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Chapter 4 Recording, Summarising and Posting Transactions.

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1 Chapter 4 Recording, Summarising and Posting Transactions

2 Source Documents What type of source documents Petty cash vouchers Cheques Received (lodgements) Cheque Stubs (payments) Wage, salary and payroll records. These records are recorded so that the business knows what they owe people and who owes the business money. These documents are recorded in the books of prime entry. Due to the volume of document they are summarised in the books of prime entry and then posted to the general ledger accounts.

3 Books of Prime Entry Book of prime entryDocuments Recorded Summarised and posted to Sales day bookSales Inv, credit noteReceivable ledger/control ac Purchase day bkPur Inv,credit note recPayables ledger/control ac Cash BookCash paid and recGeneral Ledger Petty Cash BookNotes/coin paid/recGeneral Ledger JournalAdjustmentsGeneral Ledger

4 Question State which book of prime entry the following transactions would be entered into. (a)Your business pays J Sunderland (a supplier) €6,200 (b)You send Hall & Co (a customer) an invoice for €1,320 (c)You receive an invoice from J Sunderland for €1,750 (d)You pay Hall & Co €1,000 (e)Sarti (a customer) returns goods to the value of €100 (f)You return goods to Elphick & Co to the value of €2,400 (g)Sarti pays you €760

5 Posting to the ledger Trace diagram on page 57. Personnel Small Company – small number of people recording accounts Large Company – greater amount of people recording accounts. Separation of departments, segregation of duties to prevent fraud. In other words the person sending out the sales invoices will not be receiving the cheque from the client. The individual could invoice the client and lodge cheque into their own account.

6 Accounts Dept A receivable ledger controller A credit controller A payables ledger controller An assistant accountant A payroll controller A management accountant A financial accountant A financial controller – to supervisor all other accounting staff.

7 Payables ledger controller The petty cash will be managed by the payables ledger controller and must be authorised by the accountant. The payables ledger controller will prepare cheques for payment after checking that: There is a purchase order for the goods The correct goods were received (GRN) They were received in good condition (any faults should be detailed on Delivery note) The invoice is correct – correct quantities, price, vat calculation.

8 Main Books of Prime Entry The main books of prime entry are: Sales day book Purchase day book Journal Cash book Petty cash book

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10 Sales day book The sales day book is a list of all invoices sent out to customers each day. The sales ledger reference is the reference of the page that the customer is on in the sales ledger. In a computerised accounting system this will be an account name, e.g. University of Limerick (as a customer) might have an account called UL02. There may be further analysis columns in the sales day book for difference types of sales. For example, in a car sales showroom might have sales of private vehicles and sales of commercial vehicles under different columns.

11 Sales Returns Day Book When customers return goods due to faults etc, the returns are recorded in the sales returns day book. The sales returns book looks mush the same as the sales book

12 Purchases Day Book Entered into the system once the invoice comes from supplier A debit to the income statement (purchases) and the credit to the payables ledger and payables ledger control account. A computerised system will update all accounts When the supplier statement arrives the supplier account balance can be checked against it. The payables ledger control account must be reconciled to the payables ledger.

13 Purchases Returns day book The purchase returns day book is kept to record credit notes received in respect of goods which the business sends back to its suppliers. The business might expect a credit note from the supplier. In the mean time it might issue a debit note to the supplier, indicating the amount by which the business expects its total debt to the supplier to be reduced. See extract from purchase returns day book Pg 59.

14 Cash Book The cash book is a book of prime entry, used to keep a cumulative record of money received and money paid out by the business via its bank account. Could be money received on the premises such as cash sales and cash or cheques received from debtors. Also recorded in the cash book will be amounts going through the bank which you may not know about until you receive the bank statement. These will be items such as bank transfers, bank charges or interest. The cash book may be recorded in a book on a page divided in two. On the left side (debit ) the income will be recorded and on the right side (credit) the payments will be recorded.

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17 Recording Receipts Batching Transactions When a business receives a large number of receipts, it is often a good idea to split them up into manageable batches of transactions, and to process each batch. Checking Receipts from credit customers against the invoice When money is received from a credit customer, the receipt should be matched with the invoice that the customer is paying. Sometimes, a customer might pay several invoices at the same time.

18 Cash Book The details are entered into the cash book as follows: Date – this is the date the money is received Reference - this might be the name of the customer or might say cash or credit sale Total – This will be the total amount received Debtors – If the receipt is a receipt from a credit customer then the total amount should be entered in to the debtors column. The amount will not be analysed out to sales and VAT as this has been done already when the sale was made. It was recorded already in the sales book and should not be recorded again in the cash book.

19 Cash Book Cash Sales – If the receipt is for cash sales, the total amount received is shown in the Total column. The cash sales column is used to record the amount of the sales excluding VAT. VAT – This column is used to record any VAT received for anything except credit sales invoices. If it is a cash sale the total will go to the total column the vat amount will go to the vat column and the net amount in the cash sale column. The reason for recording VAT on cash sales here as this is the first time the VAT on the sale is recorded. Other - This might be interest on deposit account or bank loan Settlement Discount – This is a memorandum record of the discount allowed for early payment. This is totalled and posted to the discount allowed account in the ledger.

