1. Recording financial transactions
UNIT THREE
Recording financial transactions

2. THE ACCOUNTING EQUATION
By adding up what the accounting records say belongs to a business and deducting what they say the business owes, you can identify what the business is worth according to the accounting records.
The whole of financial accounting is based upon this very simple idea.
It is known as the accounting equation.
It can be explained as follows;

3. THE ACCOUNTING EQUATION
If the business is to be set up and start trading, it will need resources.
Assuming it is the owner of the business who supplied all of the resources.
This can be shown as :
Resources supplied by the owner = Resources in the business

4. THE ACCOUNTING EQUATION CONTINUED
Resources supplied by the owner = Resources in the business
The amount of resources supplied by the owner is called capital.
The resources that are in the business are called assets.
This means if the owner has supplied all the resources ,the accounting equation can be shown as Capital = Assets

5. THE ACCOUNTING EQUATION CONTINUED
Usually however ,people other than the owner have supplied some of the assets.
Liabilities is the name given to the amounts owing to these people for these assets.
The accounting equation changes to :
Capital + Liabilities = Assets
The two sides of the equation will have the same totals.

6. THE ACCOUNTING EQUATION
Assets = Capital + Liabilities
Alternatively
Resources: what they are = Resources :who supplied them
(Assets) = (Capital + Liabilities)

7. THE ACCOUNTING EQUATION REARRANGED
The equation can be rearranged so as to enable the calculation of missing figures:
Assets = Capital + Liabilities
Capital = Assets – Liabilities
Liabilities = Assets – Capital

8. THE ACCOUNTING EQUATION CONTINUED
Assets consists of property of all kinds, such as buildings,machinery,stocks(inventories) of goods and motor vehicles owned by the business.
Other assets include debts owed by customers and the amount of money in the organisation ‘s bank account.
Liabilities include amounts owed by the business for goods and services supplied to the business and for expenses incurred by the Business that have not yet been paid for.

9. THE ACCOUNTING EQUATION CONTINUED
They also include funds borrowed by the business.
Capital is often called owner’s equity or net worth.
It comprises the funds invested in the business by the owner plus any profits retained for use in the business less any share of profits paid out of the business to the owner.

10. THE BALANCE SHEET
The accounting equation is expressed in a financial position statement or Balance sheet.
Listing all the assets on one side and the capital and liabilities on the other.

11. EXAMPLE 1 INTRODUCTION OF CAPITAL
On 1 MAY R. Banda started a business and deposited K60,000 into a bank account opened specially for the business.
Show his statement of financial position as at this date:
Effect of the transaction is to increase the asset called bank balance by K60,000 and the capital by K60,000.

12. EXAMPLE 1 INTRODUCTION OF CAPITAL
R. Banda ‘s Statement of financial position as at 1 May 2014 Assets: K Assets :Cast at bank 60,000 Capital 60,000

13. EXAMPLE 2 PURCHASE OF AN ASSET BY CHEQUE
On 3 May 2014 R.Banda buys a small shop K 32,000 paying by cheque .
Show his statement of financial position as at this date:
The effect of this transaction on the statement of financial position is that the asset cash at the bank is decreased by K32,000 and is replaced by a new asset shop worth K32,000;

14. EXAMPLE 2 PURCHASE OF AN ASSET BY CHEQUE
R.BANDA Statement of financial position as at 3 May 2014 Assets: K Shop 32,000 Cash at bank 28,000 Total assets 60,000 Capital 60,000

15. EXAMPLE 3: PURCHASE OF AN ASSET AND INCURRING OF A LIABILITY
On 6 May R.Banda buys some goods for K7,000 from H.Mboozi and agrees to pay for them some time within the next two weeks.
Show his statement of financial position as at this date:
The effect of this is that a new asset ,inventory is acquired and a liability for the goods is created.
A person to whom money is owed for the goods is known in accounting language as a creditor and is described in the statement of financial position as an account payable.
The statement of financial position is as shown below;

