Joan Martin

This module is revision for students who are studying Junior Certificate Business Studies and have an interest in studying Accounting for Leaving Certificate as part of their Transition Year course. The student is introduced to and understand: Purpose of accounting records Steps in Accounting Source documents and day books Double-entry bookkeeping and the trial balance Assets, Liabilities, Expenses and Revenue The function of each day book Interpret ledger entries and balances

If you owned a business, what areas do you need to keep track of? Businesses must complete a number of documents before transferring the information to accounts. Can you name some of these documents?

Source Documents What is the purpose of each document? Letter of Enquiry QuotationOrder FormInvoice Debit/Credit Note Delivery Docket Statement of Account

DRCR Accounting Cycle INVOICE Credit Note, Cheques TRIAL BALANCE TRADING ACCOUNT PROFIT & LOSS ACCOUNT BALANCE SHEET Transaction occurs Analysis of transaction Recording of transactions Posting to ledger account Preparation of trial balance Adjustment of balances Preparation of final accounts

Source DocumentsBooks of First Entry Sales invoicesSales Book Credit notes sentSales Returns/ Returns Inwards Book Purchases invoicesPurchases Book Credit notes receivedPurchases Returns/ Returns Outwards Book Lodgement slips, cheques, receiptsCash Book Petty cash vouchersPetty cash book Financial correspondenceGeneral Journal

Accounting is recorded in the following sequence 1.Books of First Entry 2.Ledger Accounts 3.Trial Balance 4.Final Accounts a.Trading Account b.Profit and Loss Account c.Balance Sheet

Books of First Entry The Books of First Entry are the first stage of Accounting for all new businesses. These books are: General Journal Sales Day Book Sales Returns Day Book Purchases Day Book Purchases Returns Day Book Cash Book (Receipts and Payments) Petty Cash Book All transactions are posted twice from the Books of First Entry to the Ledger Accounts. There are 3 Ledgers: Debtors Ledger Creditors Ledger General/Nominal Ledger

Class/Group Discussion Goods/items can be bought or sold on credit or by cash? What does buying on CREDIT mean?

General Journal This Book is used to record entries that cannot be entered in any other Book of First Entry for example opening entries of assets and liabilities at the start of the year. i.e. Purchase of a Fixed Asset Worked Example Martin’s Ltd had the following Assets and Liabilities on 1 st January 2012; Premises €350,000, Land €120,000, Stock €50,000, Bank Overdraft €40,000, Share Capital €480,000 Click to access General Journal questionsClick to access General Journal questions 2012General Journal 1JanPremisesGL€350,000 LandGL€120,000 StockGL€50,000€520,000 Bank OverdraftCB€40,000 Share CapitalGL€480,000€520,000 Assets, Liabilities and capital as on this date

Sales Day Book Goods that are sold on credit are entered in a Sales Day Book There are three money columns, main column is Gross Sales (including VAT) Analysis columns is divided into VAT and Net Sales Entries from the Sales Day Book is used to update the Nominal/General Ledger and Debtors Ledger Worked Example: 1 June Sold goods on credit to J Knox Invoice 1 €5,400 4 June Sold goods on credit to T Reilly Invoice 2 €6,500 Sales Day Book DateDetailsFIn. No.Net Sales 23% Total Sales 1 JuneJ KnoxDL11€5,400€1,242€6,642 4 JuneT ReillyDL22€6,500€1,495€7,995 €11,900€2,737€14,637

Sales Returns Day Book Businesses will issue credit notes to customers when: 1.Goods previously sold are returned due to be faulty or damaged 2.Where prices charged on the original invoices were miscalculated and need to be corrected Worked Example: 5 June J Knox returned goods Credit note 1 €400 8 June T Reilly returned goods Credit note 2 €200 Sales Returns Day Book DateDetailsFCr. No.Net Sales 23% Total Sales 5 JuneJ KnoxDL11€400€92€492 8 JuneT ReillyDL22€200€46€246 €600€138€738

Sales Day Book/Sales Returns Day Book The figures can be transferred to ledger accounts as follows: Sales Day Book Debit side Debtors A/C Credit side VAT A/C Credit Side Sales A/C Sales Returns Day Book Credit Side Debtors A/C Debit Side VAT A/C Debit Side Sales Returns A/C NETVATTOTAL €€€

