accounting

igcse
MS Paulin

name:

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CHAPTER 1 (UNIT 1): THE FUNDAMENTALS OF ACCOUNTING
DIFFERENCE BETWEEN BOOK-KEEPING AND ACCOUNTING
Book-keeping: The process of recording the financial transactions of a business. Involves: recording
details of each financial transaction, the amounts of money involved, and when each transaction took
place. Involves recording transactions in the “books” of the business. Transactions are recorded in two
separate places:
 Books of prime entry- similar transactions recorded in specific books according to the type of
transaction.
 Ledger accounts- Ledgers contain the accounts of the business.
Accounting: The process of recording financial transactions, producing financial statements and
analyzing financial performance of a business. Accountants use the financial records produced by
those completing book-keeping. The records are used to construct the financial statements of the
business. Function: Analyze the financial performance of the business which involves using financial
data from the financial statements to assess how well the business is performing.
Financial statements: Statements produced for an accounting period summarizing business
performance. They include an income statement of financial position. 2 important financial statements
are:
 The income statement- shows profit earned or loss made by business.
 The statement of financial position- shows business resources and how those resources are
financed.

PURPOSE OF MEASURING BUSINESS PROFIT AND LOSS

Business objectives: Aims and goals of a business. Business objectives are:
 Profit Maximization- (Common) Aiming to earn as high a level of profit as possible.
 Growth- Measured by sales value or by sales volume (Quality of goods sold)
 Market share- How much of the market the businesses sales account for.
 Survival
 Break-even- Financial objective of not-for-profit organizations, such as charities.
 Social objectives
 Environmental objectives
Business objectives change over time for the same business (Business experiencing economic
struggles aim for survival rather than profit maximization).
Profit: Total income less total expenses for a period of time. Measured by the difference between
income earned and the expenses paid by a business for an accounting period.
Income greater than expenses Profit
Expenses greater than income Loss

Accounting period: The time period for which financial statements are prepared. It is used to
calculate the profit or loss made by the business. Most businesses, the accounting period is one year.
It cannot start on the 1st of January, most start on the 1st of April. It has to start the beginning of the
month.
Income statement: A financial statement showing a business’s income and expenses for an
accounting period and the resulting profit or loss.

It is important to measure how much profit is made in order to make decisions about how it can
be used:
 Business owners may take money out of the business for personal use (NB they don’t take too
much that it affects their business).
 Profit can be reinvested within the business to enable the business to expand.
 Profit can be used to pay debts the business has.
As well as decisions about spending’s:
 Paying tax- Businesses pay tax as a percentage of their profits (calculating how much profit is
made is NB in order to calculate the amount of tax to be paid).
 Obtaining credit- Lenders only lend money to businesses if they have proof that the business is
likely to survive and be able to repay the money lent.
 Keeping shareholders happy- Limited companies are businesses owned by the shareholders.
They regularly give profits to shareholders as dividend payments and ensuring these payments
are made keeps shareholders happy and attracts new ones.
  Attracting investors- Companies may need to attract investors and profit is a sin of good
investment.
 Encouraging entrepreneurship- Profit gives a motive for people to take calculated risks in
running a business, such as expanding.

THE ROLE OF ACCOUNTING IN PROVIDING INFORMATION FOR MONITORING

PROGRESS AND DECISION MAKING
Monitoring progress: Financial statements are analyzed to monitor the progress of the business.
Which areas of the financial statements are monitored will depend partly on who is looking at the
information contained on the statements.
 Business owners are interested in the profit earned as it is the main objective of most
businesses. They look at the size of the profit compared with the previous years and the profits
earned by similar businesses.
 The size of the debts of the business are monitored closely. If debt rises, there is a risk that the
business will not be able to make repayments or the interest on debts may rise to a level
greater than the profits earned by the business.
 Suppliers want to be sure they will receive payments before allowing a business to buy goods
on credit. The financial statements provide information on the stability of the business.
Decision-making: The information contained within the financial statements can help in business
decision-making:
 Knowing the size of the profit allows the owners to decide whether they can afford to buy more
assets.
 Knowing the cash balance of the business allows decisions to be made on whether to arrange
another source of finance.
 Knowing the sales revenue allows decisions to be made about expansions of operations and
recruitment of staff.
Management accounting: Using the financial information to make business decisions concerning
costs, revenues and output. Managers compare the actual performance of the business with budgeted
levels of performance. They also plan by setting targets for future performance.

