The solution is to have separate accounts for different
movements of inventory. There are four separate accounts to record different movements in inventory.
The four accounts for inventory
1 Purchases – for purchases of inventory
2 Sales – for sales of inventory
3 Returns inwards – when a customer returns inventory to the firm.
4 Returns outwards – when the business returns inventory to the supplier.
4.2.3.1 Double Entry Transactions for Inventory
 Purchases of inventory
The purchase of inventory will require a debit entry into the purchases account as
an asset has increased, but there are two options for the corresponding credit entry:
A =Cash purchase
B =Credit purchase
Example 4
A) On 10 November, the business purchases 450,000F of inventory by bank cheque.
B) On 18 November, the business purchases 50,000F of inventory on credit.
 Sales of inventory
The sale of inventory will require a credit entry in the sales account as the asset
of inventory is being reduced. Again, there are two options for the corresponding
debit entry:
A =Cash sale
B =Credit sale
Example 5
On 19 April, the business sells 870,000F of inventory
a) By cash
b) On credit
 Returns of inventory
This is a situation where goods are returned to the original supplier due to a fault or an error. Returns
inwards refer to the goods which are sent back to the firm from the customer. For this reason, they are
also known as sales returns
Returns outwards refer to the goods which the business returns to the original suppliers. They are
purchases that are unsuitable and for this reason are also known as purchases returns.
Example 6
A)-Goods previously sold on credit to Beh Dang for 189,000F were returned to the firm on 12 March in
the motive of non-conformity with the order.
B)-Goods previously purchased from Ngumsih for 212,000F were found to be faulty and were
subsequently returned to him on 5 April.
4.2.3.2 Income and Expenses

The double-entry account transactions to record income and expenses are straight-forward. It is often
easier to think of these transactions in terms of their effect on the bank or cash account – as a payment
will involve the bank or cash account being credited, the debit entry for this transaction must be in the
relevant expense account. Similarly, if money is received as business income then we would debit either
the cash account or the bank account. This means that the credit entry for this transaction would be in the
relevant income account.
Example 7
A-On 9 March, the firm paid wages of 140,000F in cash.
B-On 9 March, the firm received a cheque for 250,000F in respect of rent received
4.2.3.3 Balancing Accounts
At the end of a given accounting period (which could be weekly, monthly or yearly), the double-entry
accounts will be balanced. The main purpose of balancing the accounts is so that the financial statements
of the business can be produced. Balancing off accounts involves comparing the totals of the debit entries
in the individual accounts with the total of the credit entries. The balance on an account arises where
there is a difference between the total of the debits and the total of the credits as follows:
 If the total debit is greater than the total credit, then the balance is a debit balance which should be
written on the credit side
 If the total credit is greater than the total debit, then the balance is a credit balance which should be
written on the debit side
We can summarise all the above as follows:
Debit for Increase Debit for Decrease
Credit for Decrease Credit for Increase
Assets Liabilities
Drawings Capital
Expenses Revenues
Steps for recording transactions

i. Identify the two accounts that are affected and situate the category of accounts
ii. Determine the nature of movement (increase or decrease)
iii. Identify the account to be debited or credited
iv. Check that a debit entry and a corresponding Credit entry have been made and are both for the
same amount.
Advantages of the Double Entry System
a) Both aspects of every transaction are recorded. Every debit must have a corresponding credit.
b) It provides most reliable information from day to day as to the amounts owing to and by the trader.
c) It facilitates reference to the details of any account if information is needed regarding any set or series
of transactions.
d) It is easy to check the arithmetical accuracy of the entries by a trial balance.
e) It reduces fraud by rendering any alteration in accounts more difficult as alterations in accounts
means a sequence of other alterations.
f) A trader can easily ascertain the anticipated profit or loss by preparing a profit and loss account.
EXERCISES FOR PRACTICE

1. Complete the following table:
Transaction Account to
Account to Credit
Debit
Bought a Motor Lorry for cash
A Debtor, Cheghe pays us by cheque
Sold motor lorry for cash
A loan of 400,000 is received from BICEC
Received Rent from the Reform Centre
Paid insurance for a Building by cash
Paid Creditor Njabou by cheque
Repaid BICEC’s loan by cash
Proprietor puts in further cash into the business
Bought equipment on credit from Ghangha ltd
2. On the 01/01/2017, Geh Zeke took a loan from the Reform Consulting Group worth 200,000FCFA by
cash. The loan was repaid three months later as follows: ½ by cash and the rest by cheque and interest
at the rate of 2% paid cash.
Required: Record the above transactions in the books of Geh Zeke
3. Record the following transactions in the books of the Reform Consulting Group Ltd concerning the
month of August 2017:
01/08/17: commence business with 4,000,000frs in the bank and 1,000,000frs in cash.
02/08/17: Purchased goods worth 800,000frs from Keluh on credit.
04/08/17: bought fixtures and fittings for 120,000frs by cheque.
05/08/17: sold goods for 121,000frs cash.
06/08/17: Bought goods on credit for 150,000frs from Acha
07/08/17: paid Rent for 300,000frs by cheque
08/08/17: bought office stationaries by cash for 27,000frs
09/08/17: sold goods on Credit to Mbong 340,000frs
17/08/17: bought a delivery van by cheque for 1,700,000frs
19/08/17: cash sales 440,000frs
23/08/17: cash purchases 211,000frs
24/08/17: Mbong selltled her account and Acha was also settled by cash.
28/08/17: wages of 117,000frs for the month were paid by cheque.
30/08/17: one of the Partners of the Reform Consulting Group withdrew 540,000frs for his
personal use.
CHAPTER FIVE
THE TRIAL BALANCE
5.1 Introduction
The double entry system requires every transaction to be recorded twice, once as a debit and once as a
credit. It follows from this that the total of the debits and the credits should always be equal. By preparing
what is known as the “Trial Balance”, businesses carry out such a check at regular intervals to confirm
that the double entry principle has been applied in full when accounting for transactions.
Illustration
Fill the table below by:
a. Using column 2 to classify each account named in column 1 as an asset, liability, income or
expenditure; and
b. Stating in column 3 the side on which you expect to find the balance in that account whether debit
or credit.
Column 1 Column 2 Column 3
Name of the Account Class of account Side of balance
1. Cash account
2. Rent account
3. Purchases account
4. Sales account
5. Motor vehicles account
6. Salaries account
7. Stationeries account
8. Furniture and fittings account
9. Telephone and postage account
10. Land and building account
11. Advertising account
12. Staff welfare account
13. Capital account
14. Loan to sales representative’s account
15. Bank loan account
5.2 Definition
A trial balance is a list of each of the ledger account balances (the cash account as well as the income,
expenditure, asset and liability accounts in the ledger) extracted at any point in time. In it, the debit
balances are listed separately from the credit balances for the purpose of finding out whether the total of
all the debit balances equals the total of the credit balances. If the totals agree, it is presumed that every
transaction has been recorded in the books of account by a debit entry as well as a corresponding credit
entry. Putting in another way, if every transaction recorded by the cashier in the cash book is accurately
posted by the bookkeeper to the appropriate ledger account and the second entry in the ledger is on the
side opposite to the one in which it is recorded in the cash book, the trial balance must balance.
 Layout of the trial balance
There are various formats of the trial balance depending on the number of columns. Trial balance range
from two columns, 4columns, 6columns and 8 columns; thus we have the following formats for the trial
balance:
a. Two column trial balance
Account name Debit Credit
b. Four column trial balance

