Presentation on theme: "FUNDAMENTALS OF ACCOUNTING I"— Presentation transcript:
1 FUNDAMENTALS OF ACCOUNTING I The Book- Keeping Process& Double entry
2 Chapter Objectives Identify the various types of business records Appreciate the accounting cycleExplain the double entry systemRecord transactions in the various books of original entryDraw sales, purchases and ledger entriesDraw a basic cashbook.
3 IntroductionFinancial information is recorded in a systematic order.The process follows the procedural rules of double entry records, which form the accounting system.Business accounting requires the books of accounts to be maintained in a systematic manner.
4 Accounting cycleThe process of accounting involves records drawn at successive stages and typically involves four levels.Transaction documentsJournals(daybooks)LedgersTrial balanceFinancial statements
5 Transaction documents These are records used to capture and store information about business events.The recording of transactions accurately is vital because usually transactions are too many to be memorized.transaction documents can be used as defense in case of differences in the future.E.g. cash receipts, invoices, goods received notes, salary slip, cheque.Transaction documents capture the following information:Date of transactionDetails of transactionType of transactionReference numberBeneficiary of transactionsMode of paymentExecution officerAuthorization officer
6 JournalsThese are books of original entry in which transactions are captured on a day to day basis.They are day books a.k.a books of prime entry. and they capture transactions directly from the transaction documents.There are four main types as discussed below:Sales journal, purchase journal, general journal, cashbook1) Sales JournalA book of original entry which records credit sales as they are made. Ideally a sales journal should be recorded and summarized on a daily basis.
7 Format of sales journal Sales Day BookDateInvoice NumberDetailsFolioAmountFolio: A key or page reference. Book keeping involves a lot of cross referencing and therefore, a key or page is very useful in this respect.Note: The sales daybook summarizes total credit sales for a given day (period) through the sequence of the invoice numbers.However, it doesn’t summarize the sales and payments by individual credit customers and this is captured in a separate record, the sales ledger.
8 Example 2.2 (Fundamentals of Accounting by D. Wang’ombe) ABC ltd made the following sales on credit as follows.On 1/1/04 Invoice no. 251 sales to Macharia KShs 5,000,000On 2/1/04 Invoice no. 252 sales to Akinyi KShs 2, 000,000On 3/1/04 Invoice no. 254 sales to Mutua KShs 1,000,000On 3/1/04 Invoice no. 253 sales to Abdi KShs 2, 500,000On 5/1/04 Invoice no. 255 sales to Macharia KShs 3,000,000.On 6/1/04 Invoice no. 256 sales to Abdi KShs 4,000,000Required: Draw the sales day book.
9 It records the summary on a daily basis Format of purchase journal 2) Purchases JournalThis is a book of original entry where credit purchases are recorded as they are made.It records the summary on a daily basisFormat of purchase journalPurchases Day BookDateInvoice NumberDetailsFolioAmount
10 Example 2.3 (Fundamentals of Accounting by D. Wang’ombe) ABC bought goods on credit as follows:Invoice no. 005 purchases from Bamburi Ltd. KShs 5, 000, 000 on 1/1/2011Invoice no. 201 purchases from mumias Ltd. KShs 10, 000,000 on 2/1/ 2011Invoice number 352 purchases from Athi River Miners Ltd. KShs 4,000,000 on 3/1/2011Invoice number 020 purchases from Bamburi Ltd. KShs 2,000,000 on 4/4/2011Invoice number 221 purchases from Unga Group Ltd KShs 2,000,000 on 5/ 1/2011Required: Draw the purchases day book
11 3) General Journal (journal proper) records all other transactions not included in the sales or purchases journal.4) CashbookThis is the accounting book which documents both cash receipts and payments.Its objective is to record cash transactions on a daily basis.It contains all the transactions that relate to various cash transactions
12 A collection of books of account. LedgersA ledger is a register having number of pages which are sequentially numbered and each page allocated to a specific account.A collection of books of account.Account is a record of a business event that forms part of the accounting system.An account has two sides:Debit: Left hand sideCredit: Right hand side
13 Thus credit account that receives and debit the account that gives. When account receives benefit is debited while if it gives out a benefit is credited.Thus credit account that receives and debit the account that gives.Accounts may be classified as follows.Personal account-accounts of personsReal accounts-accounts of item, land,building,mvNominal accounts-accounts of income, expense,Ledgers may be classified as followsSales ledger: register of individual a/cs of credit customersPurchase ledger-register of individual a/cs of credit suppliersGeneral ledger/Nominal ledger-register of all other a/cs not captured in purchase and sales ledger.
14 Format of account Double entry rule The rule is: For each and every debit there should be a corresponding credit entry, and for each credit there should be a corresponding debit entry.Each transaction has a duel aspect. Double entry helps in proving the accuracy of book keeping.This implies that each and every transaction is recorded twice. One on the debit side (left) and the other on the credit side (right).DrName of AccountCrDateDetailsFAmount
15 Basic double entry rules of accounts To recordEntry in the accountAssetsAn increaseDebitA decreaseCreditLiabilitiesCapitalRevenueExpenses
16 Accounting for Sales, Purchases, Incomes & Expenses Sales Sales are divided into cash sales and credit salesWhen a cash sale is made,Debit- cash at bank/in handCredit- sales accountWhen a credit sale is made,Debit- trade accounts receivable accounts (an asset)Credit –sales a/cFor both credit and cash sales, a sales account is credited.4/17/2017MIS Notes
17 They can either be cash or on credit PurchasesThey can either be cash or on creditFor cash purchases Debit- purchases a/cCredit –cash at bank/in handFor credit purchases Debit- purchases a/cCredit-trade a/cs payableBoth cash and credit purchases are posted in the purchases a/cNOTE: no entry is made in the stock a/c4/17/2017MIS Notes
18 IncomeThis includes other income besides that generated from trading (sales).E.g. rent received , bank interest, discount receivedEntries to be made when a firm receives such incomeDebit cash in bank /hand a/cCredit particular income a/c(Each income should have its own a/c)Essentially, income increases the value of capital & that’s why we credit incomes a/c just like we credit the capital a/c.4/17/2017MIS Notes
19 Amounts paid for services rendered other than for purchases. ExpensesAmounts paid for services rendered other than for purchases.E.g. postage & stationery, salaries &wages, rent, electricity & telephone bills, motor vehicles, running expensesWhen a firm pays for an expense;Debit- expense a/cCredit- cash/bank a/cEach expense will have its own a/cExpenses are debited because they reduce capital.
20 Return Inwards/Sale Returns These are goods (from previous sales) that have been returned by customers due to various reasons e.g. The goods are of a wrong size, colour, or model, the goods are damaged, the goods are of poor quality e.t.cEffect: The asset of stock is increased by goods returned hence a debit is needed.Open returns inwards accounts and debit it.Credit trade account receivables account if it was a credit sale or credit cash a/c if it was a cash sale since the amount is refunded.4/17/2017MIS Notes
21 Returns Outwards/Purchases Returns These are goods returned to suppliers due to the same reasons given aboveIf purchases made were cash purchases:Debit- cash at bank /in hand (cash refunded by the supplier)Credit- returns outwards amountFor credit purchasesDebit-trade accounts payable to reduce the liabilityCredit –return outwards account.4/17/2017MIS Notes