BSTL COLLAGE HAWASSA CUMPAS

Business and finance

Accounts and budget support level II
Unit of competency: - Process Financial Transactions and
Extract Interim Reports
MODULE TITLE: Processing Financial Transactions and
Extract Interim Reports
MODULE CODE: BUF ACB3 01 0812

2012 E.C

Contents
LO1: CHECK AND VERIFY SUPPORTING DOCUMENTATION..........................................4
THE SOURCE DOCUMENT IN AN ACCOUNTING TRANSACTION.................................4
LO2: PREPARE AND PROCESS BANKING AND PETTY CASH DOCUMENTS.................9
PETTY CASH..............................................................................................................................9
REPLENISHMENT OF PETTY CASH......................................................................................9
CASH SHORT AND OVER.....................................................................................................10
BANK RECONCILIATION......................................................................................................11

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 FEATURES OR CHARACTERISTICS OF BANK RECONCILIATION STATEMENT.....11
BANK RECONCILIATION PROCESS...................................................................................12
LO3: PREPARE AND PROCESS INVOICES FOR PAYMENT TO CREDITORS AND FOR
DEBTORS.....................................................................................................................................16
INVOICE...................................................................................................................................16
VOUCHER................................................................................................................................16
LO4: PREPARE JOURNALS AND BATCH MONETARY ITEMS.........................................17
JOURNAL.................................................................................................................................17
SUB-DIVISION OF JOURNAL...............................................................................................18
ADVANTAGES OF USING JOURNAL..................................................................................19
JOURNALIZING.......................................................................................................................20
LO5 POST JOURNALS TO LEDGER.........................................................................................22
LEDGER....................................................................................................................................22
SUB-DIVISION OF LEDGER..................................................................................................23
DISTINCTION BETWEEN JOURNAL AND LEDGER.........................................................23
POSTING...................................................................................................................................24
RULES REGARDING POSTING.............................................................................................25
LO6 ENTER DATA INTO SYSTEM...........................................................................................27
INTRODUCTION TO DATA AND DATA COLLECTION...................................................27
DATA VERSUS INFORMATION...........................................................................................27
IMPORTANCE OF DATA.......................................................................................................27
WHAT IS DATA COLLECTION?...........................................................................................28
DATA COLLECTION GENERAL RULES.............................................................................28
KEY ISSUES ABOUT MEASURES OF DATA COLLECTION............................................29
SOURCES OF DATA...............................................................................................................30
 SECONDARY SOURCE.......................................................................................................31
LO7 PREPARE DEPOSIT FACILITY AND LODGE FLOWS..................................................33
DEPOSITS & ITS TYPES.........................................................................................................33
TERM DEPOSIT FACILITY RESOURCE CENTER.................................................................34
OPERATION RESULTS.......................................................................................................35
TERM DEPOSIT FACILITY OPERATIONS......................................................................35
LO8 EXTRACTING A TRIAL BALANCE AND INTERIM REPORTS...................................36
TRIAL BALANCE....................................................................................................................36
FEATURES OF TRAIL BALANCES......................................................................................37
LIMITATIONS OF TRAIL BALANCE...................................................................................37
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 METHODS OF PREPARING TRAIL BALANCE..................................................................38
BALANCE SHEET...................................................................................................................38
CLASSIFICATION OF ASSETS AND LIABILITIES............................................................39
ASSETS.....................................................................................................................................39
LIABILITIES.............................................................................................................................40
PROFIT AND LOSS ACCOUNT (UNADJUSTED INCOME STATEMENT)......................41
IMPORTANT POINTS IN PROFIT AND LOSS ACCOUNT.................................................41
RECTIFICATION OF ERRORS...............................................................................................43
CLASSIFICATION OF ERRORS.............................................................................................44
LOCATION OF ERRORS.........................................................................................................45
RECTIFICATION OF ERRORS...............................................................................................47

LO1: Check and verify supporting documentation

Objectives

After going through this lesson, you will be able to-

 Identify and check relevant Information recorded from documents

 Examine supporting documentation to establish accuracy and completeness and to ensure
authorization by appropriate personnel

The Source Document in an Accounting Transaction

Source Documents

The source document is the original record of a transaction. During an audit, source documents
are used as evidence that a particular business transaction occurred.

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A source document describes all the basic facts of the transaction such as the amount of the
transaction, to which the transaction was made, the purpose of the transaction, and the date of the
transaction.

A source document is the original record containing the details to substantiate a transaction
entered in an accounting system.

The source document should be recorded in the appropriate accounting journal as soon as
possible after the transaction. After recording, all source documents should be filed away in
some sort of system where they can be retrieved if and when they are needed.

Once a transaction has been journalized, the source document should be filed and made
retrievable so that transactions can be verified should the need arise at a later date.

All the daybooks are constructed on the basis of transfers from original source documents. These
are items of business use that contain financial data related to business transactions. The main
source documents a firm is likely to use are as follows:

 Purchase invoice Received by the firm from suppliers buying goods on credit
 Sales invoice: Sent by the firm when selling goods on credit
 Debit notes: Received by the firm from suppliers when goods purchased are returned to
the original supplier
 Credit notes: Sent by the firm to customers who have returned the goods
 Cheque counterfoils: From the cheque book to show cheques paid out
 Paying slipEvidence of money paid into bank accounts
 Till rolls/: Evidence of cash being received
 Petty/ cash vouchers Slips to indicate small amounts of cash being paid
 Bank statements: A summary of the bank account from the banks point of view.

The following daybooks are constructed by the use of each of the following source documents:

Daybook Source documents

Sales daybook Sales invoice

Purchases daybook Purchases invoice

Returns inwards daybook Credit notes

Returns outwards daybook Debit notes

Cashbook Cheque counterfoils/ paying in slips, till rolls, etc.

The journal Everything else not covered by above

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At a minimum, each source document should include the date, the amount, and a description of
the transaction. When practical, beyond these minimum requirements source documents should
contain the name and address of the other party of the transaction.