Account name Opening Balances Closing Balances
Debit Credit Debit Credit
Debit
c. Six column trial balance

Account name Opening Balances Movements Closing Balances
Debit Credit Debit Credit Debit Credit
d. Eight column trial balance

Account Opening Balances Movements Balances Closing Balances
Name Debit Credit Debit Credit Debit Credit Debit Credit
Illustration
On 31/07/2017, the Reform Consulting Group started business with the following items:
Capital 700000F, Furniture 33000F, Stationery 5500F, Bank 330000F, Cash 547600F, Loan 120000F,
Suppliers 96100F.
During the month of August, the following transactions were carriedout:
01/08/17: commence business with 4,000,000frs in the bank and 1,000,000frs in cash.
02/08/17: Purchased goods worth 800,000frs from Keluh on credit.
04/08/17: bought fixtures and fittings for 120,000frs by cheque.
05/08/17: sold goods for 121,000frs cash.
06/08/17: Bought goods on credit for 150,000frs from Acha
07/08/17: paid Rent for 300,000frs by cheque
08/08/17: bought office stationaries by cash for 27,000frs
09/08/17: sold goods on Credit to Mbong 340,000frs
17/08/17: bought a delivery van by cheque for 1,700,000frs
19/08/17: cash sales 440,000frs
23/08/17: cash purchases 211,000frs
24/08/17: Mbong settled her account and Acha was also settled by cash.
28/08/17: wages of 117,000frs for the month were paid by cheque.
30/08/17: one of the Partners of the Reform Consulting Group withdrew 540,000frs for his personal use.
Required: record the above transactions in the appropriate ledger accounts and draw up a six column trial
balance for the Reform Consulting Group.
CHAPTER SIX
BOOKS OF ORIGINAL ENTRY AND LEDGERS
6.1 Introduction
For very small businesses all the double-entry accounts can be kept in one book – one ledger – which will
be sufficient for the business’s financial records. However, for most businesses, keeping all the accounts
in one ledger would not be the most efficient in terms of organisation as it would become time-
consuming to track down individual entries when required. Therefore, some amendments are made to the
accounting system once a business moves beyond a certain size. Once a business goes beyond a certain
size it makes sense to divide the ledgers up according to the type of account in which the transactions are
to be entered. Ledger accounts only provide a small amount of information about transactions. It is useful
to have a separate source of information about each transaction which provides back-up to the ledgers.
This extra information is contained with the business’s day books.
6.2 Definition
Books of original entry (also known as Subsidiary books or Books of Prime entry or Day books) are
where transactions are first recorded. These day books are not accounts. (The cash book is the only day
book which serves jointly as both a day book and an account.) They are simply books that record details
of transactions as and when they happen. There are several day books, each of which will be used for a
particular type of transaction. The day books which are used are as follows:
 Cash Book– for receipts and payments of cash and cheques.
 Sales Day Book (or Sales Journal) – for credit sales.
 Purchases Day Book (or Purchases Journal) – for credit purchases.
 Returns Inwards Day Book (or Returns Inwards Journal) – for returns inwards.
 Returns Outwards Day Book (or Returns Outwards Journal) – for returns outwards.
 General Journal (or Journal if the term ‘Day Book’ is used for the other books of original entry) – for
other items.
Entries are made in the books of original entry. The entries are then summarized and the summary
information is entered, using double entry, to accounts kept in the various ledgers of the business. One
reason why a set of ledgers is used rather than just one big ledger is that this makes it easier to divide the
work of recording all the entries between different bookkeepers. The different types of ledgers most
businesses use are:
 Sales Ledger. This is for customers’ personal accounts.
 Purchases Ledger. This is for suppliers’ personal accounts.
 General Ledger. This contains the remaining double entry accounts, such as those relating to
expenses, fixed assets, and capital.
Some people describe all accounts as personal accounts or as impersonal accounts.
 Personal Accounts– these are for debtors and creditors (i.e. customers and suppliers).
 Impersonal Accounts– divided between ‘real’ accounts and ‘nominal’ accounts:
 Real Accounts– accounts in which possessions are recorded. Examples are buildings,
machinery, fixtures and stock.
 Nominal Accounts– accounts in which expenses, income and capital are recorded.
NB;
The ledger in which the impersonal accounts are kept is known as the Nominal (or ‘General’) Ledger. On
the other hand, the capital, drawings, and other similar accounts are sometimes kept in a Private Ledger.
This prevents office staff from seeing details of items which the proprietors want to keep secret.
6.3 Cash Books

This is a book that records all bank and cash transactions made by the business. The Cash Book consists
of the cash account and the bank account put together in one book. In the Cash Book, the debit column
for cash is put next to the debit column for bank while the credit column for cash is put next to the credit
column for bank. The bank column contains details of the payments made by cheque and direct transfer
from the bank account and of the money received and paid into the bank account. The bank will have a
copy of the account in its own books. Periodically, or on request from the business, the bank sends a copy
of the account in its books to the business. This document is known as the bank statement. When the
business receives the bank statement, it checks it against the bank columns in its Cash Book to ensure
that there are no errors. The cash book takes the following format:
Dr. Cr.
Date Details Folio Cash Bank Date Details Folio Cash Bank
(Receipts) (Payments)
The above format is known as the Double Column Cash Book. When the bank columns are not included,
we call it a Single Column Cash Book.
6.3.1 The use of folio columns
As we have already seen, the details column in an account contains the name of the account in which the
other part of the double entry has been entered. Anyone looking through the books should, therefore, be
able to find the other half of the double entry in the ledgers. However, when many books are being used,
just to mention the name of the other account may not be enough information to find the other account
quickly. More information is needed, and this is given by using folio columns
In each account and in each book being used, a folio column is added, always shown on the left of the
money columns. In this column, the name of the other book and the number of the page in the other book
where the other part of the double entry was made is stated against each and every entry. So as to ensure
that the double entry is completed, the folio column should only be filled in when the double entry has
been completed.
6.3.2- The Cash Book and Cash Discount
The term ‘cash discount’ refers to the allowance given for quick payment. It is still called cash discount,
even if the account is paid by cheque or by direct transfer into the bank account. The rate of cash discount
is usually stated as a percentage. Full details of the percentage allowed, and the period within which
payment is to be made, are quoted on all sales documents by the seller. A typical period during which
discount may be allowed is one month from the date of the original transaction. A business may have two
types of cash discounts in its books. These are:
 Discounts allowed: cash discounts allowed by a business to its customers when they pay their
accounts quickly.
 Discounts received: cash discounts received by a business from its suppliers when it pays what it
owes them quickly.
An extra column is added on each side of the Cash Book in which the amounts of discounts are entered.
The cash book now takes the following format:
Dr. Cr.
Date Details Folio Discoun Cash Bank Date Details Folio Discount Cash Bank
(Receipts) t (Payments) Receive
Allowed d
Discounts received are entered in the discounts column on the credit side of the Cash Book, and discounts
allowed in the discounts column on the debit side of the Cash Book. This format is known as the Three
Columns Cash Book
6.3.3 The Cash Book and Bank Overdrafts

