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2. Accounting Cycle Source Documents Record in Daybooks/Journals Post to Ledgers Extract Trial Balance Prepare Financial Statements

3. Posting to Ledgers Lecture Notes 2

4. Posting to Ledgers Posting Before transactions are posted they are recorded in the Books of Original or Prime Entry/Journals The Books of Prime Entry are then used to Post to the Various accounts in the three ledgers: – General Ledgers – Records general transactions – Purchase Ledgers – Records Credit Purchases – Sales Ledgers – Records Credit Sales There are three types of transactions that would occur in the Business

5. Posting to Ledgers Posting There are three types of transactions that would occur in the Business: – Transactions that affect Assets, Capital an Liabilities – Transactions that affect Expenses, Revenue, Assets, Liabilities, and sometimes Capital – Transactions that affect the stock, assets, Liabilities and sometimes Capital Each transactions should be entered the Accounts in the Ledgers using the Double Entry Principle

6. Posting to Ledgers Posting How to identify the double entry effect of a transaction? – Identify the accounts affected the transaction – In order to do so, ask yourself the questions: Who is affected? What is happening? How is happening? Why is this happening? – After identifying accounts post to the accounts within the Ledgers while ensuring that each debit entry is matched by equal corresponding credit or vice-versa.

7. Posting to Ledgers Posting – RULES Debit all ExpensesCredit all Income Debit the Receiver Credit the Giver Debit what Comes InCredit What Goes Out

8. Posting to Ledgers Posting - Example Purchase Motor Vehicle for cash $2m and paid a deposit of $500,000. Purchase goods by credit $20,000 Sold goods for cash $30,000 Sold Goods on credit $26,000 Purchase goods for cash $50,000 Paid rent $50,000 Paid wages $250,000

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10. The Account Format Title of Account Date Details $$ Debit SideCredit Side

11. Stock Adjustments Posting Lecture Notes 2

12. Stock Adjustment Posting Purchases – Increase in Stock Goods purchase for resale are entered in the Purchases Account and not stock account. They are entered on the debit side of the account, whether or not the transaction is for cash or credit. The corresponding entries are made either to the cash or creditor’s account (creditor). Why is goods bought not entered in stock account If goods purchased for resale were entered in the stock account at cost, when they are sold they would have to be entered in the stock account at cost, requiring calculations for each transaction of sale.

13. Stock Adjustment Posting Sales – Decrease in Stock Goods sold for cash or credit are entered in Sales Account. Both cash and credit sales of trading goods are entered on the credit side of the sales account. The corresponding entry if it is a cash sale goes to the debit side of the cash account. A credit sale will require a debit entry to the debtor’s account (credit customer).

14. Stock Adjustment Posting Sales Returns – Return of Stock by Customer Return of sales, are entered in a separate account known as the sales return or returns inward account. The corresponding account if the sales transaction was on credit would be a credit to the debtor’s account. Purchases Returns – Return of Stock to supplier Return of purchases, are entered in the purchases return account or returns outward account. The corresponding account if the purchase was on credit would be a debit to the creditor’s account.

15. Stock Adjustment Posting Other Considerations Purchases and Sales Return accounts are used so as not to offset the transactions in one account and thus reduce our ability to analyze. Cost is defined in relation to the different categories of stock as being that expenditure which has been incurred in the normal course of business in bringing the product or service to its present location and condition. This expenditure should include, in addition to purchase; such costs of conversion as are appropriate to the location and condition.

16. Closing an Account Lecture Notes 2

17. Closing and Account How to Close off the Accounts Add both sides Place the greater of the two sides on both sides Record the difference on the smaller side. Balance (bal.) carried down (c/d) is placed next the balancing figure and balance brought down (b/d) at the bottom figure under the total of the greater side.

18. The Account Format Purchases Account Date Details $$ Credit PurchasesBalance c/d 2,000Cash Purchases 5,0007,000 Balance b/d 15/1/11 31/1/11 01/2/11

19. Closing and Account Accounting Steps Double entry bookkeeping for each transaction or event. Closing of the accounts and bring down the balances. Prepare a trial balance indicating Balance Sheet items and Profit and Loss items. Prepare a Trading and Profit and Loss Account. Prepare Balance Sheet Statement

20. Trial Balance Lecture Notes 2

21. Trial Balance Definition The Trial Balance is a summary of the balances in a double entry system, and is used to check the arithmetic accuracy, and prepare the financial statements. Errors that are not revealed in the Trial Balance:- Errors of Omission – there is neither a debit nor a credit in relation to the transaction. Errors of Principle – the amount is correctly recorded but placed in the wrong class of account.

22. Trial Balance Errors that are not revealed in the Trial Balance:- Errors of Commission - where an amount is correctly recorded but entered in the wrong personal account. Errors of Original Entry - where the transaction is recorded with the wrong amount. Errors of Compensation – here the error on one side is compensated by an error/s of similar amount on the other side. Complete Reversal of Entry – Incorrect posting of the debit and credit of a transaction, that is the debit of the transaction is credited and the credit is debited.

23. Trial Balance Errors that are revealed in the Trial Balance:- Errors in extraction of the Trial Balance. Omission of an account balance. Errors in computation of the balances of the accounts. Non-correspondence of debit and credit. Other Considerations:- In the Trial Balance, the stock usually is of the previous year or the Opening Stock. The value of the stock at the end of the year or at the Trial Balance date is usually given as a note.

24. Trial Balance Other Considerations:- Items or accounts that will always appear on the debit side of the Trial Balance:- – All assets – Debtors – Cash at Bank – Cash in Hand These accounts are also referred to as debit balances, as the debit side is greater than the credit side.

25. Trial Balance Other Considerations:- Those that will appear on the credit side:- – All liabilities – Creditors – Capital – Bank Overdraft These accounts are referred to as credit balances, as the credit side is greater than the debit side. Those accounts with the debit side being equal to the credit side are referred to as zero balances. Such accounts are not placed in the trial balance.

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