16. SOLUTION EXAMPLE 3 R .Banda Statement of financial position
as at 6 May 2014
Assets: K
Shop ,000
Inventory ,000
Cash at bank ,000
Total assets ,000
Capital and liabilities:
Capital ,000
Liabilities:
Accounts payable ,000
Total Capital and Liabilities ,000

17. EXAMPLE 4 SALE OF AN ASSET ON CREDIT
On 10 May 2014 goods which cost K 600 were sold to J.Banda his son for the same amount the money to be paid later.
The effect of this transaction is a reduction in the amount of goods held , i.e. inventory, and the creation of a new asset.
A person who owes the business money is known in accounting language as a debtor ,and is described in the statement of financial position as an account receivable.
The statement of financial position is as shown below:

18. SOLUTION EXAMPLE 4 R Banda Statement of financial position
as at 10 May 2014
Assets: K
Shop
32,000
Inventory (7, )
6,400
Accounts receivable
600
Cast at bank
28,000
67,000
Capital and liabilities:
Capital
60,000
Liabilities:
Accounts payable
7000

19. EXAMPLE 5:SALE OF ASSET FOR IMMEDIATE PAYMENT
On 13 May 2014,goods which cost K400 were sold to D.Phiri for the same amount.
Phiri paid for them immediately by cheque.
The affect of the transaction is that one asset inventory is reduced while another asset cash at bank is increased by K400.
The statement of financial position is as shown below;

20. SOLUTION EXAMPLE 5 R.Banda Statement of financial position
as at 13 May 2014
Assets: K
Shop
32,000
Inventory (7, )
6,000
Accounts receivable
600
Cast at bank(28, )
28,400
67,000
Capital and liabilities:
Capital
60,000
Liabilities:
Accounts payable
7000

21. EXAMPLE 6 PAYMENT OF LIABILITY
On 15 May 2014 R.Banda pays for K3,000 to H.Mboozi in part payment of the amount owing.
The effect of the transaction is that the asset of cash at bank is therefore reduced, and the liability to the creditor is also reduced.
The statement of financial position is as shown below;

22. SOLUTION EXAMPLE 6 R.Banda Statement of financial position
as at 15 May 2014
Assets: K
Shop
32,000
Inventory
6,000
Accounts receivable
600
Cast at bank (28, )
25,400
64,000
Capital and liabilities:
Capital
60,000
Liabilities:
Accounts payable (7,000 -3,000)
4000

23. EXAMPLE 7 COLLECTION OF AN ASSET
J.Banda who owed R.Banda K600 makes a part payment of K200 by cheque on 31 May 2014.
The effect of the transaction is to reduce one asset account receivable and to increase another asset cash at bank.
The statement of financial position is as shown below;

24. SOLUTION EXAMPLE 7 R.Banda Statement of financial position
as at 31 May 2014
Assets: K
Shop
32,000
Inventory
6,000
Accounts receivable
400
Cast at bank (28, )
25,600
Total Assets
64,000
Capital and liabilities:
Capital
60,000
Liabilities:
Accounts payable
4000
Total capital and liabilities

25. EXAMPLE 7 MORE DETAILED STATEMENT OF FINANCIAL POSITION
B.Blake
Statement of financial position
as at 31 May 2014
Assets K
Non -Current assets
Shop
32,000
Current assets
Inventory
6,000
Accounts receivable
400
Cast at bank
25,600
Total Assets
64,000
Capital and liabilities:
Capital
60,000
Current Liabilities:
Accounts payable
4000
Total capital and liabilities

26. EQUALITY OF THE ACCOUNTING EQUATION
It can be seen that every transaction has affected two items.
Sometimes it has changed two assets by reducing one and increasing the other.
In other cases it has different effects.
The accounting equation has held true throughout the examples ,and it always will.