A business may borrow money from a bank by means of a bank overdraft. This means that the business is
allowed to pay more out of its bank account than the total amount it has deposited in the account. Up to
this point, the bank balances have all been money at the bank, so they have all been assets, i.e. debit
balances. When the bank account is overdrawn, the business owes money to the bank, so the account is a
liability and the balance becomes a credit one.
Application Exercise 1: Prepare a three column cash book for the month of September 2017 for the
Reform I.T. consult using the following information and balance the cash book
Date Elements Amount
FCFA
01/09 Reformer started business with cash in the bank 12,000,000
02/09 Bought goods by bank cheque 6,000,000
03/09 Withdrew cash from the Bank 2,000,000
04/09 Paid carriage in cash 60,000
05/09 Sold goods for cash 1,600,000
06/09 Paid for general expenses in cash 55,000
07/09 Paid for advertising expenses by cheque 150,000
08/09 Bought packing materials for cash 200,000
10/09 Paid for carriage by Cash 20,000
13/09 Paid to Ndifon Cash 300,000
Discount received from Ndifon 30,000
15/09 Paid Kang by cheque 1,400,000
Kang allowed a discount worth 80,000
17/09 Sold goods for cash 750,000
18/09 Received cash from Tegha 440,000
Tegha received a discount worth 25,000
23/09 Bought goods by cheque 2,200,000
24/09 Received cheque from Chebeh 3,200,000
25/09 Deposited cash in hand into the bank 800,000
27/09 Received from Beh Dang cash 100,000
Discount Allowed 10,000
28/09 Paid electricity bill by cash 52,000
29/09 Paid wages by cash 1,300,000
Practice Exercise
The accounts of an enterprise as at the beginning of May 2015, presented the following balances brought
down from April:
Cash balance 29000
Bank balance 654000
Debtors accounts:
King 120000
Campbell 280000
Shand 40000
Creditors accounts:
Barrow 60000
Allen 440000
Long 100000
During the month, the following transactions were carried out by the business:
May 2- King payed the by cheque, having deducted 2.5% cash discount 3000. 117000
May8- The enterprise paid Long his account by cheque, deducting 5% cash discount 5000. 95000
May 11-The enterprise withdrew100 cash from the bank for business use.100000
May 16- Campbell paid the enterprise his account by cheque, deducting 2.5% discount of 7000. 273000
May 25-The enterprise paid office expenses in cash. 92000
May 28- Shand paid the enterprise in cash after having deducted 5% cash discount 38000
May 29- The enterprise paid Barrow by cheque less 5 % cash discount of 3000. 57000
May 30- The enterprise paid Allen by cheque less 2.5% cash discount of 11000. 429000
Work required
Prepare a cash book for the enterprise and post the cash book to the different ledger accounts
6.4 The Sales Day Book and the Sales Ledger
When goods sold are paid for immediately, they are described as ‘cash sales’, even where the payment
has been made by cheque or transfer of funds from the customer’s bank account into the seller’s bank
account. For accounting purposes, in such cases we do not need to know the names and addresses of
neither customers nor what has been sold to them and, as a result, there is no need to enter such sales in
the Sales Day Book. The Sales Day Book (and all the other day books) are only used for credit
transactions
The sales day book records all transactions resulting from credit sales. This must only include sales
relating to goods bought with the specific intention of resale. For example, a firm that sells computers
would not include the credit sale of office furniture in the sales day book and would only include the
credit sales of computers (and other equipment that related to the business’s main trading area, e.g.
printers or scanners). For each sale made, the business will issue an invoice. This is a written document
which contains details of the sale, such as the goods ordered, the value of the sale and any relevant trade
or cash discounts. The sales invoice would be issued to a customer when the sale is made. From the
invoice, the details of each sale would be written up into the sales day book.
Instead of having one ledger for all accounts, we now have a separate Sales Ledger for credit sale
Transactions as follows:
 The credit sales are now posted, one by one, to the debit side of each customer’s account in the
Sales Ledger.
 At the end of each period the total of the credit sales is posted to the credit of the sales account in
the General Ledger. The format is as follows:
SALES DAY BOOK
Date Invoice N0 Details Folio Amount receivable VAT
Application Exercise 2: for the following transactions, prepare the sales day book:
03/05: invoice N0 B22 to Chong 45,000FCFA
08/05: invoice N0 C35 to Ngoh 89,000FCFA
11/05: invoice N0 D53 to Bama 111,000FCFA
12/05: invoice N0 V18 to Tiang 76,000FCFA
18/05: invoice N0 Z20 to Tem 21,000FCFA
27/05: invoice N0 S45 to Kom 54,000FCFA
Practice Exercise 2
SOREPCO S.A sold the following goods on credit for the month of September 2015
Sept 1 Invoice No. 16554D to Poole 56000FCFA
Sept 8 T Invoice No 16555to Cockburn 164,000FCFA
Sept28 C Invoice No 16556 to Carter 22000FCFA
Sept30 D Invoice No 16557 to Stevens & Co 110,000FCFA
Required; Enter the above transactions to the sales day book and post the sales day book to the sales
ledger and general ledger
NB: when trade discounts are involved in the invoice, we deduct the trade discount from the purchase
value but do not present any double entry for the trade discount.
6.5 The Purchases Day Book and the Purchases Ledger
The purchases day book consists of all credit purchases of goods for resale. For example, a business
selling office furniture would not include the purchase of a delivery van as purchases as this is an asset to
be used within the business. From the purchases invoices for goods bought on credit, the purchaser enters
the details in the Purchases Day Book (or Purchases Journal). The entries made in the purchase day book
are now posted to the purchase ledger and the double entry is as follows:
 The credit purchases are posted one by one, to the credit of each supplier’s account in the
Purchases Ledger.
 At the end of each period the total of the credit purchases is posted to the debit of the purchases
account in the General Ledger. The purchase Day Book is presented thus:
Purchase Day Book
Date Invoice N0 Details Folio Amount
Application Exercise 3
AMINGO Co carried out the following purchases on credit in the month of September 2015
Sept 1; purchase from J Blake (invoice No 9/101……………………560,000F
Sept 8; invoice No 9/102 from B Hamilton…………………………1,380,000F
Sept 19; Invoice No 9/103 from C Brown…………………………. 230,000F
Sept 30; Invoice No 9/104 from K Gabriel…………………………. 510,000F
Work required
Enter the above transactions in the day book and do the ledger posting
6.6 The Returns Day Books
Both purchases and sales may, if allowed, be returned to the original supplier. In this case, the return
would be recorded in the relevant day book. There is a return book for the each of the two types of return:
Returns inwards day book for recording returns inwards (or sales returns) accompanied by a credit note
showing the amount of the allowance to be given by the seller
Returns outwards day book for recording returns outwards (or purchases returns) accompanied by a debit
note giving details of the goods and the reason for their return.
For each of these, the method used is the same as used in the sales and purchases day books:
the Goods previously sold were returned to SOREPCO as follows
Sept 5 Poole 6000f
Sept 12 Cockburn 4,000f
Sept 25 Carter 2000f
a) AMINGO Co returned goods to the following suppliers
Sept 3; Blake 25,000F
Sept 9; Hamilton 80,000F
Sept 23; Brown 40,000F
Work required
Record the above returns in the appropriate day books and present the double entry
6.7 The Journal