When a source document does not exist, for example, when a cash receipt is not provided by a
vendor or is misplaced, a document should be generated as soon as possible after the transaction,
using other documents such as bank statements to support the information on the generated
source document.

Each time a company makes a financial transaction, some sort of paper trailis generated. That
paper trail is called a source document. If a small business writes a check out of its checking
account for office supplies, for example, the source document is the check along with the receipt
for office supplies.

The source document is essential to the bookkeeping and accounting process. It is the evidence
that a financial transaction occurred. If a company is audited, source documents back up the
accounting journals and general ledger as an indisputable audit trail.

Keeping a source document for a business is just like keeping your receipts for tax-deductible
items for your personal taxes. You have to have those receipts in case your taxes are audited. The
same is true for your business, but you don't just keep receipts for tax deductible expenses. You
keep receipts (source documents) for every financial transaction.

When a business transaction occurs, a document known as the source document captures the key
data of the transaction. The source document describes the basic facts of the transaction such as
its date, purpose, and amount.

To facilitate referencing, each source document should have a unique identifier, usually a
number or alphanumeric code. Pre-numbering of commonly-used forms helps to enforce
numbering, to classify transactions, and to identify and locate missing source documents. A well-
designed source document form can minimize errors and improve the efficiency of transaction
recording.

The source document may be created in either paper or electronic format. For example,
automated accounting systems may generate the source document electronically or allow paper
source documents to be scanned and converted into electronic images. Accounting software
often provides on-screen entry forms for different types of transactions to capture the data and
generate the source document.

The source document is an early document in the accounting cycle. It provides the information
required to analyze and classify the transaction and to create the journal entries.

In the past, source documents were printed on paper. Today many of the paper documents are
being converted to an electronic format.

Source documents should be retained for future reference. For instance, auditors will review a
portion of a company’s transactions and will need to examine the pertinent source documents.

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A business enterprise generally prepares the following two basic financial statements:

Profit and Loss Account to ascertain the profit earned or loss incurred during an accounting
period.

Balance Sheet to ascertain the financial position of the businesses on a particular date

Generally, a business enterprise has numerous transactions every day during an accounting
period. Unless the transactions are recorded and analyzed, it is not possible to determine the
impact of each transaction in the above two basic statements. Traditionally, accountings a
method of collecting, recording, classifying, summarizing, presenting and interpreting financial
data aspect of an economic activity. The series of business transactions occurring during the
accounting period and its recording is referred to an accounting process/mechanism. An
accounting process is a complete sequence of accounting procedures which are repeated in the
same order during each accounting period.

Therefore, accounting process involves the following steps or stages:

1. Identification of transaction

In accounting, only business transactions are recorded. Transaction is an event which can be
expressed in terms of money andwhich brings change in the financial position of a business
enterprise. An event is an incident or a happening which may or may not being anychange in the
financial position of a business enterprise. Therefore, alltransactions are events but all events are
not transactions. A transactions a complete action, to an expected or possible future action. In
every transaction, there is movement of value from one source to another

2. Recording the transaction

Journal is the first book of original entry in which all transactions are recorded event wise and
date-wise and presents a historical record of all monetary transactions. It may further be divided
into sub-journals as well which are also known subsidiary books.

3. Classifying

Accounting is the art of classifying business transactions.

Classification means statement setting out for a period where all the similar transactions relating
to a person, a thing, expense, or any other subject are grouped together under appropriate heads
of accounts.

4. Summarizing

Summarizing is the art of making the activities of the business enterprise as classified in the
ledger for the use of management or other user groups i.e. Sundry debtors, Sundry creditors etc.
Summarization helps in the preparation of Profit and Loss Account and Balance sheet fora
particular fiscal year.

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5. Analysis and Interpretation

The financial information or data as recorded in the books of anaccount must further be analyzed
and interpreted so to draw useful conclusions. Thus, analysis of accounting information will help
the management to assess in the performance of business operation and forming future plans
also.

6. Presentation or reporting of financial information

The end users of accounting statements must be benefited from analysis and interpretation of
data as some of them are the ‘stockholders’ and other one the ‘stake holders’. Comparison of
past and present statement and reports, use of ratio and trend analysis are the different tools of
analysis and interpretation.

LO2: Prepare and process banking and petty cash documents

Petty Cash
Petty Cash, also known as impress cash, is a fund established for making small payments that
are impractical to pay by check. Examples include postage due, reimbursement to employees for
small purchases of office supplies, and numerous similar items. The establishment of a petty cash
system begins by making out a check to cash, cashing it, and placing the cash in a petty cash
box:

A petty cash custodian should be designated to have responsibility for safeguarding and making
payments from this fund. At the time the fund is established, the following journal entry is
needed. This journal entry, in essence, subdivides the petty cash portion of available funds into a
separate account.

Petty cash-------------------------------- 1, 000

Cash-------------------------------------------------- 1, 000

(To record establishment of petty cash fund)

Replenishment of Petty Cash

As expenditures occur, cash in the box will be depleted. Eventually the fund will require
replenishment back to its original level. To replenish the fund, a check for cash is prepared in an
amount to bring the fund back up to the desired balance. The check is cashed and the proceeds
are placed in the petty cash box. At the same time, receipts are removed from the petty cash box
and formally recorded as expenses.

The journal entry for this action involves debits to appropriate expense accounts as represented
by the receipts, and a credit to Cash for the amount of the replenishment. Notice that the Petty

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Cash account is not impacted -- it was originally established as a base amount and its balance has
not been changed by virtue of this activity.

Supplies Expense---------------------------------- 390

Fuel Expense--------------------------------------- 155

Miscellaneous Expense--------------------------- 70

Cash-----------------------------------------------------------------615

(To record replenishment of petty cash)

Cash Short and Over

Occasionally, errors will occur, and the petty cash fund will be out of balance. In other words,
the sum of the cash and receipts differs from the correct Petty Cash balance.