Purchases Day Book This book records credit purchases Main column is Gross/Total purchases (including VAT) Analysis columns divided into VAT and Net Purchases Information from the Purchases Book is used to update both the Nominal/General Ledger and Creditors Ledger on a monthly basis Worked Example 1 JulyPurchased goods on credit Invoice No. 34 from J. Clarke €3,000 4 JulyPurchased goods on credit Invoice No. 35 from T. Jones €2,400 DateDetailsFIn. No.Net Purchases 23% Total Purchases 1 JulyJ. ClarkeCL134€3,000€690€3,690 4 JulyT. JonesCL235€2,400€552€2,952 €5,400€1,242€6,642

Purchases Returns Day Book Businesses receive credit notes from suppliers when: 1.You have returned goods to the supplier due to damage or faulty 2.When you have been overcharged on an invoice from a supplier Worked Example: 6 JulyReturned goods to J. Clarke Credit Note No. 21 €200 9 July Returned goods to T. Jones Credit Note No. 22 €140 Purchases Returns Day Book Click here to access Day Books questions DateDetailsFCr. No.Net Purchases 23% Total Purchases 6 JulyJ. ClarkeCL121€200€46€246 9 JulyT. JonesCL222€140€32.20€ €340€78.20€418.20

Purchases Returns Day Book Debit Side Creditors A/C Credit Side VAT A/C Credit Side Purchases Returns A/C

Cash Book – Cash Receipts This book records cash receipts and payments Main columns are cash received, payments and balance Analysis columns are Debtors, Cash Sales and more if required Discount allowed in separate column Information from Cash Receipts Book is used to update the Nominal/General Ledger and Debtors ledger on monthly basis Cash Book – Cheque Payments Records cheque payments and bank debits i.e. direct debits, standing orders Main column is cheque amount Analysis columns are Creditors and other payment types Discount received in separate column Information from Cash Payments Book is used to update the Nominal/General ledger and Creditors ledger on monthly basis Cash Book Cash ReceiptsCheque Payments Bank Statements Copy of receipts Lodgements Cheque book Bank Statements Receipts received

Cash Receipts and Payments Book Worked Example Record the following transactions of Smith Ltd using the following headings: Debit Side:Debtors, Sales Credit Side:Creditors, Purchases, Wages 1 April Cash at bank €3,500 1 AprilPurchased goods by cheque (No. 23) €1,450 3 AprilPaid wages by cheque (No. 24) €1,230 5 AprilPaid Clarke Ltd by cheque (No. 25) €1,330 6 AprilCash Sales lodged €4,500 9 AprilPurchased good by cheque (No. 26) € April Received cheque from Holmes Ltd €800 lodged Task: Complete the transactions on the next slide.

Cash Receipts and Payments Book Debit Side Credit Side DateDetailsFBankDebtorsSales 1 AprilCashb/d€3,500 DateDetailsFBankCreditorsPurchas es Wages PurchasesPB€1,450 Wages€1,230

PETTY CASH BOOK What is Petty Cash Book used for? What is a float? Name some items that belong in a Petty Cash Book?

Petty Cash Book Petty cash book operates as an Imprest system, it has a float paid in at the beginning of each month. Records small cash receipts and payments Main columns are bank/cash, receipts and payments Analysis columns are used to group similar payments such as stationery, postage etc. Information from the petty cash book is used to update the Nominal/General Ledger on a monthly basis Worked example: Record the following transactions in the Petty Cash book of Martin Ltd for April 2012, following are column headings: Postage, Canteen, Sundries 1 AprilCash on hand (imprest) €200 3 AprilStamps Voucher No. 1 € April Coffee Voucher No. 2 € AprilCharity donation Voucher No. 3 € April Stamps Voucher No. 4 €1.80 Click here to access Petty Cash Book questions

Solution Martin Ltd Petty Cash Book Petty Cash Book Receipts – Dr Side Petty Cash Book Payments – Cr Side DateDetailsFCash 1 AprilBalanceb/d€200 DateDetailsVoucher No. CashPostageCanteenSundries 3 AprilStamps1€ AprilCoffee2€ AprilCharity3€ AprilStamps4€1.80 Balance€ €200.00€4.80€1.50€5.00

Ledger Accounts Sales Day Book, Sales Returns Day Book, Purchases Day Book and Purchases Returns Day book entries are transferred to the Ledger accounts: Debtors Ledger: these are the accounts of debtors or customer i.e. people who owe the business money. Creditors Ledger: these are the accounts of creditors or suppliers i.e. people the business owe money to.