We have seen that most transactions are entered in one of the following books of original entry:
- Cash Book
- Sales Day Book
- Purchases Day Book
- Returns Inwards Day Book
- Returns Outwards Day Book.
These books are each devoted to a particular form of transaction and to trace any of the transactions
entered in these five books would be relatively easy, as we know exactly which book of original entry
would contain the information we are looking for. The other items which do not pass through these five
books are much less common, and some-times much more complicated and as such are all recorded in a
diary known as the journal.
Some of the main uses of the journal include the following:
- The purchase and sale of fixed assets on credit.
- Writing off bad debts.
- The correction of errors in the ledger accounts.
- Opening entries. These are the entries needed to open a new set of books.
- Adjustments to any of the entries in the ledgers
The layout of the journal is presented as follows:
The journal
Date Details Folio Dr Cr
The name of the account to be debited XXX
The name of the account to be credited XXX
Narration of the transaction recorded
AMINGO Co carried out the following transactions in the year 2015
On 12 Feb, we purchase a delivery van from Sharp Ltd on credit for 3,700,000F
On 8 April, we write off a debt of 120,000F owing to us from J Dolman as bad. We received a payment
of 20%of the amount.
On 10 may; Sale of stationery no longer required for 30,000F on credit to K Lamb
On 18 July; A milling machine is bought on credit from Toolmakers Ltd for 1,055,000F
Required: Record the above information in the journal
Practice exercise
Show the journal entries necessary to record the following items:

2012
Apr 1: Bought fixtures on credit from Bell and Co 1,153,000F.
April 4: We take goods costing 340,000F out of the business stock without paying for them.
April 9: 68000F of the goods taken by us on 4 April is returned back into stock by us. We do nottake any
money for the return of the goods.
April 12: H Cowes owes us 640000F. He is unable to pay his debt. We agree to take some computer
equipment from him at that value and so cancel the debt.
April 18: Some of the fixtures bought from Bell and Co, 42000F worth, are found to be unsuitable
and are returned to them for full allowance.
April 24: A debt owing to us by P Lees of 124000F is written off as a bad debt.
April 30: Office equipment bought on credit from Furniture Today Ltd for 1,710000F.
CHAPTER SEVEN
THE PETTY CASH BOOK AND IMPREST SYSTEM
7.1 THE NATURE OF THE IMPREST
This system is practiced in businesses with more than one cashier whereby there is a main cashier to
make major payments and petty cashier in charge of minor payments for minor expenditures.
With the imprest system, enough cash is given to the petty cashier by the main cashier to meet the
petty cash needs for a given period. At the end of the period, the main cashier verifies the petty cash
voucher and TOPS UP cash to the value spent on petty cash during the period to bring the imprest to
the original amount.
An imprest is therefore an agreed maximum amount of petty cash which can be held. This amount is
also referred to as a FLOAT.
7.2 NATURE OF PETTY CASH BOOK
This is a second type of cash book use in recording small amounts paid for expenditure with two
main advantages;
- Minor cash expenditures are transferred to the petty cashier thereby reducing the volume of
entries to be made in the main cash book.
- Details out the nature of expenditure at the analysis column.
7.3 CONSTRUCTING A PETTY CASH BOOK
The typical steps in the construction of the account are:
1. Enter opening balance in the” Receipts” column.
2. Enter the items of expenditure in the “Total” column and in the appropriate analysis column.
3. Rule off and total the analysis column.
4. Add up the “Total” column ( note: you can check the accuracy of your addition because the
individual analysis column totals, when added together, should agree with the total shown in the
“Total” column)
5. Balance the account: you will probably need to use the imprest principle of “whatever is spent is
received” to calculate the amount of petty cash to debit in the “Receipts” column in order to make
up the float.
The Analytical petty cash book is drawn as follows:
RECE FOL DA DETA VOUC TOT ANALYSIS COLUMN
IPT IO TE ILS HER AL CLEA MOTO POST STAFF L/ LED
NO NING R AGE TRAVEL F GER
EXPE LING A/C
NSES
N.B The receipt column serves as the debit side of the petty cash book.
- When the imprest is given to the petty cash book, the credit entry is made in the cash book while
the debit entry is made in the petty cash book.
- The analysis column serves as the credit side of the petty cash book with each column reserve for a
particular type of expenditure or payment.
The double entry for petty cash book is used for items paid out of the petty cash book which needs
posting to the ledger other than the general ledger (sales or purchase ledger).
APPLICATION
Kpwe_Wung Ets is a sole trader who keeps his petty cash on the imprest system, the imprest amount
being 400,000FCFA. For the month of December 2016 his petty cash transactions were as follows:
1 December, petty cash in hand 34 700FCFA
2 December, petty cash restored to the imprest amount
4 December, stamps purchased 39 600FCFA
8 December, envelopes purchased 41 500FCFA
10 December, paid wages 63 000FCFA
14 December, paid to HARISON NDIFON, a creditor, 56 000FCFA
21 December, typing paper purchased 37 000FCFA
24 December, paid wages 71 000FCFA
Required:
i. Draw up the petty cash book of Kpwe_Wung Ets and enter the above transactions
ii. Balance the petty cash book as at the close of the business on 31 December 2016 and carry
down the balance
iii. Give the entry necessary on 1 January 2017 to restore the petty cash to the imprest amount.
Note: Your analysis columns should be postage, stationery, wages and ledger.
Solution
Receipts Date Details Total ANALYSIS COLUMN
FCFA FCFA Postage Stationery Wages Ledger
FCFA FCFA FCFA FCFA
Practice Exercise
For the month of June 2013, the following transactions were made by the petty cashier of NEW
LIFE Enterprise:
01/06 the cashier gives 600 000FCFA to the petty cashier
01/06 cash voucher No 001 for 32 000FCFA for fuel
02/06 transport expenses of 46 000FCFA is paid to the staff
03/06 24 000FCFA paid for posting of mails
04/06 cash voucher No 004 of 64 000FCFA for transport to a worker
05/06 cleaning expenses of 22 000fcfa
07/06 purchases of fuel for 42 000FCFA
09/06 travelling expenses of 26 000fcfa
12/06 Fuel for 46 000FCFA
15/06 transport of 10 000fcfa to the staff
16/06 cleaning expenses of 22 000FCFA
18/06 fuel for 42 000fcfa
24/06 settlement of ABC’s Account in the purchase ledger for 26 000FCFA
27/06 postage for 24 000FCFA
30/06 the cashier reimburses the petty cashier the amount spent during the month.
REQUIRED:
Present the petty cash book with analysis column for motto expenses, transport, postages,
cleaning, mails and ledger account.(on pieces of papers).
CHAPTER EIGHT
ACCOUNTING ERRORS AND THE SUSPENSE ACCOUNT
8.0 Introduction
Within the accounting information system there are a number of checks that can be used to locate errors
that have taken place. In this section, we will look at how we can check the double-entry system and how
to correct this when errors occur. Ideally, these checks will help to prevent errors occurring in the first
place. However, errors will take place and it is important that, once located, these are corrected quickly
and accurately. The final accounts will be inaccurate and misleading to varying degrees until the
corrections take place. Errors can be classified in various ways, but a common distinction is made
between those that would and those that would not affect the trial balance agreement
8.1 Errors that do not affect the trial balance agreement