UNIT 2: THE ACCOUNTING EQUATION

ASSETS, LIABILITES AND OWNERS EQUITY
Assets: Resources used within the business for its activities. They are items used to run and manage
a business. Examples: Business premises, machinery, inventory (stock of materials/finished goods)
and money held as cash or in business bank account.
Liabilities: Amounts borrowed to fund business activity. Amounts owed by the business to other
businesses. Example: Short-term debts- temporary delay between buying and paying for goods for
resale. Long-term debts- bank loans. Repaid in future.
Owners’ equity: Business resources supplied by the owner of the business. Resources used by the
business that have been supplied by the business owner. They may be from the owner’s personal
savings, or other resources, such as a car. Also known as capital.
Duality principle: This principle states that the business transaction always has two effects on the
business and requires two entries, one debit and one credit, to be made in the accounts; also known
as “double entry”.

THE ACCOUNTING EQUATION

ASSETS= OWNERS EQUITY + LIABILITIES.

A basic principle found within most accounting records is the duality. This means the transaction is
viewed from two perspectives. Based on two elements:
 The resources the business has- the assets of the business.
 How these resources were financed- by the owners’ equity and the liabilities of the business.
The two sides of the equation must always be equal (equation “balancing”).
EXAMPLE:
Business purchases a car on credit for $5000. How does it affect the accounting equation?
Buying a car means that
Assets INCREASE $5000 the business has the use
of the car as an asset.
Car purchased on credit.
Business has new liability
Liabilities INCREASE $5000
which is the amount owing
on the car purchased.

REARRANGING THE EQUATION

ASSETS = LIABILITIES + OWNERS EQUITY
OWNERS EQUITY = ASSETS – LIABILITIES
LIABILITIES = ASSETS – OWNERS EQUITY

EXAMPLE:
The owner of a business has assets valued at $16500. She knows she has borrowed $3250. What is
the value of the owners’ equity?
Owners’ Equity = Assets - Liabilities =$16500 - $3250
=$13250

THE ACCOUNTING EQUATION AND THE STATEMENT OF FINANCIAL POSITION

Statement of financial position: A financial statement showing the assets of the business and the
financing for these assets, either from owners’ equity or liabilities. Useful as it shows how much the
business owes. A simplified statement of financial position will consist of two sides:
 One side shows the resources used within the business (the assets).
 The other side shows how the assets were financed, either with borrowed money (liabilities) or
from the business owner (owners’ equity).
EXAMPLE (TRANSACTION 1- INTRODUCING OWNERS EQUITY)
Ramondo is setting up a business. On 1 August, he deposited $8000 into a bank account and he
used $3500 to purchase a van for the business use. Prepare the financial position after these
 transactions. Appears in horizontal format. Both sides always equal.
Ramondo
Statement of financial position as at 1 August
Assets $ Owners’ equity and liabilities $
Van 3500 Owners equity 8000
Bank 4500
8000 8000

Trade payable: The amount that a business owes to a supplier for goods or services sold on credit.
The supplier may also be known as a trade payable or creditor.
Trade payables (Liability) : The sum of the amounts that a business owes to its suppliers for goods
or services sold on credit. All the suppliers of a business may also be referred as trade payables.
Trade receivable (Asset): The amount that a business is owed by a customer for goods or services
supplied on credit. The customer may also be known as the trade receivable or debtor.
Trade receivables: The sum of the amounts that a business is owed by its customers for goods or
services sold on credit. All the credit customers of a business may also be referred as trade debtors.
Liquidity: A measure of how easy it is to convert an asset into cash without it losing its value.
Inventory: Goods held by a business for resale. They may be in form of finished goods, partly finished
goods or raw materials.
EXAMPLE (TRANSACTION 2- BUYING INVENTORY ON CREDIT)
On the 4th of August, Ramondo bought inventory from Iqbal, who is a trader. The inventory was
valued at $800 and was purchased on credit.
Ramondo
Statement of financial position as at 4 August
Assets $ Owners’ equity and liabilities $
Van 3500 Owners’ equity 8000
Inventory 800 Trade payables (Iqbal) 800
Bank 4500
8800 8800

 The trade payable (Iqbal) is the amount the business owes Iqbal (supplier) for the purchase of
inventory on credit.

EXAMPLE (TRANSACTION 3- BUYING AN ASSET)

On the 8th of August, Ramondo bought equipment for the business. The cost of $2400 was paid from
the business bank account.

Ramondo
Statement of financial position as at 8 August
Assets $ Owners’ equity and liabilities $
Van 3500 Owners’ equity 8000
Equipment 2400 Trade payables (Iqbal) 800
Inventory 800
Bank 2100
8800 8800

 One asset increased (equipment) and one asset decreased (bank, 4500-2400= 2100,
decreased because equipment was paid from the bank account).
EXAMPLE (TRANSACTION 4- SELLING AN INVENTORY ON CREDIT)
 On the 12th of August, Ramondo sold $400 of inventory for the same prize on credit to Narinder.
Ramondo
Statement of financial position as at 12 August
Assets $ Owners’ equity and liabilities $
Van 3500 Owners’ equity 8000
Equipment 2400 Trade payables (Iqbal) 800
Inventory 400
Trade receivables (Narinder) 400
Bank 2100
8800 8800

 Inventory decreases by $400 as he sold $400 worth of his inventory.