27. THE DOUBLE ENTRY SYSTEM
The double entry system of accounting is characterised by the following features:
Each transaction requires two entries to be made
Each transaction requires
One debit entry
One credit entry.
For each transaction this means that a bookkeeping entry will have to be made to show an increase or decrease of one item and another entry to show the increase or decrease of the other item

28. THE DOUBLE ENTRY SYSTEM
Instead of constantly drawing up statements of financial position after each transaction ,what we have instead is the double entry system.
The basis of this system is that the transactions which occur are entered in a set of accounts within the accounting books.
An account is a place where all the information referring to a particular asset or liability or to capital is recorded.
Thus there will be an account where all information relating to specific transactions will be entered.

29. THE ACCOUNTS FOR DOUBLE ENTRY
Each account should be shown on a separate page in the accounting books.
The double entry system divides each page into two halves.
The left hand side of each page is called the debit side.
While the right hand side is called the credit side
The title of each account is written across the top of the account at the centre.
The layout of a page of an accounts book can be shown as follows:

30. THE ACCOUNTS FOR DOUBLE ENTRY

31. THE ACCOUNTS FOR DOUBLE ENTRY
You describe the entries in the accounts by saying something like debit account X with Kz and credit account y with KZ inserting the names of the accounts and the actual amount in place of x , y and z.
So for example if you paid K1,00 by cheque for a kettle, you could say debit the kettle account with K100 and credit the bank account with K100.
The debit is in the Kettle account and credit in the bank account.

32. THE ACCOUNTS FOR DOUBLE ENTRY
Kettle account K 10
Bank account

33. RULES FOR DOUBLE ENTRY BOOKKEEPING
The rules for double entry bookkeeping are outlined in the following table:

34. RULES FOR DOUBLE ENTRY BOOKKEEPING
The double entry rules for liabilities and capital are the same, but they are the opposite of those for assets.
Looking at the accounts the rules will appear as:

35. RULES FOR DOUBLE ENTRY BOOKKEEPING
Capital account
Decreases
Increases - +
Any asset account
Any liability account

36. FULL FORMAT OF AN ACCOUNT
FULL NAME OF THE ACCOUNT
Date of
Details
Amount
Transaction
name
In K
in K of
the
account
where
other
transaction
is entered

37. FULL FORMAT OF AN ACCOUNT
In a real business , at least a full page would be taken for each account in the accounting books.
However, as we do have enough space in the slides to put each amount on a separate page, accounts will be listed under each other.

38. EXAMPLE 1
The owner starts the business with K10,000 in cash on 1 August 2014.
The effect of this transaction are as follows

39. EXAMPLE 1 Effect Action 1. Increases the asset of cash
Debit the cash account
2. Increases the capital
Credit the capital account

40. SOLUTION EXAMPLE 1 Debit CASH ACCOUNT Credit 2014 $ 1 August Capital
1 August
Capital
10,000
CAPITAL ACCOUNT
Cash

41. EXAMPLE 2
A van is bought for K4,500 cash on 2 August 2014.
The effect of this transaction are as follows

42. EXAMPLE 2
Effect
Action
1. Increases the asset of van
Debit the cash account
2. Decreases the asset of cash
Credit the cash account

43. SOLUTION EXAMPLE 2 VAN ACCOUNT 2014 K 2 August Cash 4,500 CASH ACCOUNT
2 August
Cash
4,500
CASH ACCOUNT
Van

44. EXAMPLE 3
Fixtures (e.g. shelves) are bought on credit from Shop Fitters for K1,250 on 3 August 2014.
The effect of this transaction are as follows

45. EXAMPLE 3 Effect Action 1. Increases the asset of fixtures
Debit the fixtures account
2. Increases the liability to Shop Fitters
Credit the Shop fitters account

46. SOLUTION EXAMPLE 3 FIXTURES ACCOUNT 2014 £ 3 August Shop fitters 1,250
3 August
Shop fitters
1,250
SHOP FITTERS ACCOUNT
Fixtures

47. EXAMPLE 4
Paid the amount owing to Shop Fitters in Cash on 17 August 2014.
The effect of this transaction are as follows