A trial balance that agrees would normally confirm that the double-entry bookkeeping has been carried
out accurately. However, there are still types of errors that occur that would not prevent the trial balance
from agreeing. These errors are defined as follows:
Error of omission; the transaction was missed out completely – no debit or credit entry was made in any
account.
Error of commission; The correct totals are entered on the correct sides of the accounts but the entry is
made in the wrong personal account. This often occurs when names of either customers or suppliers are
similar.
Error of principle; As above, the correct totals are made in to the correct sides of the account, but one
half of the transaction is entered into the wrong type of account. For example, classifying the acquisition
of an asset as an expense would fall under this heading.
Error of original entry; The transaction is recorded in the correct accounts and on the correct sides of
the account but the amount entered is incorrect for the transaction – the accounts are either under or
overcast.
Reversal of entries; The transaction is entered with the correct amounts in the correct accounts but the
debits and credits are reversed. For example, a credit sale would be debited to sales and the debtor’s
account would be credited.
Compensating error; More than one error combines to have the same effect on each side of the trial
balance and gives the impression that it has cancelled out the effect on each side. For example, if both
purchases and sales were overcast by 10,000F then the trial balance would still agree.
8.2 Correction of the errors

The procedure to follow when correcting errors is as follows:
 Enter the correction into the Journal.
 Correct the entries in the double-entry accounts.
All errors are corrected in the Journal regardless of what day book they would normally have been
entered into. This is so a narrative can be included to explain the error and its correction. We will
consider one example of each type of error and see how it would be corrected.
Illustration
Correct the following errors
 error of omission
A credit purchase of goods of 112,000F from E Cole was missed out completely.
 error of commission
A credit sale of 76,000F to A Salmon was mistakenly debited to the account of A Sandon
 error of principle
Motor expenses paid for23000F were mistakenly debited to the motor vehicles account.
 error of original entry
A cash payment of 45,000F for advertising was mistakenly entered in both accounts as 54,000F
 reversal of entries
Goods of 28,000F returned by the firm to C Rowlands was debited to the returns account and credited to
the account of Rowlands.
 compensating error
8.3 Errors that affect the trial balance agreement
If the trial balance totals fail to agree then it is likely that one or more of the following errors have been
made:
 Only entering one half of transaction in the accounts (not completing the double-entry)
 Entering different amounts for the debit and credit entries
 Entering two debits or two credits for a transaction.
When faced with trial balance totals that do not agree then it is important to find these errors as quickly as
possible. This should be the priority. However, if they cannot be found immediately then a firm can
ensure that the trial balance totals do agree by opening up what is called a suspense account.
Trial balance as at 31 December 2017

Dr Cr
Totals of each column 55,400 56,000
Suspense 600
56,000 56,000
The suspense entry in the trial balance means that we need to open up a suspense account in the general
ledger with a debit balance of 600. This implies that errors have been made that combine to give the
effect of a 600 shortage on the debit column of the trial balance. This does not necessarily mean that we
have missed out debit entries somewhere in our bookkeeping, as it is possible that the errors have
artificially increased the total of the credit column and that the debit column is correct. This can only be
ascertained once the errors have been located and corrected.
Dr Suspense Cr
2017 2017
Dec 31 Trial balance difference 600
This balance will remain here until the errors are found. Each time an error is located which would affect
the trial balance agreement, an entry would be made in the suspense account as part of the correction
procedure. When the errors have been located and corrected we will find that the balance on the suspense
account disappears. However, until that occurs, the suspense balance would appear in the final accounts
on the firm’s statement of financial position as follows:
 A debit suspense account balance is an asset
 A credit suspense account balance is a liability
Illustration
The books of an enterprise show that the trial balance had a 600000F shortage in the debit column as at
31st Dec. 2017.
In January 2018, the firm discovered that the following errors had been made:
A. The wages account had been under cast by 120000F
B. A credit sale of goods for 250000F to S Butler had been credited to both accounts
C. The returns inwards account had been overcast by 70000F
D. The purchases account was under cast by 50,000F
Work required
Show the correction of the above errors in the journal and the appropriate entries in the suspense account
Preparation of the financial statements of sole traders
CHAPTER NINE
ADJUSTMENTS FOR FINANCIAL STATEMENTS
INTRODUCTION
In all the previous examples of financial statements that we have dealt with so far we havealways
assumed that all the expenses were paid exactly when they were due. This isunrealistic. As you are probably
aware, most households and businesses will not payexpenses at the exact moment they are due. This
divergence between the date an expenseis due and the date it is paid will be dealt with in this chapter. The
accruals conceptis applied in determining how much should appear in thestatement of comprehensive income
as an expense or income for any particularaccounting period. All incomes and expenses that are incurred in a
particular periodof time should appear in the statement of comprehensive income of that particularperiod of
time – regardless of whether they have actually been paid or received by thebusiness.
9.1-ACCRUALS AND PREPAYMENTS

The term ‘accruals’ refers to expenses that remain unpaid. They are, in effect, expensesowing.
Applying the accruals concept means that the amount to be transferred to the statement of comprehensive
income must be the full amount that belongs to the year
It is perfectly possible that a business pays some of its expenses before the date required. These
amounts paid in advance are known as prepayments. The outstanding balance is brought down to the next
year’s account as a debit balance.
If we are always to include the full amount due for incomes and expenses regardless of whether they
have been paid or received then surely the statement of financial position would not balance? Your initial
reasoning might be as follows:
If an expense remains owing then the balance at the bank would be higher than if the expenses had
been paid in full. This would suggest that the statement of financial position would not balance.
However, this can be dealt with by the inclusion of the outstanding balances on the statement of
financial position as either a current asset or a current liability.
Type of balance Balance on account Appears on statement of financial position as

Accrual Credit Current liability
Prepayment Debit Current asset
Accrued revenue Debit Current asset
Prepaid revenue Credit Current liability
Many questions will require the completion of the financial statements from a given trial balance. In
this situation, the amounts appearing within the trial balances for incomes and expenses will represent the
amounts actually paid or received. Any adjustments needed for outstanding balances will be presented outside
the trial balances – usually underneath.
Illustration 1
The following trial balance relates to H Speller as at 31 December 2014:
Dr Cr
Inventory at 1 Jan 2014 6,105
Sales 56,193
Purchases 30,010
Office expenses 3,980
Rent 1,750
Wages 11,325
Premises 26,500
Equipment 4,990
Trade receivables 2,655
Trade payables 3,156
Bank 1,074
Capital 34,500
Drawings 5,460
93,849 93,849
Additional information:
 Inventory as at 31 December 2014 was valued at 7,230F.
 Office expenses still owing as at 31 December 2014 amounted to 510F.
 Rent accrued at 31 December 2014 was 230F.
 Wages paid in advance for 2015 totaled995F.
9.2- BAD DEBTS AND PROVISION FOR DOUBTFUL DEBTS

When drawing up a statement of financial position one should be prudent in the values placed on asset
values. Any business that allows sales on credit terms runs the risk of a debtor not settling the amount owing
in full, meaning the business will incur what is known as a bad debt. Bad debts are a normal, if unfortunate,
consequence and will need to be accounted for if we are not to overstate the value of total assets for a
business. Similarly, if we are aiming to show realistic values for the assets of the business, then we would
need to anticipate the likelihood of future bad debts. This can be dealt with through the creation of a provision
for doubtful debts.
9.2.1-The accounting of bad debt is as follows:

Illustration 2
During 2008, the following credit sales were made:
●On 15 January, sales of 750 were made to I Fraser.
●On 11 March, sales of 480 were made to M Flower.
On 31 December 2008, the following was decided:
●The amount owing by Fraser would be written off as a bad debt.
●Flower had declared himself bankrupt and a payment of 25% was allthat would be received in full
settlement.
Work required;Present the individual debtor accounts
9.2.2-Provision for doubtful debts
Given that bad debts are commonplace the amount for total debtors is likely to overstate the amount
that we will actually receive in settlement (i.e. we are assuming that we will never collect all that we are
owed) which means it would not be prudent to place the debtors at their full value on the statement of
financial position. As a result, it is prudent to calculate an estimate for the future size of any bad debts. This is
known as the provision for doubtful debts.
According to IAS 37 a provision is ‘a liability of uncertain timing or amount’. The provision for
doubtful debts figure will be deducted from the debtors figure on the statement of financial position to
represent a more realistic figure that will be collected from debtors..As this is an estimate and cannot be
known with certainty, the following factors are likely to influence the size of any provision:
●The length of time debts have been outstanding
●Historical trends for bad debts in a particular industry
●Economic factors – i.e. what are the prevailing macroeconomic conditions – in times of economic
decline we would expect the incidence of bad debts to rise as business failure is more common.
The balance on a provision account will remain the same until it is adjusted by either increasing or
decreasing the provision. The adjustment for the provision will be entered into the statement of
comprehensive income in the period in which the adjustment is made:
Accounting entries for provision for doubtful debts
Increasing the provision Decreasing the provision
Debit Credit Debit Credit
Statement of comprehensive Provision for Provision for Statement of
Income doubtful debts doubtful debts comprehensive income
From the above table it should be clear that the increase in the provision will be treated as an expense in the
statement of comprehensive income, whilst the reduction in the provision will be treated as an income in the
statement of comprehensive income.
Adjustments for provisions for doubtful debts in statement of comprehensive income
Increasing the provision Decreasing the provision
Debit profit and loss with increase only (i.e. the Credit profit and loss with decrease only
increase is treated as an ‘expense’) (i.e. treated as an ‘income’)
Illustration 3
A business discovers that bad debts, on average, are 5% of the value of total debtors and therefore
would like to create a provision for doubtful debts equivalent to 5% of the year-end debtor balances:
Year Debtors (FCFA ) at 31 December
2002 5,000
2003 6,000
2004 6,000
2005 4,500
Work required; Present the ledger account for provision for doubtful debt
6.2.3-Provision for doubtful debts and the statement of financial position

As with all provision accounts, it is the full amount (i.e. the end-of-year balance) that will appear on
the statement of financial position and this will be deducted from the relevant asset. In the example above, the
relevant section of the statements of financial position would appear as follows:
9.3-Depreciation of non-current assets

9.3.1-Definition
Non-current assets are those assets that will generate future benefits to the businessand whose
costs can be reliably measured. They are listed together on the statementof financial position. The
purchase of a non-current asset is classified as capital expenditure and therefore does not appear as an
expense in the financial statements.However, the method by which we account for the ‘cost’ of non-
current assets isthrough the process of depreciationwhich will appear in the statement of comprehensive
income.
According to IAS 16 (Property, depreciation is the systematic allocation of the depreciable
amountof an asset over its useful life where the depreciable amount refers to the cost of the asset less any
expected residual value.The depreciation ‘charge’ will be deducted against the profit for each year in
whichthe firm benefits from the use of the asset.
9.3.2-Causes of depreciation
Physical deterioration:
 Wear and tear; when a motor vehicle or machinery or fixtures and fittings are used they
eventually wear out.
 Erosion, rust, rot and decay: Land may be eroded or wasted away by the action of wind, rain,sun
and other elements of nature. Similarly, the metals in motor vehicles or machinery willrust away.
Wood will rot eventually. Decay is a process which will also be present due to theelements of
nature and the lack of proper attention
Economic factors
 Obsolescence. This is the process of becoming out-of-date
 Inadequacy;this arises when an asset is no longer used because of the growth and changes in the
size of the business.
Depletion
Some assets, particularly natural resources (e.g. gold mines, oil reserves), will onlyhold value
while the asset can be exploited. As the asset is depleted – ‘used up’ – theasset will lose value until the
asset is exhausted and contains no more value
9.3.3-Methods of deprecitation
There are a variety of methods of depreciation but the main focus will be on two methods; straight
line and reducing balance.
 Straight line method
This method of depreciation is widespread and is the easiest method to use. The depreciation charge,
once calculated, remains the same for every year of the asset’s life.
The depreciation is calculated as follows:
cost of asset −residual value
Depreciation charge (per year) =
Number of years of assets life
The residual valueis often known as the scrap value and is the estimated value of the asset at the end of
its life.
Illustration 4
A firm purchases a motor van for business use on 1 January 2016 at a cost of 12,000,000F.
The van is expected to last for five years and the firm believes that the van will have a residual value of
3,000,000F.Determine the amount of depreciation charge
 Reducing balance method
This method of depreciation, also known as diminishing balance, will charge more in the earlier years of
an asset’s life than in the later years. This arises out of the depreciation being based on a percentage of
the asset’s net book value. The percentage rate is based on a complex formula which takes into account
the cost, expected lifetime, and residual value and would normally result in a percentage rate to be used
which is not a whole figure
Net Book Value (NBV) =Cost of asset −accumulated depreciation
The basic formula used to find the percentage to apply with this method is:
Where;
r =1−
√n S
C
n=the number of years

s =the net residual value
c=the cost of the asset
r =the rate of depreciation to be applied.
Illustration 5
a) A machine costs 25,000,000F and is to be depreciated using reducing balance at a rate of 20%.
Calculate the depreciation charge for each year.
b) Calculate the reducing balance depreciation rate for an asset that was bought at the cost of
1,000,000F to be depreciated over 5 years. the residual value of the asset will be 100,000F
On the statement of financial position we normally value non-current assets at historical cost.
With the introduction of depreciation, this is modified and the value fornon-current assets on the
statement will now be based on historical cost less the provision for depreciation.
CHAPTER TEN
CONTROL SYSTEMS IN ACCOUNTING
10.1-Bank reconciliation statements
10.1.1-General notion
In the books of a business, funds paid into and out of the bank are entered into the bankcolumns
of the Cash Book. At the same time, the bank will also be recording the flows of fundsinto and out of the
business bank account.If all the items entered in the Cash Book were the same as those entered in the
records held bythe bank, the balance on the business bank account as shown in the Cash Book and the
balanceon the account as shown by the bank’s records would be the same.
Banks usually send acopy of that record, called a bank statement, to their customers on a regular
basis, but a bankstatement can be requested by a customer of the bank at any time.However, although the
bank column of the cash book and the bank statement balance should always be the same it is likely that
the balances – even if taken onexactly the same date – will not be the same. This discrepancy could be
because ofany of the following:
 Items appearing on the bank statement but not in the cash book
 Items appearing in the cash book but not on the bank statement
 Errors made by the business or by the bank
So as to ascertain the cause of the discrepancy – and in particular to detect if errorshave occurred – a
business will draw up a bank reconciliation statementwhichwill highlight the cause of any discrepancy
between the two balances
10.1.2-Procedure for bank reconciliation