Supplies Expense---------------------------------- 390

Fuel Expense--------------------------------------- 155

Miscellaneous Expense--------------------------- 70

Cash Short (Over) --------------------------------- 20

Cash---------------------------------------------------------------635

Bank Reconciliation

A company's general ledger account Cash contains a record of the transactions (checks written,
receipts from customers, etc.) that involve its checking account. The bank also creates a record of
the company's checking account when it processes the company's checks, deposits, service to
also be the same true balance, you have reconciled the bank statement. Most accountants would
simply say that you have done the bank reconciliation or the bank rec.

Features or characteristics of bank reconciliation statement

a) It is merely a statement not an account.

b) This is a periodical statement.

c) It is prepared on a particular day or this statement is valid for the day it is prepared.

d) The preparation of bank reconciliation statement is not a part of the double entry book-
keeping.
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e) The causes which are responsible for the disagreement of the two balances can easily be found
out.

Bank Reconciliation Process

Step 1. Adjusting the Balance per Bank

We will demonstrate the bank reconciliation process in several steps. The first step is to adjust
the balance on the bank statement to the true, adjusted, or corrected balance. The items necessary
for this step are listed in the following schedule:

Step 1. Balance per Bank Statement on Aug. 31, 2010

Adjustments:
Add: Deposits in transit
Deduct: Outstanding checks
Add or Deduct: Bank errors
Adjusted/Corrected Balance per Bank

Deposits in transit are amounts already received and recorded by the company, but are not yet
recorded by the bank. For example, a retail store deposits its cash receipts of August 31 into the
bank's night depository at 10:00 p.m. on August 31. The bank will process this deposit on the
morning of September 1. As of August 31 (the bank statement date) this is a deposit in transit.

Step 2. Adjusting the Balance per Books

The second step of the bank reconciliation is to adjust the balance in the company's Cash account
so that it is the true, adjusted, or corrected balance. Examples of the items involved are shown in
the following schedule:

Step 2. Balance per Books on Aug. 31, 2010

Adjustments:

Deduct: Bank service charges

Deduct: NSF checks & fees

Deduct: Check printing charges

Add: Interest earned

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 Add: Notes Receivable collected by bank

Add or Deduct: Errors in company's Cash account

Adjusted/Corrected Balance per Books

Bank service charges are fees deducted from the bank statement for the bank's processing of the
checking account activity (accepting deposits, posting checks, mailing the bank statement, etc.)
Other types of bank service charges include the fee charged when a company overdraws its
checking account and the bank fee for processing a stop payment order on a company's check.
Because the bank service charges have already been deducted on the bank statement, there is no
adjustment to the balance per bank. However, the service charges will have to be entered as an

Step 3. Comparing the Adjusted Balances

After adjusting the balance per bank (Step 1) and after adjusting the balance per books (Step 2),
the two adjusted amounts should be equal. If they are not equal, you must repeat the process until
the balances are identical. The balances should be the true, correct amount of cash as of the date
of the bank reconciliation.

Step 4. Preparing Journal Entries

Journal entries must be prepared for the adjustments to the balance per books (Step 2).
Adjustments to increase the cash balance will require a journal entry that debits Cash and credits
another account. Adjustments to decrease the cash balance will require a credit to Cash and a
debit to another account.

Prepare and process invoices for payment to creditors and for debtors

Invoice
While making a sale, the seller prepares a statement giving the particulars such as the quantity,
price per unit, the total amount payable, any deductions made and shows the net amount payable
by the buyer. Such a statement is called an invoice

VOUCHER
A voucher is a written document in support of a transaction. It is a proof that a particular
transaction has taken place for the value stated in the voucher. Voucher is necessary to audit the
accounts.

Each transaction is recorded in books of accounts providing all therequired information of the
transaction. Since each transaction has an effect on the financial position of the business, there
should be documentary evidence to establish the monetary accounts at which transactions are
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recorded and also the transactions are properly authorized. The common documents that are
generally used are asunder:

(i) Payment voucher;

(ii) Receipt voucher; and

(iii) Transfer voucher.

(i) A Payment voucher: usually on a printed standard form, is a record of payment? When
payment is made for an expense, generally a bill is prepared to record full particulars of the claim
by the person or organization receiving payment. From the bill, the accounting department
prepares a voucher for each payment to be made, no matter whether the amount that is paid for
the goods purchased, or to pay employee’s salaries, or to pay for services or to pay for any other
asset acquisition.

(ii) A Receipt voucher: is a document which is issued against cash receipts. It may also be a
printed standard form. This document shows that a certain sum of money was received from a
person or organization and also, contains information of the purpose for which the money is
received. It is signed by a responsible employee, authorized by the management to receive the
money.

(iii) A Transfer voucher: is used to record the residuary transactions. An internal transaction or a
transaction not involving any cash payment or cash receipt is recorded in the transfer voucher.
Examples are: Goods purchased on credit; depreciation of assets, outstanding expenses, accrued
income, etc.

Journal Entry

Journal entry means recording the business transactions in the journal. For each transaction a
separate entry is recorded. Before recording, the transaction is analyzed to determine which
account is to be debited and which account is to be credited.

Name of the Journal Page No

Date Particulars L.F Debit Credit

(Items) (Post. Ref) (Amount) (Amount)

(1) (2) (3) (4) (5)

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(1) Date: In each page of the journal at the top of the date column, the year is written and in the

(3) Ledger Folio: This column is meant to record the reference of the main book, i.e., ledger and
is not filled in when the transactions are recorded in the journal.

The page number of the ledger in which the accounts are appearing is indicated in this column,
while the debits and credits are posted o the ledger accounts.

(4) Amount (Debit): The amount to be debited along with its unit of measurement at the top of
this column on each page is written against the account debited.

(5) Amount (Credit): The amount to be credited along with its unit of measurement at the top of
this column on each page is written against the account credited.