Double-entry Bookkeeping system In your study of double entry so far, every accounting entry is based on the double-entry principle. There are two aspects to every transaction. The basic rule is: DEBIT – Assets and Expenses CREDIT – Liabilities and Revenue If a business wanted to reduce an asset or an expense – entry on the credit side of asset or expense account. If a business wanted to reduce a liability or revenue – entry on the debit side of the liability or income account. It follows that if all the debit and credits are entered correctly in the ledger at the end of the accounting period the totals of the debits will equal the totals of the credits. These balances are listed in a Trial Balance.

A business will have ASSETS. These are something of value for example: Buildings Motor Vehicles Delivery Vans Equipment Cash Stock (items for resale) Your business will also have LIABILITIES. These are something you owe for example: Loan Bank Overdraft If you sell on credit, you owe money to a Debtor. If you buy on credit, a Creditor owes you money. Is a Debtor an Asset or a Liability? Is a Creditor an Asset or a Liability?

Discussion When a business is starting up it requires Capital and this money is lodged in the Bank. Which of the underlined words is the ASSET and which is the LIABILITY? Explain why?

All transactions can be recorded in 4 different types of accounts: ASSETS – resources owned by a business such as land, buildings, machinery etc. LIABILITIES – these are amounts owed by the business to outsiders such as bank overdraft, long term loans, creditors, capital and owners equity. EXPENSES – these are costs suffered in generating the revenue of a business such as wages, rent, light and heat etc. REVENUE – these are earnings from selling goods and services or other income earned such as bank interest, sales

An account is maintained for every Asset, Liability and every category of expense and revenue. Rules of Entry – Recording transactions affecting Assets, Liabilities and Capital Rule 1 To record an increase in an Asset – Debit the Account To record a decrease in an Asset – Credit the account Asset A/C Rule 2 To record an increase in a Liability – Credit the Account To record a decrease in a Liability – Debit the Account Liability A/C Dr SideCr Side Increase (+)Decreases (-) Dr SideCr Side Decreases (-)Increases (+)

Rule 3 To record an increase in Expense – Debit the Account To record a decrease in Expense – Credit the Account Expense A/C Rule 4 To record an increase in revenue – Credit the Account To record a decrease in revenue – Debit the Account Revenue A/C For every Debit entry there must be a Credit entry of equal amount and vice versa Dr SideCr Side Increases (+)Decreases (-) Dr SideCr Side Decreases (-)Increases (+)

Class Questions/Activities Click to access the Double Entry Quiz Day Books questions Double Entry questions Double Entry worksheet Full questions, all accounts General Journal questions Petty Cash Book questions Layout of Accounts Accounting Worksheets

Each transaction is entered into an account Account Name Debit Side Credit Side Date: Date of transaction Details: Other account involved in the transaction Folio: Reference to where the other account can be found €: Amount of money involved See additional notes on T Accounts and Balancing Accounts and Trial Balance. Layout of Accounts.docx DateDetailsF€DateDetailsF€

Double-entry Bookkeeping With every transaction there is a debit and credit side entry Rule: Debit Receiver Credit Giver Example: 1 st June: Paid insurance by cash €450 See Worksheet for additional Questions Double entry questions.docx DrInsurance AccountCr 1/6Cash€450 DrCash AccountCr 1/6Insurance€450

After all transactions are completed in the ledger accounts, the accounts are balanced off and the closing balances are transferred to a Trial Balance. Trial Balance From a Trial Balance the Final Accounts are prepared: Trading Account Profit and Loss Account Balance Sheet Full questions all accounts.docx DetailsFDebitCredit SalesGL€230,000 BankCB€230,000

Business Documents Transactions Credit Purchases Credit SalesReturns Inwards Returns Outwards Purchases BookSales Book Returns Inwards Book Returns Outwards Book Petty Cash BookGeneral Journal Cash Book Debtors Ledger Creditors Ledger General Ledger Trial Balance Cash Receipts and Payments Unusual Transactions Summary: An Overview