 Trade receivables goes under assets as $400 is owed to Ramondo as he sold $400 worth of
inventory on credit.
EXAMPLE (TRANSACTION 5- BORROWING MONEY)
On the 15th of August, Ramondo obtained a loan for the business of $3000 from Quick Finance Co.
This money was paid directly into the business bank account.
Ramondo
Statement of financial position as at 12 August
Assets $ Owners’ equity and liabilities $
Van 3500 Owners’ equity 8000
Equipment 2400 Trade payables (Iqbal) 800
Inventory 400 Loan (Quick Finance Co) 3000
Trade receivables (Narinder) 400
Bank 5100
11800 11800

 Assets increased by $3000 as this money was put in their bank (2100+3000=5100) directly
from the loan taken from Quick Finance Co.
 Liabilities increased by $3000 as the business now owes $3000 to Quick Finance Co for the
loan taken out.

CHAPTER 2 (UNIT 1): SOURCES AND RECORDING OF DATA

THE DOUBLE ENTRY SYSTEM OF BOOK-KEEPING
Account name
Debit side (Dr) Credit side (Cr)
Year $ Year $
Date Account details Amount Date Account details Amount
(name of other account in (name of other account in
which double entry appears) which double entry appears)

Double entry book-keeping: A system of recording business transactions by making two entries (one
debit entry and one credit entry) for each transaction. Double entry accounts are sometimes referred to
as ledger accounts as a ledger is a book that contains the accounts of the business.

RULES OF DOUBLE ENTRY BOOK-KEEPING

ASSET ACCOUNTS
DEBIT CREDIT
Increases entered on this side Decreases entered on this side
 LIABILITIES ACCOUNTS
DEBIT CREDIT
Decreases entered on this side Increases entered on this side

OWNERS EQUITY ACCOUNTS

DEBIT CREDIT
Decreases entered on this side Increases entered on this side

EXAMPLE 1
Melissa is setting up a small business. On the 1 June 2018, she places $10000 into a business bank
account.
BANK
2018 $ $
1 June Owners’ Equity 10000

Owners’ Equity
$ 2018 $
1 June Bank 10000

 Bank is an asset. She put $10000 into her bank so it increases (assets increase on debt side).
It is called owners’ equity as it is her own personal money or her businesses money placed into
the bank.
 Owners’ equity increases on the credit side.
EXAMPLE 2
On the 3rd of June 2018, the business buys equipment costing $2500 and pays using money in the
bank account.
EQUIPMENT
2018 $ $
3 June Bank 2500

BANK
$ 2018 $
3 June Equipment 2500

 Equipment is an asset. The business buys equipment so they gain an asset. So it increases on
the debit side
 The business buys equipment using their money in their bank. Bank is an asset. It will decrease
as money is going out and being used to buy equipment. Decreases on credit side.
EXAMPLE 3
On the 5th June 2018, the business buys a computer. The computer was purchased on credit from
Mehdi and costs $1000.
COMPUTER
2018 $ $
5 June Mehdi 1000

MEHDI
$ 2018 $
5 June Computer 1000

 Computer is an asset. The business buys a computer so they gain an asset. So it increases on
the debt side.
  The business buys the computer on credit from Mehdi, this is a liability (money owed by the
business to Mehdi). Liability increases as the amount owed to Mehdi increases (on credit side).
EXAMPLE 4
On the 12th of June 2018, the business pays Mehdi the full amount owing from the business bank
account.
BANK
2018 $ 2018 $
1 June Owners’ equity 10000 3 June Equipment 2500
12 June Mehdi 1000

MEHDI
2018 $ 2018 $
12 June Bank 1000 5 June Computer 1000

 Bank is an asset. The business pays Mehdi from their bank account. Amount decreases on
credit side.
 Mehdi is a liability as the business owes them money. Amount will decrease on the debit side
and less money is owed to Mehdi.

ACCOUNTING FOR INVENTORY

Trader: A business organization that aims to make a profit from the buying and selling of goods. No
production takes place.
Example scenario: A business whom buys and sells computers as its main business operation (bought
specifically for resale) is classed as inventory. Inventory is an asset. Businesses whom buy a computer
for office use is not classified as inventory.
There are 4 separate accounts used for inventory transactions. Each account represents a different
inventory movement:
 Purchase Account- for purchases of inventory.
 Sales Account- for sales of inventory.
 Purchases return account- for the return of inventory by the business to original supplier.
 Sales returns account- for inventory returned by a customer to the business.