SUB-DIVISION OF JOURNAL
When innumerable number of transactions takes place, the journal, as the sole book of the
original entry becomes inadequate. Thus, the number and the number and type of journals
required are determined by the nature of operations and the volume of transactions in a particular
business. There are many types of journals and the following are the important ones:

1. Sales Day Book- to record all credit sales.

2. Purchases Day Book- to record all credit purchases.

3. Cash Book- to record all cash transactions of receipts as well as payments.

4. Sales Returns Day Book- to record the return of goods sold to customers on credit.

5. Purchases Returns Day Book- to record the return of goods purchased from suppliers on
credit.

6. Bills Receivable Book- to record the details of all the bills received.

7. Bills Payable Book- to record the details of all the bills accepted.

8. Journal Proper-to record all residual transactions which do not find place in any of the
aforementioned books of original entry.

Advantages of Using Journal

Journal is used because of the following advantages:

· A journal contains a permanent record of all the business transactions.

· The journal provides a complete chronological (in order of the time of occurrence) history of
all business transactions and the task of later tracing of some transactions is facilitated.

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 · Complete information relating to one single business transaction is available in one place
with all its aspects.

· The transaction is provided with an explanation technically called a narration.

· Use of the journal reduces the possibility of an error when transactions are first recorded in
this book.

· The journal establishes the quality of debits and credits for a transaction and reconciles any
problems. If a business purchases a bicycle, it is necessary to decide whether the bicycle
represents ordinary goods or machinery. Further anyamount paid is debited to bicycle

Journalizing
Journalizing is the process of recording journal entries in the Journal. It is a systematic act of
entering the transaction in a day book in order of their occurrence i.e., date-wise or event-wise.
After analyzing the business transactions, the following steps in journalizing are followed:

(i) Find out what accounts are involved in business transaction.

(ii) Ascertain what is the nature of accounts involved?

(iii) Ascertain the golden rule of debit and credit is applicable for each of the accounts
involved.

(iv) Find out what account is to be debited which is to be credited.

Post journals to ledger

Objectives

After going through this lesson, you should be able to-

· Know meaning and importance of ledger.

· Understand the rules regarding posting.

· Know balancing of an account.

· Know meaning and objectives of trial balance.

Ledger
It has already been discussed in earlier lesson that accounting involves recording, classifying and
summarizing the financial transactions. Recording is made in Journal, which has been explained
in the preceding lesson. Classification of the recorded transactions is made in the ledger. This is
being discussed in the present lesson.

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Ledger is a book which contains various accounts. In simple words, ledger is a set of accounts. It
includes all accounts of the business enterprise whether Real, Nominal or Personal. Ledger may
be kept in any of the following two forms:

· Bound Ledger; and

· Loose Leaf Ledger.

It is common to keep the ledger in the form of loose-leaf cards these days instead of keeping
them in bounded form. This helps in posting transactions particularly when mechanized system
of accounting is used.

Interestingly, nowadays, mechanized system of accounting is preferred over the manual system
of accounting.

Sub-division of ledger
In a big business, the number of accounts is numerous and it is found necessary to maintain a
separate ledger for customers, suppliers and for others.

Usually, the following three types of ledgers are maintained in such big business concerns.

(i) Debtors’ Ledger: It contains accounts of all customers to whom goods have been sold on
credit. From the Sales Day Book, Sales Returns Book and Cash

Book, the entries are made in this ledger. This ledger is also known as sales ledger.

(ii) Creditors’ Ledger: It contains accounts of all suppliers from whom goods have been bought
on credit. From the Purchases Day Book, Purchases Returns Book and Cash Book, the entries are
made in this ledger. This ledger is also known as

Purchase Ledger.

(iii) General Ledger: It contains all the residual accounts of real and nominal nature. It is also
known as Nominal Ledger.

Distinction between journal and ledger

(i) Journal is a book of prime entry, whereas ledger is a book of final entry.

(ii) Transactions are recorded daily in the journal, whereas posting in the ledger is made
periodically.

(iii) In the journal, information about a particular account is not found at one place, whereas
in the ledger information about a particular account is found at one place only.

(iv) Recording of transactions in the journal is called journalizing and recording of

transactions in the ledger is called posting.

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 (v) A journal entry shows both the aspects debit as well as credit but each entry in the ledger
shows only one aspect.

(vi)Narration is written after each entry in the journal but no narration is given in the ledger.

(vii) Vouchers, receipts, debit notes, credit notes etc., from the basic documents form journal
entry, whereas journal constitutes basic record for ledger entries.

Posting
The term ‘Posting’ means transferring the debit and credit items from the Journal to their
respective accounts in the ledger. It is important to note that the exact names of accounts used in
the Journal should be carried to the ledger.

Rules Regarding Posting

The following rules must be observed while posting transactions in the Ledger from the Journal:

i) Separate accounts should be opened in the Ledger for posting transactions relating to different
accounts recorded in the Journal. For example, separate accounts may be opened for sales,
purchases, sales returns, purchases returns, salaries, rent, cash, etc.

ii) The concerned account which has been debited in the Journal should also be debited in the
Ledger. However, a reference should be made of the other account which has been credited
in the Journal. For example, for salaries paid, the salaries account should be debited in the
Ledger, but reference should be given of the Cash Account which has been credited in the
Journal.

iii) The concerned account, which has been credited in the Journal; should also be credited in the
Ledger, but reference should be given of the account, which has been debited in the
Journal. For example, for salaries paid, Cash Account has been credited in the Journal. It
will be credited in the Ledger also, but reference will be given of the Salaries Account in
the Ledger.

Salaries Account Account No

Balance

Date Particulars Post. Ref Debit Credit Debit Credit

Salary 10000

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 Cash Account Account No

Balance

Date Particulars Post. Ref Debit Credit Debit Credit

Cash A/c 10000

Enter data into system

Introduction to Data and Data Collection
Data collection is the first operational stage in the information system. The objective is to ensure that
event data entering the system are valid, complete and free from material errors. In many respects, this
is the most important stage in the system.

Two rules govern the design of data collection procedure:

 Relevance and
 Efficiency.

The information system should capture only relevant data. A fundamental task of the system designer is
to determine what is and what is not relevant. He or she does so by analyzing the user’s needs. Only
data that ultimately contribute to information are relevant. The data collection stage should be designed
to filter irrelevant facts from the system.