The following is not the only method of completing the bank reconciliation but it is the one that
gives a clear procedure to follow. To complete the bank reconciliation, the following steps should be
taken:
 We need to identify the items that do not appear both in the cash book and on thebank statement,
as these could be the reason for the discrepancy.
 The cash book will need to be brought up to date by entering items found only onthe bank
statement and not in the cash book.Common types of transactions which fall into this category are
direct debits,standing orders, credit transfers, interest payments and bank charges,
Dishonouredcheques.
 Draw up a reconciliation statement using the updated cash book balance and itemsappearing in
the cash book that were not on the bank statement.
Illustration 1
The balance in the cash book and on the bank statement did not agree in the accounts of
R Alvefors for the month of July 2016.
Cash book
2016 2016
Jul 1 Balance b/d 38 Jul 18 F Benjamin 277
Jun 10 D Bellamy 452 Jul 28 F Harris 299
Jun 25 D Griffiths 119 Jul 31 Balance b/d 33
609 609
Bank statement
June Payments Receipts Balance
1 Balance b/d 38
12 Cheque deposited 452 490
17 Interest 3 493
19 Direct debit 45 448
22 Cheque 1011 277 171
26 Standing order 67 104
From the above data:
(a) Update the cash book
(b) Produce a bank reconciliation statement as at 31 July 2016
10.2-Control account
When a business has grown and the accounting work has been so divided up that there areseveral
ledgers, any errors could be very difficult to find if a trial balance was the only deviceused to try to detect
errors. Every item in every ledger may need to be checked just to find oneerror that caused the trial
balance not to balance. What is required is a type of trial balance foreach ledger, and this requirement is
met by control accounts
A control account is a summaryaccount that enables you to see at a glance whether the General
Ledger balance for the ledger towhich that control account belongs agrees with the total of all the
individual accounts heldwithin that ledger.
10.2.1-Principle of control accounts

The principle on which the control account is based is simple and is as follows: if the
openingbalance of an account is known, together with information of the additions and deductionsentered
in the account, the closing balance can be calculated.Applying this to a complete ledger, the total of
opening balances together with the additionsand deductions during the period should give the total of
closing balances.
Because totals are used, control accounts are sometimes known as ‘total accounts’. Thus, a
control account for a Sales Ledger could be known as either a ‘sales ledger control account’ or as a ‘total
debtors account’.
Similarly, a control account for a Purchases Ledger could be known either as a ‘purchasesledger
control account’ or as a ‘total creditors account’.
A control account usually looks like any other T-account:
Sales Ledger Control account
20X6 FCFA 20X6 FCFA
Jan 1 Balances b/d x,xxx Jan 31 Returns Inwards Day Book
“ 31 Sales day book (total (total of all goods returned
of sales invoiced in from debtors in the period) xxx
the period) xx,xxx Jan31 Cash book (total of all cash
received from debtors in
the period) x,xxx
Jan 31 Cash book (total of all
cheques received from
debtors in the period) xx,xxx
Jan 31 Balances c /d x,xxx
xx,xxx xx,xxx
10.2.2: Information for control accounts
Information is obtained from the following sources to draw up control accounts:
Sales Ledger Control Source
1Opening debtors List of debtors’ balances drawn up at the end of the previous period
2Credit sales Total from the Sales Day Book
3Returns inwards Total of the Returns Inwards Day Book
4Cheques received Cash Book: bank column on received side. List extracted or the total of a
special column for cheques which has been included in the Cash Book
5Cash received Cash Book: cash column on received side. List extracted or the total of a
special column for cash which has been included in the Cash Book
6Discounts allowed Total of discounts allowed column in the Cash Book
7Closing debtors List of debtors’ balances drawn up at the end of the period
Purchases Ledger Control Source
1Opening creditors List of creditors’ balances drawn up at the end of the previous period
2Credit purchases Total from Purchases Day Book
3Returns outwards Total of Returns Outwards Day Book
4Cheques paid Cash Book: bank column on payments side. List extracted or total of a
special column for cheques which has been included in the Cash Book
5Cash paid Cash Book: cash column on payments side. List extracted or total of a
special column for cash which has been included in the Cash Book
6Discounts received Total of discounts received column in the Cash Book
7Closing creditors List of creditors’ balances drawn up at the end of the period
Illustration 2
The following data relates to the credit sales transactions for the month of May 2009.
Information from the sales ledger FCFA
Balances of trade receivables as at 1 May 2009 3,124,000
Balances of trade receivables as at 31 May 2009 4,324,000
Information from other day books and ledgers for month of May FCFA
Credit sales 23,130,000
Cash book entries representing receipts from trade receivables 20,855,000
Discounts allowed 432,000
Returns inwards 531,000
Bad debts 112,000
Set up the sales ledger control account
Illustration 3
The following data relates to the credit purchase transactions for the month of June 2009.
Information from the purchases ledger FCFA
Balances of creditors as at 1 June 2009 1,897,000
Balances of creditors as at 30 June 2009 1,676,000
Information from other day books and ledgers for month of June FCFA
Credit purchases 8,790,000
Cash book entries representing payments to creditors 8,328,000
Discounts received 424,000
Returns outwards 259,000
Set up the purchase ledger control account
10.2.3: Double-entry and control accounts
Sales ledger control account

What we are owed by debtors and Amounts reducing what
increases in these amounts we are owed by our debtors
Purchases ledger control account

Amounts reducing what What we owe to our creditors and
we owe our creditors increases in these amounts
10.2.4: Use of control accounts
 Detection of errors
One of the main benefits of constructing control accounts is that it can help to localise errors. This
saves time as the location of an error would normally take considerably more time if it were left until
after the construction of the trial balance.
 Prevention of fraud
If the maintenance of the double-entry accounts is conducted by someone different from the person who
oversees the construction of control accounts then this will also act to make fraud by employees more
difficult.
 Incomplete records
If a business does not have a complete set of financial data available, the construction of control accounts
can help to determine the missing data. For example, if no data existed for the amount for credit sales,
then this could be ascertained by constructing the control account in full and the missing figure would be
whatever amount was needed for the account to balance.
Illustration 4
The following sales ledger control account was constructed for the month of June 2012:
Sales ledger control account
1 Jun Balances b/d 876000 30 Jun Cash book 5,550,000
30 Jun Credit sales 6,754000 30 Jun Discounts allowed 722,000
30 Jun Returns inwards 231,000
30 Jun Balances c/d 1,127,000
7,630,000 7,630,000
However, the total of balances from the sales ledger as at 30 June 2012 was 1,006,000.
The following errors were discovered:
 A bad debt of 65000F was recorded in the sales ledger but missed out of the journal.
 A sales invoice received from D Jack for 120000F was missed out completely.
 The total of balances from trade receivables was overcast by 50000F.
 Returns inwards of 31000Fwere entered in all records as 13000F.
Task
Set up the updated sales ledger control account
Illustration 5
From the following data we will construct the sales ledger and purchases ledgercontrol accounts
Sales ledger balances as at 1 March 2016 1,001000F
Purchases ledger balances as at 1 March 2016 666000F
Credit sales for March 8,305000F
Credit purchases for March 3,825000F
Cash sales 2,434000F
Cash purchases 4,535000F
Cash and bank receipts in respect of credit sales 8,640000F
Dishonouredcheques 280000F
Credit balances in sales ledger as at 1 March 2016 41000F
Set-offs from sales ledger against purchase ledger balances 66000F
Returns inwards 101000F
Bad debts 105000F
Payments made for credit purchases 3,888000F
Discounts allowed 265000F
Discounts received 210000F
Returns outwards 95000F
Sales ledger balances as at 31 March 2016 368000F
Purchases ledger balances as at 31 March 2016 232000F
7.3-Errors and suspense accounts