RECORDING INVENTORY IN DOUBLE ENTRY ACCOUNTS

INCREASES IN INVENTORY DECREASES IN INVENTORY
ACCOUNTS TO BE DEBITED ACCOUNTS TO BE CREDITED
 Purchases  Sales
 Sales returns  Purchases returns
Purchases: Inventory bought by the business either for immediate payment or on credit.
Sales: Inventory sold by the business either for immediate payment or on credit.
Purchases returns: Inventory previously bought by the business returned to the original supplier due
to some problem with the inventory (return outwards).
Sales returns: Inventory previously sold by the business returned by the customer due to some
problem with the inventory (return inwards).
EXAMPLE 5
On the 4th of October 2018, a business purchases $250 of inventory on credit from James.
PURCHASES
2018 $ $
4 Oct James 250
 JAMES
$ 2018 $
4 Oct Purchases 250
 Purchase’s is an asset. The business bought inventory so the business gained inventory.
Increases in debit.
 The inventory is purchased on credit, it is a liability (trade payables), and it is the amount owed
by the business to a supplier. Amount owing increases on the credit side.
EXAMPLE 6
On the 12th of October 2018, the business in example 5 sells $700 of inventory on credit to Hassan.
SALES
$ 2018 $
12 Oct Hassan 700

HASSAN
2018 $ $
12 Oct Sales 700

 Inventory is decreasing because of the sale. We have less stock as we sold some. Inventory is
an asset so it decreases on credit side.
 The inventory is sold on credit. Amounts owed to the business are known as trade receivables
and are assets. The asset is increasing so goes on debit side.
EXAMPLE 7
On the 19th of October 2018, inventory valued at $50 previously purchased from James was returned
because it was damaged.
PURCHASE RETURNS
$ 2018 $
19 Oct James 50

JAMES
2018 $ 2018 $
19 Oct Purchase returns 50 4 Oct Purchases 250

 Inventory bought from James is decreasing because it was returned to original supplier due to
damages. Purchases returns is an asset, therefore decreases in credit.
 Returning inventory to James means the business owes less to James. This is a liability and
therefore decreases in debt side.
EXAMPLE 8
On the 25th of October 2018, Hassan returned $50 of the goods that were sold to him on the 12th
October as they were faulty.
SALES RETURNS
2018 $ $
25 Oct Hassan 50

HASSAN
2018 $ 2018 $
12 Oct Sales 700 25 Oct Sales returns 50

 Asset of inventory is increasing because goods returned by customer. Debit sales return as
value of good returned.
 Trade receivables are an asset. The amount owed by Hassan is reduced by the return of goods
so you credit Hassan’s account.

ACCOUNTING FOR EXPENSE

  Wages and salaries  Advertising costs
 Office expenses  Administration costs
 Heating costs  Rent
 Business rates  Sundry (general expenses)
 Insurance
ACCOUNTING FOR EXPENSES
Accounts to be debited Accounts to be credited
Expense account Bank or cash
All expenses and incomes recorded in their own separate account- unless small and can be grouped
together as sundry or general items.

ACCOUNTING FOR INCOME


 Selling goods  Commission received
 Rent received  Selling services
ACCOUNTING FOR INCOME
Accounts to be debited Accounts to be credited
Bank or cash Income account

RECORDING EXPENSES AND INCOME IN THE DOUBLE ENTRY ACCOUNTS

EXAMPLE 9
On the 16th of November 2018, a business receives $500 relating to rental income by bank transfer.
On the 18th of November 2018, the business makes a payment from the bank of $150 for insurance.
RENT RECEIVED
$ 2018 $
16 Nov Bank 500

INSURANCE
2018 $ $
18 Nov Bank 150

BANK
2018 $ 2018 $
16 Nov Rent received 500 18 Nov Insurance 150

 Income received recorded on credit side. And however it was paid cash or bank, will be
recorded in bank on the debit side.
 Expense paid for insurance recorded on debit side. And however it was paid cash or bank, will
be recorded on credit side.

ACCOUNTING FOR DRAWINGS

Drawings: Assets (money or other resources) that the owner withdraws from the business for
personal use. It is part of owners’ equity. Decrease in debit, increase in credit.
ACCOUNTING FOR DRAWINGS
Account to be debited Account to be credited
Drawings Relevant asset account (cash)

EXAMPLE 10
 On the 25th of August 2018, the business owner takes $50 from the business bank account for her
own personal use.
BANK
$ 2018 $
25 Aug Drawings 50

DRAWINGS
2018 $ $
25 Aug Bank 50
 Money taken from business bank account is a reduction. Bank is asset, so decreases in credit
side.
 Drawings are a reduction in owner’s investments, drawings decreases on debit side.