Importance of data
The data serve as the bases or raw materials for analysis. Without an analysis of factual data, no
specific inferences can be drawn on the questions under study. Inferences based on imagination or
guesswork cannot provide correct answers to research questions. The relevance, adequacy and
reliability of data determine the quality of the findings of a study.

What is data collection?

Data Collection helps your team to assess the health of your process. To do so, you must identify the
key quality characteristics you will measure, how you will measure them, and what you will do with
the data you collect. What exactly is a key quality characteristic? It is a characteristic of the product or
service produced by a process that customers have determined is important to them. Key quality
characteristics are such things as the speed of delivery of a service, the finish on a set of stainless steel
shelves, the precision with which an electronic component is calibrated, or the effectiveness of an
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administrative response to a tasking by higher authority. Every product or service has multiple key
quality characteristics. When you are selecting processes to improve, you need to find out the
processes, or process steps, that produce the characteristics your customers perceive as important to
product quality. Data Collection is nothing more than planning for and obtaining useful information on
key

What Is Data Collection?

Data Collection is obtaining useful information.

The issue is not: How do we collect data?

It is: How do we obtain useful data?

Data Collection General Rules

The following are general rules to help you with data collection.

• Use available data if you can.

• If using available data be sure to find out how earlier evaluators:

 collected the data

 defined the variables
 Ensured accuracy of the data.

• If you must collect original data:

 establish procedures and follow them (protocol)

 maintain accurate records of definitions and coding
 Pre-test, pre-test, pre-test
 verify accuracy of coding, data input

Key Issues about Measures of Data Collection

When you collect data, you will need to keep these key issues in mind:

 Are your measures credible?

 Are your measures valid?
 Are your measures measuring what counts?
 Are your measures reliable?
 Are your measures precise?

Credibility refers to how reliable or believable your data collection is. As well, it is important to
make sure that the data you are collecting are relevant and they measure the most important

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information. Be sure to avoid the trap of measuring what is easy instead of measuring what you
need..

Validity is a term used to describe if a measurement actually measures what it is supposed to

measure.

 Face validity addresses the extent to which the contents of the test or procedure look like
they are measuring what they are supposed to measure. For example, if you were
measuring health status or physical fitness, the measure of how fast one runs 100 meters,
may indeed look like it could be a measure of health status or at least physical fitness.
 Content validity addresses the extent to which the content of the test or procedure
adequately represents all that is required for validity. Again using the example of health
status, if a researcher was trying to develop such a measure, then he or she should allow
other competent people to examine the content of the proposed test to ensure that all
relevant measures are included and that all are weighted appropriately for the proposed
test.

Reliability is a term used to describe the stability of your measurement: that it measures the
same thing, in the same way, in repeated tests.

Precision is a term used to describe how the language used in the data collection matches the
measure. For example, if the question is about countries, then the measures must be at the
national level. If the question is about people, then the measures must be on the individual level.

Sources of Data
 Primary Sources
Data is said to be primary if they are obtained first hand for the particular purpose on which one
is correctly working. So, primary data are collected either by or under the direct supervision and
instruction of the researcher. Such Data are original in character and are generated in large
number of surveys conducted mostly by government and also by some individuals, institutions,
and research bodies

1i
Advantages of primary sources

 Secondary source may contain mistakes due to errors in transcription made when the
figures were copied from the primary source.

 The primary source frequently includes definition of terms and units used.

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  The primary source often includes a copy of the schedule and description of the procedure
used in selecting the sample and in collecting the data.

 Primary source usually shows data in greater detail.

 Secondary source

These are sources containing data that have been collected and compiled for similar or another
purpose. The secondary sources consist of readily available compendia and already compiled
statistical statements and reports whose data may be used by researches for their studies, e.g.,
census reports, Reports of Government Departments, Statistical Statements relating to
Cooperatives, Federal Cooperative Commission, Commercial Banks and Micro Finance Credit
Institutions published by the National Bank for Ethiopia, Reports of trade associations,
publications of international organizations such as UNO, IMF, World Bank, ILO, WHO, etc.,
Trade and Financial Journals, newspapers, etc. Secondary sources consist of not only published
records and reports, but also unpublished records.

Features of Secondary Sources: Though secondary sources are diverse and consist of all sorts
of materials, they have certain common characteristics.

First, they are ready made and readily available, and do not require the trouble of constructing
tools and administering them.

Second, they consist of data over which a researcher has no original control over collection and
classification. Others shape both the form and the content of secondary sources. Clearly, this is a
feature, which can limit the research value of secondary sources.

Finally, secondary sources are not limited in time and space. That is, the researcher using them
need not have been present when and where they were gathered.

Use of secondary data

The secondary data may be used in three ways by a researcher.

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  First, some specific information from secondary sources may be used for reference
purposes.
 Second, secondary data may be used as bench marks against which the findings of a
research may be tested.
 Finally, secondary data may be used as the sole source of information for a research
project

Advantages

1. Secondary data, if available, can be secured quickly and cheaply

2. Wider geographical area and longer reference period may be covered without much cost.
Thus the use of secondary data extends the researcher's space and time reach.
3. The use of secondary data broadens the database from which scientific generalizations
can be made.
4. The use of secondary data enables a researcher to verify the findings based on primary
data.

Disadvantages/limitations

1. The most important limitation is the available data may not meet, our specific research
needs.
2. The available data may not be as accurate as desired.
3. The secondary data are not up-to-date and become obsolete when they appear in print,
because of time lag in producing them.
4. Finally, information about the whereabouts of sources may not be available to all social
scientists. DEPOSIT:

A sum of money placed or kept in a bank account, usually to gain interest. The terms Deposit
refers to an amount of money in cash or check form or sent via a wire transfer that is placed into
a bank account. The target bank account for the Bank Deposit can be any kind of account that
accepts deposits.