Introduction
Within the accounting information system there are a number of checks that can beused to locate
errors that have taken place. In this section, wewill look at how we can check the double-entry system
and how to correct this whenerrors occur. Ideally, these checks will help to prevent errors occurring in
the firstplace.However, errors will take place and it is important that, once located, these are corrected
quickly and accurately. The final accounts will be inaccurate and misleadingto varying degrees until the
corrections take place. Errors can be classified in variousways, but a common distinction is made
between those that would and those thatwould not affect the trial balance agreement
7.3.1. Errors that don’t affect the trial balance agreement

A trial balance that agrees would normally confirm that the double-entry bookkeeping has been
carried out accurately. However, there are still types of errors that occurthat would not prevent the trial
balance from agreeing. These errors are defined as follows:
Error of omission; The transaction was missed out completely – no debit or credit entrywas made in any
account.
Error of commission; The correct totals are entered on the correct sides of the accounts butthe entry is
made in the wrong personal account. This often occurswhen names of either customers or suppliers are
similar.
Error of principle;As above, the correct totals are made on to the correct sides of theaccount, but one
half of the transaction is entered into the wrong typeof account. For example, classifying expenditure on
assets as anexpense would fall under this heading.
Error of original entry; The transaction is recorded in the correct accounts and on the correctsides of the
account but the amount entered is incorrect for thetransaction – the accounts are either under or overcast.
Reversal of entries;The transaction is entered with the correct amounts in the correctaccounts but the
debits and credits are reversed. For example, a credit salewould be debited to sales and the debtor’s
account would be credited.
Compensating error; More than one error combines to have the same effect on each side ofthe trial
balance and gives the impression that it has cancelled out theeffect on each side. For example, if both
purchases and sales were overcast by 10,000F then the trial balance would still agree.
7.3.2. Correction of the errors

The procedure to follow when correcting errors is as follows:
 Enter the correction into the Journal.
 Correct the entries in the double-entry accounts.
All errors are corrected in the Journal regardless of what day book they would normally have been
entered into. This is so a narrative can be included to explain the error and its correction.We will consider
one example of each type of error and see how it would be corrected.
Illustration 6
Correct the following errors
 error of omission
A credit purchase of goods of 112,000F from E Cole was missed out completely.
 error of commission
A credit sale of 76,000F to A Salmon was mistakenly debited to the account of A Sandon
 error of principle
Motor expenses paid for23000F were mistakenly debited to the motor vehicles account.
 error of original entry
A cash payment of 45,000F for advertising was mistakenly entered in both accounts as 54,000F
 reversal of entries
Goods of 28,000F returned by the firm to C Rowlands was debited to the returns account and credited to
the account of Rowlands.
 compensating error
The account for insurance was overcast by 25000F, as was the account for rent received
7.3.3. Errors that do affect the trial balance agreement
If the trial balance totals fail to agree then it is likely that one or more of the followingerrors have
been made:
 Only entering one half of transaction in the accounts (not completing the double-entry)
 Entering different amounts for the debit and credit entries
 Entering two debits or two credits for a transaction.
When faced with trial balance totals that do not agree then it is important to findthese errors as quickly as
possible. This should be the priority. However, if they cannotbe found immediately then a firm can
ensure that the trial balance totals do agree byopening up what is called a suspense account.
Trial balance as at 31 December 2007

Dr Cr
Totals of each column 55,400 56,000
Suspense 600
56,000 56,000
The suspense entry in the trial balance means that we need to open up a suspenseaccount in the
general ledger with a debit balance of 600. This implies that errors (oran error) have been made that
combine to give the effect of a 600 shortage on the debitcolumn of the trial balance. This does not
necessarily mean that we have missed out debitentries somewhere in our bookkeeping, as it is possible
that the errors have actuallyartificially increased the total of the credit column and that the debit column
is correct.This can only be ascertained once the errors have been located and corrected.
Dr Suspense Cr
2007 2007
Dec 31 Trial balance difference 600
This balance will remain here until the errors are found. Each time an error is locatedwhich would affect
the trial balance agreement, an entry would be made in the suspense account as part of the correction
procedure.When the errors have been located and corrected we will find that the balance onthe suspense
account disappears. However, until that occurs, the suspense balancewould appear in the final accounts
on the firm’s statement of financial position as follows:
 A debit suspense account balance is an asset
 A credit suspense account balance is a liability
Illustration 7
The books of an enterprise show that the trial balance had a 600000F shortage in the debit column as at
31st Dec. 2007.
In January 2008, the firm discovered that the following errors had been made:
A.The wages account had been undercast by 120000F
B. A credit sale of goods for 250000F to S Butler had been credited to both accounts
C. The returns inwards account had been overcast by 70000F
D. The purchases account was undercast by 50,000F
Work required
Show the correction of the above errors in the journal and the appropriate entries in the suspense account

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CHAPTER ONE

1.4-Users of Accounting Information

2.3.1 Various components of the operating cycle

Operating cycle=Inventory peroid +receivables period

Item Beginning Ending

ACCOUNTING CONCEPTS, THE ACCOUNTING EQUATION AND THE

3.2 The Accounting Equation

3.2.1 Accounting for Business Transactions

The purchase of an asset and the incurring of a liability

Purchase of Advertising on Credit.

Services Provided for Cash and Credit.

Payment of Accounts Payable.

Receipt of Cash on Account.

Withdrawal of Cash by Owner.

3.3 The Financial Statements of a Business

ii. Net profit

iii. Trading account and Profit and loss account

Gross profit =Sales less Cost of goods sold

Net profit =Gross profit –Expenses

Trial Balance as at 31 December 2017

3.3.2 The Statement of Owner’s Equity

3.3.3.1 Components of the Statement of Financial Position

 Layout of the balance sheet

The statement of cash flows for the month ended,

To conclude, financial statements are prepared in the order below:

Statement of Comprehensive Income

Statement of Owner’s Equity

Statement of Financial Position

Statement of Cash Flows

STEP 8: Post to Ledger

4.2 The Double Entry Principle

This is the most commonly used format of an account.

Date Description Amount

4.2.1.3 Account with Moving Balances

All assets and expenses accounts

All liability and revenues accounts

4.2.3 Accounting for Inventory

4.2.3.2 Income and Expenses

4.2.3.3 Balancing Accounts

Steps for recording transactions

EXERCISES FOR PRACTICE

Sold motor lorry for cash

A loan of 400,000 is received from BICEC

Received Rent from the Reform Centre

Paid insurance for a Building by cash

Paid Creditor Njabou by cheque

Repaid BICEC’s loan by cash

Proprietor puts in further cash into the business

Bought equipment on credit from Ghangha ltd

b. Four column trial balance

c. Six column trial balance

d. Eight column trial balance

6.3 Cash Books

6.3.3 The Cash Book and Bank Overdrafts

6.4 The Sales Day Book and the Sales Ledger

6.5 The Purchases Day Book and the Purchases Ledger

6.7 The Journal

Show the journal entries necessary to record the following items:

The Analytical petty cash book is drawn as follows:

8.1 Errors that do not affect the trial balance agreement