BALANCING ACCOUNTS
Balance (of an account): The overall difference between the total on the debit side and the total on
the credit side of an account at a point in time.
Follow these steps to balance an account where there is an outstanding balance:
 Find the total of each column.
 Calculate the difference between the totals. This will be the balancing figure of the account.
 Add the balancing figure to the correct columns to make the totals the same. The balancing
figure is entered in the accounts as the “balance to be carried down”. This is the amount
needed to make the totals of the columns equal and is no he balance on the account.
 The actual balance on the account, known as the “balance to be brought down” is the balance
on the account at the start of the next accounting period.
EXAMPLE 11
In the Alex account, it is a trade receivable account. In the account of Alex, there are a number of
entries both sides of the account. Balance the account of April.
ALEX
$ $
6 Apr Sales 15 7 Apr Sales return 21
18 Apr Sales 67 12 Apr Bank 66
24 Apr Sales 28

ALEX
$ $
6 Apr Sales 15 7 Apr Sales return 21
18 Apr Sales 67 12 Apr Bank 66
Sales 28 30 Apr Balance to be carried 23
24 Apr
down
110 110
1 May Balance to be brought 23
down
 1) Total of debit column = $110 Total of credit column = $87.
 2) The balancing figure is $110-$87 = $23.
 3) Enter balancing figure on credit side as we need to add $23 to make the side equal to $110.
 4) Enter the balance to be brought down at the start of the next accounting period (1 May) on
the debit side (opposite side).
 Balance to be carried down can be written as “balance c/d”.
 Balance to be brought down can be written as “balance b/d”.
 EXAMPLE 12
In both sales account and the account of Luis, there are entries on only one side of the account.
Balance the accounts for the month of April.
SALES
$ $
1 Apr Dylan 118
18 Apr Samuel 93
27 Apr Youssef 325

LUIS
$ $
23 Apr Purchases 118

SALES
$ $
30 Apr Balance c/d 536 1 Apr Dylan 118
18 Apr Samuel 93
27 Apr Youssef 325
536 536
1 May Balance b/d 536

LUIS
$ $
23 Apr Purchases 118 30 Apr Balance c/d 118
1 May Balance b/d 118

INTERPRETING LEDGER ACCOUNTS AND THEIR BALANCES

EXAMPLE 13
BANK
2018 $ 2018 $
1 Jan Balance b/d 165 11 Jan Ester 88
5 Jan Sundry sale 110 24 Jan Insurance 120
15 Jan Commission received 84
26 Jan Adrian 90

BANK
2018 $ 2018 $
1 Jan Balance b/d 165 11 Jan Ester 88
5 Jan Sundry sale 110 24 Jan Insurance 120
15 Jan Commission received 84 30 Jan Balance c/d 241
26 Jan Adrian 90
449 449
1 Feb Balance b/d 241
Account balances can always be interpreted in following ways:
 Cash balance (always debit balance) = how much cash the business has.
  Debit balance on bank account = amount the business has in its bank account.
 Credit balance on bank account = amount the business owes to the bank.
 Credit balance on sales account = sales made for a period.
 Debit balance on purchase account = purchases made for a period.
 Debit balance on personal account = amount owed to business from customer.
 Credit balance on personal account = amount the business owes supplier.
Personal accounts: Accounts of other businesses or people that the business has a financial
relationship with.

MAKING TRANSFERS TO FINANCIAL STATEMENTS

EXAMPLE 14: A business ends its year on 31st December. The balance of the sales account for the
year is $198000. Show how this balance is transferred to the income statement in the ledger account
for sales.
SALES
$ $
31 Dec Transfer to income statement 198000 31 Dec Balance b/d 198000

EXAMPLE 15: A business ends its year on 31st December. The balance of the wages account for
the year is $39500. Show how this balance is transferred to the income statement in the ledger
account for sales.
WAGES
$ $
31 Dec Balance b/d 39500 31 Dec Transfer to income statement 39500
 With sales, it is credited to empty out the account as learnt previously.
 With wages, it is an expense, it will be debited to be emptied out as learnt previously.

LEDGER IS SUBDIVIDED INNTO THREE SEPARATE ACCOUNTS

SALES LEDGER: PURCHASES LEDGER: NOMINAL(GENERAL
Book recording trade Book recording trade payables. LEDGER):
receivables. Contains the Contain the personal accounts Book containing all other
personal accounts of all credit of all credit suppliers of the accounts not found in sales or
customers of the business. business. purchases ledger.
- Trade receivables - Trade payables All other accounts for:
- Assets
- Liabilities
- Owners’ equity
- Income accounts
- Expense accounts