TYPES OF DEPOSITS:
There are two types of deposits. These are

1. Demand Deposit

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Here money is not deposited for a specific time period. Investor can withdraw money at any
time. Bank is responsible to return the money on customer’s demand. This account allows you to
demand your money at any time. It’s further classified into types:

a) Saving deposits: These deposits accounts are one of the most popular deposits for individual
accounts. These accounts not only provide cheque facility but also have lot of flexibility for
deposits and withdrawal of funds from the account. Most of the banks have rules for the
maximum number of withdrawals in a period and the maximum amount of withdrawal, but
hardly any bank enforces these. However, banks have every right to enforce such restrictions if
it is felt that the account is being misused as a current account.

b) Current deposits: Current Accounts are basically meant for businessmen and are never used
for the purpose of investment or savings. These deposits are the most liquid deposits and there
are no limits for number of transactions or the amount of transactions in a day. Most of the
current account is opened in the names of firm / company accounts. Cheque book facility is
provided and the account holder can deposit all types of the cheques and drafts in their name or
endorsed in their favor by third parties. No interest is paid by banks on these accounts. On the
other hand, banks charge certain service charges, on such accounts.

2. FIXED/TERM/TIME DEPOSITS:

Under this scheme money is deposited for a fixed period of time so it is also called Fixed
Deposit. Investor can withdraw the money only after the time period. Premature withdrawals are
also allowed by paying a penalty. Interest is calculated on monthly, quarterly or yearly depends
on the bank and scheme. These are further classified into following types:

a) Recurring Deposit

This is another type of fixed deposit in with investor pay a small amount every month for a
specific time period.

b) Cumulative deposit:

In a Cumulative Deposits, interest is payable at the time of maturity along with the principal.
This Scheme is suitable for the people who do not require periodic interest payment. This is also
called Money Multiplier Scheme.

c) Non-Cumulative Deposit:

In a non-Cumulative Deposits principal amount is paid at the time of maturity & interest amount
is paid is paid on periodical basis.

Trial balance
Aims and Objectives

I) To study the meaning and definition of Trial balance.

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ii) To know the objectives, features and limitations of Trail balance.

iii) To understand the methods of preparing Trial balance.

Meaning and Definition

Meaning

Trial balance is a statement prepared with the balances or total of debits and credits of all the
accounts in the ledger to test the arithmetical accuracy of the ledger accounts. As the name
indicates it is prepared to check the ledger balances. If the total of the debit and credit amount
columns of the trail balance are equal, it is assumed that the posting to the ledger in terms of
debit and credit amounts is accurate. The agreement of a trail balance ensure arithmetical
accuracy only, A concern can prepare trail balance at any time, but its preparation as on the
closing date of an accounting year is compulsory.

Objectives of Preparing a Trail Balance

(i) It gives the balances of all the accounts of the ledger. The balance of any account can be
found from a glance from the trail balance without going through the pages of the ledger.

(ii) It is a check on the accuracy of posting. If the trail balance agrees, it proves:

(a) That both the aspects of each transaction are recorded and

(b) That the books are arithmetically accurate.

(iii) It facilitates the preparation of profit and loss account and the balance sheet.

(iv) Important conclusions can be derived by comparing the balances of two or more than two
years with the help of trail balances of those years.

Features of Trail Balances

The following are the important features of a trail balances:

(i) A trail balance is prepared as on a specified date.

(ii) It contains a list of all ledger account including cash account.

(iii) It may be prepared with the balances or totals of Ledger accounts.

(iv) Total of the debit and credit amount columns of the trail balance must tally.

(v) It the debit and credit amounts are equal, we assume that ledger accounts are arithmetically
accurate.

(vi) Difference in the debit and credit columns points out that some mistakes have been
committed.
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(vii) Tallying of trail balance is not a conclusive profit of accuracy of accounts.

Limitations of Trail Balance

The following are the important limitations of trail balances:

(I) The trail balance can be prepared only in those concerns where double entry system of book-
keeping is adopted. This system is too costly.

(ii) A trail balance is not a conclusive proof of the arithmetical accuracy of the books of account.
It the trail balance agrees, it does not mean that now there are absolutely no errors in books. On
the other hand, some errors are not disclosed by the trail balance.

(iii) It the trail balance is wrong, the subsequent preparation of Trading, P&L

Account and Balance Sheet will not reflect the true picture of the concern.

Methods of Preparing Trail Balance

A trail balance refers to a list of the ledger balances as on a particular date. It can be prepared in
the following manner:

 Total Method

According to this method, debit total and credit total of each account of ledger are recorded in
the trail balance.

 Balance Method

According to this method, only balance of each account of ledger is recorded in trail balance.
Some accounts may have debit balance and the other may have credit balance. All these debit
and credit balances are recorded in it. This method is widely used.

BALANCE SHEET
A Balance Sheet is a statement of financial position of a business concern at a given date. It is
called a Balance Sheet because it is a sheet of balances of those ledger accounts which have not
been closed till the preparation of Trading and Profit and Loss Account. After the preparation of
Trading and Profit and Loss Account the balances left in the trial balance represent either
personal or real accounts. In other words, they either represent assets or liabilities existing on a
particular date. Excess of assets over liabilities represent the capital and is indicative of the
financial soundness of a company.

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A Balance Sheet is also described as a “Statement showing the Sources and Application of
Capital”. It is a statement and not an account and prepared from real and personal accounts. The
left hand side of the Balance Sheet may be viewed as description of the sources from which the
business has obtained the capital with which it currently operates and the right hand side as a
description of the form in which that capital is invested on a specified date.

Characteristics

The characteristics of a Balance Sheet are summarized as under:

(a) A Balance Sheet is only a statement and not an account. It has no debit side or credit side.
The headings of the two sides are ‘Assets’ and ‘Liabilities’.

(b) A Balance Sheet is prepared at a particular point of time and not for a particular period. The
information contained in the

Balance Sheet is true only at that particular point of time at which it is prepared.

(c) A Balance Sheet is a summary of balances of those ledger accounts which have not been
closed by transfer to Trading and Profit and Loss Account.