20 Example The following amounts were received on 19 October 2006 (a)Payment of invoice number 69 by BL Lorries (account number S239), total €4,700 (b)Payment of invoice number 70 by MA Meters (account number S314), total €2,820. A settlement discount of €40 was taken by this customer. (c)Payment of invoice number 78 by Tanktop Limted (account number A205), total €3,100. (d)A cash sale of €1,175 including VAT at 17.5% Task: Write up the cash receipts book and total each of the columns.

21 Example DateRefTotalDebtorsCash Sales VATDiscounts Allowed BL Lorries 4,700 MA Meters 2, TankTo p 3,100 Cash Sale 1,1751, ,79510,6201,

22 Balancing the Cash Book If at the beginning of the day there was a cash balance of €900 (debit balance), during the day there were receipts of €2,490 and payments of €2,610 what is the balance at the end of the day? Opening balance 900 Receipts2,490 3,390 Payments(2,610) Closing Balance 780 The balance c/d at the end of the day is €780 and the balance b/f to the following day is €780. see pg 62.

23 Discounts, Rebates and allowanes Trade Discounts- Bulk buying Cash Discounts – Prompt payment Accounting for trade discount A trade discount is a reduction in the amount of money demanded from a customer. A cash discount is an optional reduction in the amount payable by a customer. The decision to take advantage of a cash discount is a financing decision.

24 Accounting for Cash Discount Kathy buys goods from Nick for €1,200. She will receive a discount for payment within two weeks. Show the entries made in Nick’s accounts. Invoice originally entered Dr Debtors €1,200 Cr Sales €1,200 Record Discount Dr Discount Allowed€100 Cr Debtors€100 Record Cash Receipt Dr Cash€1,100 Cr Debtors€1,100

25 Bank Statements The banks statements will be received on a regular basis. The cash book should be reconciled to the bank statement to ensure no monies have gone missing.

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27 Petty Cash Book The petty cash book is the book of prime entry which keeps a cumulative record of the small amounts of cash received into and paid out of the cash float. The cash is used for small purchases such as milk and biscuits, taxi or bus fares. The amount held in cash day one will be the float. At any one time the amount of receipts and cash remaining should total to the original float. The float will be topped up from time to time and the amount it will be topped up by will equal the amount of receipts in the petty cash box. This system is called the imprest system.

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29 Double Entry Bookkeeping Accounting Equation Record from Business Viewpoint Record from Business Viewpoint Assets = Capital + Liabilities Separate Entity Business Entity Concept Dual Effect Ledger Accounting Debit Credit Financial Statements Adjustments Trial Balance Closing Balances

30 Chapter 4 Business is a separate entity from its owner Transactions are always recorded from the business’ point of view

31 The Dual Effect Principle  capital  drawings  income  income  expenditure  expenditure  liability  liability  asset  asset CreditDebit CreditDebit LiabilityAsset Revenue (Income)Expense R LE A

32 The Dual Effect Principle Every transaction has two equal effects. Transactions recorded via ledger accounts A ledger account $NarrativeDate$NarrativeDate Credit (Cr) Name of account e.g. sales, bank Debit (Dr)

33 Summary of steps to record a transaction 1.Identify the two accounts affected 2.Whether accounts are being increased or decreased 3.Decide whether each account should be debited or credited General rule-debit the receiving account -credit the giving account. 4.Check debit = credit Double Entry Bookkeeping

34 Recording Transactions To record a cash payment Dr Expense account Cr Cash Account To record a cash Receipt Dr Cash Account Cr Income/Sales Account

35 Question (a) A cash sale (ie a receipt) of €60. (b) Payment of a rent bill totalling €4,500 (c) Buying some goods for cash at €3,000 (d) Buying some shelves for cash at €6,000 Create the T accounts to record these transactions

36 Credit Transactions Credit Sales Dr Debtors Cr Sales When money is received Dr Bank/Cash Cr Debtors Credit Purchases Dr Purchases/Expenses Cr Creditors

37 Credit Transactions When the money is paid out Dr Creditors Cr Bank/Cash

38 Questions 1.Bought Machine on credit from A, cost €8,000 2.Bought goods on credit from B, cost €500 3.Sold goods on credit to C, value €1,200 4.Paid D (a supplier) €300 5.Collected €180 from E, a customer 6.Paid wages €4,000 7.Received rent bill of €700 from landlord G 8.Paid rent of €700 to landlord G 9.Paid insurance premium €90

39 Question Opening balances: VAT Dr €500, Bank €10,000 Sales on credit to T Wilde €1,000 excluding vat Purchases of goods on credit €500 excluding vat Received advertisement bill from news paper €200 Sold goods Cash €1200 including VAT Purchased Van €4,000 on credit including VAT Paid wages €1,000 out of bank Paid Advertising bill €200 Approved for loan from bank €10,000 lodged to bank Paid rent including VAT €2,000 out of bank account Received refund of VAT from previous return of €500. Draw up T Accounts and balance off.

40 Questions Your business, which is not registered for sales tax, has the following transactions. (a)The sale of goods on credit (b)Credit notes to credit customers upon return of faulty goods (c)Daily cash takings paid into the bank Task For each transaction identify clearly the following: (a)The original documents (b)The book of prime entry for the transaction (c)The way in which the data will be incorporated into the double entry system

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