CHAPTER 2 (UNIT 2): BUSINESS DOCUMENTS

TYPE OF BUSINESS DOCUMENTS
Business documents: A document received or issued by a business when a transaction takes place.
It contains information relevant to the transaction. Sometimes referred to as “source documents”.
Business documents are used:
 As the source of information for making entries in the accounts of the business.
 To confirm agreements made between businesses.
 As evidence in the event of a dispute.
Pro-forma documents: Standardized documents used by businesses. It contains details that relate to
all transactions of a certain type.
INVOICE
A document issued by a business when making a credit sale. The business buying the product
receives this document but calls it a purchase invoice. This is a business document which
contains:
 Name and address of business making sale.
 Name and address of the customer.
 Date of sale.
 Details of sale- items, quantities, and prices.
 Carriage and delivery costs.
 Payment conditions- such as trade discounts and discounts for prompt payment.
Trade discounts: A discount given by one business to another business. It is calculated as a
percentage reduction in the invoice quantity. Seen on invoice as percentage, doesn’t appear in double
entry accounts, instead after deducted appears in accounts.
The invoice is issued by K
Sanderson for a sale made
to Stoddard Ltd.
For K Sanderson it is a
sale invoice.
For Stoddard Ltd this is a
purchase invoice.

Total for radiators:

4 x $65 = $260
Total for piping:
25m x $4 = $100
Total before discount:
$260 + $100 = $360
Trade discount:
10% of $360 = $36
Total after trade discount:
$360 - $36 = $324

DEBIT NOTE
A document issued by a business to the supplier when the goods received are unsuitable. Unsuitable
for:
 Wrong quantities received
 Incorrect goods
 Wrong specification (wrong color, size, etc.)
Debit notes contain:
 Name and address of the business (customer)
  Name and address of supplier
 Date
 Details of goods that are not suitable and are being returned
 Value of unsuitable goods
Debit note is a request by the customer for a credit note to be issued by the supplier for unsuitable
goods received by the customer. Doesn’t generate a transaction in the double entry accounts. Supplier
has to agree to accept the debit note and allow the goods to be returned before any entries can be
made in the double entry accounts.

Debit note issued by

K Sanderson as a
result of receiving
unsatisfactory goods
from Nanchester
Plumbing Supplies.

Total of debit note:

$150 + $105 = $255

CREDIT NOTE
Credit note: Document issued by the
business to a customer when goods are
returned to the business because they are
unsuitable. When accepting returned
goods because they are unsuitable, the
supplier will issue a credit note to the
customer. Can also be used when overcharging a customer. Information found on credit note
includes:
 Name and address of the business (business issuing credit note)
 Name and address of the customer (where the credit note is being sent)
 Date
 Details of goods being returned by the customer to the business
 Value of credit note
Can be printed in red so they look different to invoices.

STATEMENT OF
ACCOUNT
A document issued to all
customers still owing money to
the business. It contains
details relating to the
transactions taking place
between the business and the
customer.
A statement of account will
normally show:
 Name and address of
the business
 Name and address of
the customer
 Relevant transactions
and dates for the month
 Balance owing by the
customer at the start
and end of the month
 Payments received
from customer during
the month
 Details of invoice (from sales) sent to the customer during the month
 Details of any credit notes agreed.
The balance owing to the business by Levinson Ltd at 31 May is $420 - $300 = $120.

CHEQUE
A written document authorizing payment from the bank account of a business to another person or
business. Pre-printed cheques contain:
 Name and address of bank used by the business.
 Account details of business- sort code (number identifying the ranch of bank which the business
has an account) and the account number (which is unique to a business).
 Name of the business.
To make a payment, the business adds the following details to a cheque before it is passed
onto the payee:
 Name of payee.
 Amount to be paid (written in both numbers and words).
 Date of payment.
  Signature of payer (the business or person making the payment).
Cheque counterfoil: Part of the cheque which is kept by the business as a record of the payment
made by cheque. It may also be referred to as a “cheque stub”. Left hand portion of cheque- cheque
can be detached, leaving counterfoil attached to the book. The people authorized to sign cheques are
called “signatories”.
Payer: The person/business making a payment to another (Drawer).
Payee: The person/business receiving payment from the business (Drawee).
Payee:
K Sanderson
Payer:
J B Stroish
K Sanderson would
make the following
entries in his double
entry accounts:
Bank would be
debited by $100
J B Stroish credited
by $100

PAYING-IN SLIP
A document used to deposit funds (cheques or notes and coins) into a bank account. They are pre-
printed and can be issued by businesses banks to be used for customers. There are 2 ways in which
the business records that money has been deposited into the bank account:
 Business receives stamped copy of paying-in slip from bank.
 Complete the counterfoil attached to the paying-in slip book.