(d) A Balance Sheet shows the nature and value of assets and the nature and the amount of
liabilities at a given date.

Classification of assets and liabilities

Assets
Assets are the properties possessed by a business and the amount due to it from others. The
various types of assets are:

(a) Fixed Assets

All assets that are acquired for the purpose of using them in the conduct of business operations
and not for reselling to earn profit are called fixed assets. These assets are not readily convertible
into cash in the normal course of business operations. Examples are land and building, furniture,
machinery, etc.

(b) Current Assets

All assets which are acquired for reselling during the course of business are to be treated as
current assets. Examples are cash and bank balances, inventory, accounts receivables, etc.

(c) Tangible Assets

There are definite assets which can be seen, touched and have volume such as machinery, cash,
stock, etc.

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(d) Intangible Assets

Those assets which cannot be seen, touched and have no volume but have value are called
intangible assets. Goodwill, patents and trademarks are examples of such assets.

(e) Fictitious Assets

Fictitious assets are not assets at all since they are not represented by any tangible possession.
They appear on the asset side simply because of a debit balance in a particular account not yet
written off e.g. provision for discount on creditors, discount on issue of shares etc.

(f) Wasting Assets

Such assets as mines, quarries etc. that become exhausted or reduce in value by their working are
called wasting assets.

(g) Contingent Assets

Contingent assets come into existence upon the happening of a certain event or the expiry of a
certain time. If that event happens, the asset becomes available otherwise not, for example, sale
agreement to acquire some property, hire purchase contracts etc.

In practical no reference is made to contingent assets in the Balance Sheet. At the most, they may
form part of notes to the Balance Sheet.

Liabilities
A liability is an amount which a business is legally bound to pay. It is a claim by an outsider on
the assets of a business. The liabilities of a business concern may be classified as:

(a) Long Term Liabilities

The liabilities or obligations of a business which are not payable within the next accounting
period but will be payable within next five to ten years are known as long term liabilities. Public
deposits, debentures, bank loan are the examples of long term liabilities.

(b) Current Liabilities

All short term obligations generally due and payable within one year are current liabilities. This
includes trade creditors, bills payable etc.

(c) Contingent Liabilities

A contingent liability is one which is not an actual liability. They become actual on the
happenings of some event which is uncertain. In other words, they would become liabilities in
the future provided the contemplated event occurs.

Marshalling of assets and liabilities

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The arrangement of assets and liabilities in a particular order is called marshalling of the Balance
Sheet. Assets and liabilities can be arranged in the Balance Sheet into two ways:

(a) In order of liquidity.

(b) In order of permanence.

PROFIT AND LOSS ACCOUNT (Unadjusted income statement)

Trading Account results in the gross profit/loss made by a businessman on purchasing and
selling of goodsLoss Account considers all such expenses and incomes and gives the net profit
made or net loss suffered by a business during a particular period.

All the indirect revenue expenses and losses are shown on the debit side of the Profit and Loss
Account, whereas all indirect revenue incomes are shown on the credit side of the Profit and
Loss Account.

Profit and Loss Account measures net income by matching revenues and expenses according to
the accounting principles. Net income is the difference between total revenues and total
expenses. In this connection, we must remember that all the expenses, for the period are to be
debited to this account - whether paid or not. If it is paid in advance or outstanding, proper
adjustments are to be made (Discussed later). Likewise all revenues, whether received or not are
to be credited.

Revenue if received in advance or accrued but not received, proper adjustment is required.

Important points in Profit and Loss account

1. Selling and Distribution Expenses

These expenses are incurred for promoting sales and distribution of sold goods. Example of such
expenses are good own rent, carriage outwards, advertisement, cost of after sales service, selling
agents commission, etc.

2. Management Expenses

These are the expenses incurred for carrying out the day-to-day administration of a business.
Expenses, under this head, include office salaries, office rent and lighting, printing and stationery
and telegrams, telephone charges, etc.

3. Maintenance Expenses

These expenses are incurred for maintaining the fixed assets of the administrative office in a
good condition. They include repairs and renewals, etc.

4. Financial Expenses

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These expenses are incurred for arranging finance necessary for running the business. These
include interest on loans, discount on bills, etc.

5. Abnormal Losses

There are some abnormal losses that may occur during the accounting period. All types of
abnormal losses are treated as extra ordinary expenses and debited to Profit and Loss Account.
Examples are stock lost by fire and not covered by insurance, loss on sale of fixed assets, etc.

Following are the expenses not to appear in the Profit and Loss

Account:

(i) Domestic and household expenses of proprietor or partners.

(ii) Drawings in the form of cash, goods by the proprietor or partners.

(iii) Personal income tax and life insurance premium paid by the firm on behalf of proprietor or
partners.

6. Gross Profit

This is the balance of the Trading Account transferred to the Profit and Loss Account. If the
Trading Account shows a gross loss, it will appear on the debit side.

7. Other Income

During the course of the business, other than income from the sale of goods, the business may
have some other income of financial nature.

The examples are discount or commission received.

8. Non-trading Income

Such incomes include interest on bank deposits, loans to employees and investment in
debentures of companies. Similarly, dividend on investment in shares of companies and units of
mutual funds are also known as non-trading incomes and shown in Profit and Loss Account.

9. Abnormal Gains

There may be capital gains arising during the course of the year,

e.g., profit arising out of sale of a fixed asset. Such profit is shown as a separate income on the
credit side of the Profit and Loss Account.

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RECTIFICATION OF ERRORS
INTRODUCTION

Every concern is interested in ascertaining its true profit/loss and financial position at the close
of the trading year. The effort of the accountant is to prepare the final accounts in such a fashion
which exhibits true picture of the business. The basic information for the preparation of final
accounts is supplied by the trial balance.

:a) Presenting correct accounting records;

b) Ascertaining correct profit or loss for the accounting period; and

c) Exhibiting a true financial position of the concern on a particular date.