48. EXAMPLE 4 Effect Action 1. Decreases the liability to shop fitters.
Debit the Shop Fitters account
2. Decreases the asset of cash
Credit the cash account

49. SOLUTION EXAMPLE 4 SHOP FITTERS ACCOUNT 2014 K 17 August Cash 1,250
CASH ACCOUNT
Shop fitters

50. COMBINING ALL TRNSACTIONS
In practice a single account is used for all similar transactions.
Transactions are entered in date order in the accounts.
Once an account is opened you continue making entries in it rather than opening a new account for every entry.
Combining all four of the above transactions the accounts will be shown as follows

51. COMBINING ALL TRANSACTIONS
CASH ACCOUNT
2014 K
1 August
Capital
10,000
2 August
Van
4,500
17 August
Shop Fitters
1,250

52. COMBINING ALL TRANSACTIONS
CAPITAL ACCOUNT
2014 K
1 August
Cash
10,000
VAN ACCOUNT
2 August
4,500
SHOP FITTERS ACCOUNT
17 August
1,250
3 August
Fixtures
FIXTURES ACCOUNT
Shop fitters

53. COMPREHENSIVE EXAMPLE
Write the following transactions in the books of L.Moyo
2014
July 1
Started business with K5,500 in bank
July 2
Bought stock for resale on credit for K 540 from C. Lungu
July 5
Sold goods on credit for K450 to N.Banda
July 6
Paid rent on office premises by cheque for K450
July 10
Withdrew K800 from bank for use in cash till
July 14
Sold goods for K180 cash
July 22
Paid insurance in cash K45
July 23
Goods returned to us by N.Banda for K180
July 27
Bought delivery van on credit from Toyota (Z) Ltd for K2,500
July 31
Paid sundry expenses K67 cash

54. SOLUTION COMPREHESIVE EXAMPLE
Capital Account
2014 K
July 1
Bank
5,500
Bank Account
2014 K
Jul 1
Capital
5,500
Jul 6
Rent
450
Jul 10
Cash
800

55. SOLUTION COMPREHESIVE EXAMPLE
Purchases Account
2014 K
Jul 2
C .Lungu
540
Sales Account K
2014
Jul 5
N.Banda
450
Jul 14
Cash
180
N . Banda Account
2014 K
Jul 5
Sales
450
Jul 23
Returns inwards
180

56. SOLUTION COMPREHESIVE EXAMPLE
C.Lungu Account
2014 K
July 2
Purchases
540
Rent Account
2014 K
Jul 6
Bank
450
Cash Account
2014 K
Jul 10
Bank
800
Jul 22
Insurance 45
Jul 14
Sales
180
Jul 31
Sundry expenses 67

57. SOLUTION COMPREHESIVE EXAMPLE
Returns inwards Account
2014 K
Jul 23
N .Banda
180
Insurance Account
2014 K
Jul 22
Cash 45

58. SOLUTION COMPREHESIVE EXAMPLE
Toyota (z) Ltd Account
2014 K
Jul 27
Van
2,500
Van Account
2014 K
Jul 27
Toyota(Z) Ltd
2,500
Sundry expenses Account
2014 K
Jul 31
Cash 67

59. ASSIGNMENT 2
Write up the following transactions in the books of K Crummy:
2014
March 1
Started business with K3,500 cash
March 2
Paid K2,500 in business bank account
March 4
Bought stock on credit for K560 from L Hill and K240 from M Miller
March 9
Returned goods to M Miller worth K100
March 13
Bought motor vehicle for K1,200 paying by cheque
March 19
Paid the following expenses by cash: Wages K85 and Advertising K28
March 23
Bought office equipment on credit from Supplies Warehouse for K2,500
March 26
Sold stock on credit to R Rollo for K345
March 28
Sent cheque to L Hill for K560
March 30
Received K250 cash from R Rollo
March 31
Took office equipment worth K500 for personal use