RECEIPT
A written document issued by a business when it
receives a payment as proof of receiving money.
Can either be printed by machine (cash till/register) or it may be handwritten signed by the business
receiving the money. Receipts normally contain:
 Amount received
 Date of payment
 What the payment was for (goods or services supplied)

BANK STATEMENT
A document issued by the
bank of the business showing
al bank transactions for a
period of time.
(Credit = Cr) Means the bank
owes K Sanderson.
K Sanderson has taken out
more from the bank than he
has in his account (Debit –
Dr), this means K Sanderson
now owes the bank money.
Amount in the bank at start of
month: $829 - $240 = $589
At end of month balance
withdrawn: $58

BANK DOCUMENTS AS SOURCES OF INFORMATION

BUSINESS DOCUMENT ACCOUNT TO BE DEBITED ACCOUNT TO BE CREDITED
(Sales) invoice Credit customer Sales
(Purchase) invoice Purchases Credit supplier
Cheque counterfoil Account related to payment Bank
Cheque received Bank Credit customer
Credit note Sales return Credit customer
Receipt Bank or cash Account related to receipt
Paying-in slip Bank Cash or credit customer
Bank statement Bank (if money received) Bank (if money paid out)

CHAPTER 2 (UNIT 3): BOOKS OF PRIME ENTRY

Book of prime entry: A book, or journal, in which transactions are first recorded before being posted
to the double entry accounts.
Posting: The process of transferring information from books of prime entry to the correct double entry
account.
Business documents provide information for the books of prime entry. Information from the books of
prime entry is then posted as entries in the ledger accounts.
Books of prime entry also known as journals or books of original entry.
Books of prime entry Type of transaction recorded in the book
Cash book All cash and bank transactions
Petty cash book All small items of cash payment
 Sales journal All credit sales of goods
Purchases journal All credit purchases of goods bought for resale
Sales return journal Sales return of goods previously returned
Purchases return journal Purchase returns of goods previously purchased
General journal Any transaction not covered by the other journals

Abbreviation for this note ONLY:

Book of prime entry = BOPE

Advantages of using BOPE:

 Totals are posted from the books of prime entry instead of each individual entry (means double
entry accounts used less frequently and are easier to read as a result).
 The books of prime entry provide a back-up to information contained in the double entry
accounts. Useful when records are missing.
 Responsibility for maintaining the financial records can be delegated to different workers. Each
person maintains a different book of prime entry.
Cash book: A combined cash and bank account which records all transactions involving payment and
receipts of money. Has 2 debit and 2 credit columns- one each for cash and for bank. It is the only
BOPE that is also a double entry account (2 accounts, in reality).
Electronic bank transfers methods:
 Direct debits
 Standing orders
 Bank transfers
 Credit transfers
EXAMPLE 1:
For April 2018, these cash and bank transactions are made.
1 April Balances are as follows: Cash in hand $102, Cash in bank $1190
8 April Payment of $200 by cheque to Emma
10 April Cash sales of $89 paid for by cheque
12 April Cheque received from Kashi for $315
15 April Cash paid for advertising $95
The cash book appears as follows:
CASH BOOK
CASH BANK CASH BANK
2018 $ $ 2018 $ $
1 Apr Balance b/d 102 1190 8 Apr Emma 200
10 Apr Sales 89 15 Apr Advertising 95
12 Apr Kashi 315

Update the cash book by entering the following transactions:

19 April Cash amount of $45 withdrawn from bank for business use.
23 April Payment of $178 by cheque to Jayden.
28 April Electronic transfer made from business bank of $100 to NW Electricty Ltd
Balance the cash book at the end of the month. Stating the closing balances.
The cash book entries are completed by posting into appropriate columns. This depends on whether
the transaction involves money being received (debit), or money paid out (credit).

CASH BOOK
CASH BANK CASH BANK
2018 $ $ 2018 $ $
1 Apr Balance b/d 102 1190 8 Apr Emma 200
10 Apr Sales 89 15 Apr Advertising 95
12 Apr Kashi 315 19 Apr Cash 45
19 Apr Bank 45 23 Apr Jayden 178
28 Apr NW Electricity 100
30 Apr Balance c/d 52 1071
147 1594 147 1594
1 May Balance b/d 52 1071
The transaction on 19 April requires a debit and credit entry as it is a movement between holding cash
in bank and holding cash in hand.

CASH DISCOUNTS
A reduction in the amount owing on a credit transaction to encourage prompt payment. Don’t require
that payment is made in cash. It is just the name to distinguish it from trade discount. Trade discounts
are reductions in amounts owing offered usually between businesses in same industry (don’t appear in
double entry). Cash discounts do.
Type of cash discount Description
Discount allowed Offered by the business to its credit customers
Discount received Received by the business from its credit suppliers

EXAMPLE 2:
A business sells $480 of goods to Jacob and offers a 2.5% discount if payment is received within 2
weeks. The business has also purchased goods on credit for $800 from Gloria and is offered a
discount of 1.25% if payment is made within 2 weeks.
Both transactions are settled within the 2 week period. Calculate the amount received from Jacob and
the amount paid to Gloria.
The amount received from Jacob is $480 less 2.5% The business is owed $480 but
=2.5% of $480= $12 receives $468 in full settlement. The
difference represents the discount
=$480-$12=$468 allowed by the business.
The amount paid too Gloria is $800 less 1.25% The business owes $800 but pays
$790 in full settlement. The difference
=1.25% of $800=$10
represents the discount received by
=$800-$10=$790 the business.