CLASSIFICATION OF ERRORS
The errors can be classified as follows:

 Clerical Errors
 Errors of Principle

1. Clerical errors

Clerical errors are those errors which are committed by the clerical staff during the course of
recording the business transactions in the books of accounts. These errors are:

a) Errors of omission

b) Errors of commission

c) Compensating errors

a) Errors of Omission

When a transaction is either wholly or partially not recorded in the books of accounts, it is an
error of omission. When a transaction is omitted completely, it is called “complete error of
omission” and when transaction is partly omitted, it is called a “partial error of omission”.
Complete error of omission does not affect the agreement of trial balance whereas partial error of
omission may or may not affect the agreement of trial balance.

b) Errors of Commission

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Errors of commission take place when some transactions are incorrectly recorded in the books of
accounts. Such errors include errors on account of wrong balancing of an account, wrong
posting, and wrong

Totaling, wrong carry forwards, etc.

c) Compensating Errors

These errors, also called self-balancing or equalizing errors, are a group of errors, the total effect
of which is not reflected in the trial balance. These errors are of a neutralizing nature. One error
is compensated by the other error or by errors of an opposite nature. Errors of Principle

LOCATION OF ERRORS
The location of errors or omissions, compensations and principles are slightly difficult because
of the fact that such errors do not affect the agreement of trial balance. However, the locations of
some errors of commission are comparatively easier because they affect the agreement of the
trial balance. Thus, the errors can be classified into two categories from the point of view of
locating them:

 Errors which do not affect the agreement of Trial Balance

As stated, errors of omission, errors of compensating nature and errors of principle do not affect
the agreement of the trial balance. Their location is, therefore, a difficult task. These are usually
found out when the statements of accounts are sent to the customers or received by the business
or during the course of audit and sometimes by chance.

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Errors which affect the agreement of Trial balance

The errors which cause a mismatch in the trial balance totals are frequently referred to as errors
disclosed by a trial balance. However, the mismatch does not automatically point out the actual
errors. It is only the diligence and ingenuity of the person preparing the accounts which would
help in the location of errors. The procedure to be followed for location of such errors can be put
as follows:

i) The totals of the trial balance itself should be thoroughly rechecked in order to find out exact
or correct difference.

ii) Make sure that the balances of cash and banks are included.

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iii) The difference of the two sides of the trial balance should be found and be divided by two
and then find out whether a figure equal to the same (i.e. half the difference) appears in the trial
balance. This procedure would enable to locate the amount placed on the wrong side.

RECTIFICATION OF ERRORS
From the point of view of rectification of errors, these can be divided into two groups:

a) Errors affecting one account only.

b) Errors affecting two or more accounts.

Errors affecting One Account

The following errors affect only one account:

(a) Errors of posting

(b) Carry forward

(c) Balancing

(d) Omission from trial balance

(e) Casting

Such errors should first of all be located and rectified. These are rectified either with the help of
journal entry or by giving an explanatory notes in the account concerned and not by simply
crossing the wrong amount and inserting the right one.

Errors affecting two or more accounts

The following errors affect two or more accounts:

(a) Errors of omission

(b) Posting to wrong account

(c) Principles

As there errors affect two or more accounts, rectification of such errors is done with the help of a
journal entry.

b) Rectification of two sided errors

As these errors affect two or more accounts, rectification of such errors can often be done with
the help of a journal entry. These types of errors do not affect the agreement of trial balance. For
example, if furniture purchased has been recorded through purchase book, two accounts viz.
purchases account and furniture account are affected.
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Thus, rectification will be made by taking these two accounts.

Rectification of errors after the preparation of final accounts

I. The rectification of errors after the preparation of final accounts depends upon the
nature of error.

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 BSTL COLLAGE HAWASSA CAMPUS
Work sheet
For all level II Students
Module title: Process financial transaction and Extract Interim Reports

Name_____________________ID.NO______Dep________Level____________

II. Choose the best answer for the following alternatives

____1. Which of the following is evidence of cash being received?
A. Till rolls B. Credit notes C. Transaction D. all
____2. From the sent by the firm to customers who have returned the goods is
A. Credit notes B. Sales invoice C. purchase invoice D. none
____3. Which of the following is the items of the main documents
A. Paying slip B. Credit notes C. Debit notes D.all
-------4. Which of the accounting process involves are
A. Classifying B. summarizing C. Presentation D. all
____5. One of the following is includes in a bank reconciliation steps
A. Add B. Deduct C. Adjustment D. all
____6. . Which of the following a written document in support of a transaction?
A. Voucher B. Invoice C. charge D. none
____7. . It means recording the business transaction is
A. Journal entry B. Transfer C. Credit D. none
_____8. The common documents that are generally used asunder is
A. Payment voucher B. Receipt voucher C. Transfer voucher D. all
____9.. Which are fees deduct from the bank statement for the banks processing
A. Balance B. service charge C. Interest D. all
____10. It meant to record the reference of the main book is
A. Amount B. Ledger folio C. cash book D. all

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i
II. Say True /False For the following Statements
____11. Cheque counterfoils is from the cheque book to show cheques paid out.
____12.A balance sheet is to ascertain the financial position in the business on the particular date.
____13. The source document may be created in either paper or electronic format.
____14. Accounting is is the art of classifying business transaction.
____15.A payment voucher is usually on a printed standard form, is a record of payment
___16. 1The source document is the original record of the transaction.
____17. The source document should be recorded in the appropriate journal.
-------18. All the daybooks are constructed on the basis of transfer from original source
documents.
____19. At a minimum each document should include the date, the amount, the description of the
transaction.
____20. A petty cash also known as impress cash.

Part III.
Match the column A with column B
___21. Ledger folio A. to record the reference of the main book
___22. Salary daybook B. to record all credit sales
___23. Purchases daybook C. To record all purchases
--- -24. Bill receivable book D. To record the receipt received
___25.Journal proper E. to record all residual transactions

Workout Part V

. 1. Describe the main sources of the documents a firm flows

>
>
>
>
2. Mention the accounting process involves in steps
a/
b/
c/
d/
e/
f/
3. Write down the Bank reconciliation process with two steps and give you example as
you read it from the module