POSTING DISCOUNTS IN THE DOUBLE ENTRY ACCOUNTS

Discounts allowed: A reduction in the invoice total offered by a business to its credit customers to
encourage early settlement of invoices.
Discount received: A reduction received in the amount a business owes to the credit supplier of the
business to encourage early settlement.
 JACOB DISCOUNT ALLOWED
$ $ $ $
Sales 480 Bank 468 Jacob 12
Discount 12
allowed

GLORIA DISCOUNT RECEIVED

$ $ $ $
Bank 790 Purchase 800 Gloria 10
Discount 10
received

THREE COLUMN CASH BOOK

Includes additional column on the debit and credit sides to be used for showing cash discounts. A cash
book with no column for discounts is referred to as a two-column cash book.
CASH BOOKS
DISCOUNT DISCOUNT
CASH BANK CASH BANK
ALLOWED RECIEVED
$ $ $ $ $ $
Jacob 12 468 Gloria 10 790

EXAMPLE 3:
1 April Balances brought forward: Cash $175, Bank $290 overdrawn
3 April Paid Ling by cheque $400 in full settlement for $420 owing
8 April Paid $50 cash into bank account
15 April Received cheque from Cheng for $250 in full settlement of sale for $275
22 April Received cheque of $90 from Hosna in settlement of sales worth $95
25 April Cash withdrawn from bank for business use $30
29 April Paid Kalim by bank transfer for $210 in full settlement of sales invoice totaling $225
(+)CASH BOOK(-)
DISCOUNT CASH BANK DISCOUNT CASH BANK
$ $ $ $ $ $
2018 2018
1 Apr Balance 175 1 Apr Balance 290
b/d b/d
8 Apr Cash 50 3 Apr Ling 20 400
15 Cheng 25 250 8 Apr Bank 50
Apr
22 Hosna 5 90 25 Cash 30
Apr Apr
25 Cash 30 29 Kalim 15 210
Apr Apr
30 Balance 540 30 Balance 155
Apr c/d Apr c/d
30 205 930 35 205 930
1 May Balance 155 1 May Balance 540
b/d b /d
Discount columns are totalled but not balanced. The totals for the discounts columns are posted to the
accounts for discounts allowed and discounts received.
The balances of the cash book at 30 April: Cash $155, Bank $540 credit.
DISCOUNT ALLOWED DISCOUNT RECEIVED
$ $ $ $
Total of April 30 Total of April 35

PETTY CASH BOOK

A BOPE used for small items of payments by cash. The opening balance on the petty cash book is
known as the float.
Imprest system: A system of maintaining a petty cash book by always ensuring the opening balance
of the petty cash book is the same amount for each time period.
Float: The amount of petty cash available at the start of the month.
EXAMPLE 4:
The total for each category of expenses is debited to the double entry account for each category of
expenses. The $67 which is debited to the petty cash book to restore the float comes from the credit
side of the main cash book.
Total to be refunded as part of the imprest system: $67

SALES JOURNAL
The BOPE used to record credit
sales made by the business. Only
includes the sales of goods which
were purchased by the business
specifically for resale. E.g. sale of
vehicle on credit which has been
used by the business would not
appear in sales journal. When
business makes credit sale of
goods, sends invoice to customer
(used to make record of sale in
sales journal).
EXAMPLE 5:

PURCHASE JOURNAL
The BOPE used to record credit purchases of goods for resale. Only includes items specifically bought
for resale. Business receives purchases invoice from supplier when making credit purchase.
Information found on invoice is entered into purchases journal.
EXAMPLE 6:
 SALE
S RETURN JOURNAL
The BOPE used to record sales returns to the business by credit customers. A business allowing a
customer to return goods issues a credit note. Credit notes are recorded in the sales returns journal.
EXAMPLE 7:
PURCHASES RETURNS JOURNAL
The BOPE used to record purchases return where businesses return goods to suppliers. A purchase
return will be authorised by the receipt of a credit note from the original supplier. When credit note
received, an entry is made in the purchase return journal.
EXAMPLE 8:

GENERAL JOURNAL
The BOPE used to record transactions not found in any other journals, sometimes referred to as the
journal.
GENERAL JOURNAL
Journal entry Dr Cr
Year $ $
Date Name of account to be debited Amount
Name of account to be credited Amount
Narrative- a brief explanation of the transaction entered above.
 Bought asset on credit

EXAMPLE 10:

EXAMPLE 11: