CHAPTER 4

Recording and summarising transactions

Contents

Recording business transaction1

Recording Sales2

Recording purchases 3

The cash book4

Contents

Cash registers and cash received sheets5

The general ledger 6

Discounts, rebates and allowances 7

Sales tax 8

Posting cash receipts to the general ledger9 Posting cash receipts to the general ledger

Recording business transactions

Text

To record

Source documents

Books of prime entry

Source documents

Invoices Credit notes Petty cash vouchers Cheques received Cheque stubs (for cheques paid out) Wages, salary and employee tax records

Books of prime entry

Discussion

Which of books of prime entry is used if:Your business pays a supplier $5,000?Cash bookYou send a customer an invoice for $1,320?Sales day bookYou receive an invoice from J Sunderland for $1,750Purchase day book

Discussion

You pay Hall & Co $1,000Cash bookSarti (a customer) returns goods to the value of $100Sales returns day bookYou return goods to Elphick & Co to the value of $2,400Purchase returns day book

Summarising source documents

Full processes

Recording Sales

Sales invoices

Sales credit notes

Cheques received

Sales day book

Bank account

Sales tax control account

Cash book

Receivables ledger control accountReceivables ledger

Sales day book

The sale to Jones Co for $105 is also recorded on page 14 of the receivables ledger.

Invoice number is unique generated by the business's sales system.

Recording Purchases

Purchase invoices

Purchase credit invoices

Cheques paid

Purchase day book

Bank account

Sales tax control account

Cash book

Payables ledger control accountPayables ledger

Purchase day book

vThe purchase from Cook Co for $315 is also recorded on page 31 of the payable ledger.

The cash book

Cash

control account in G

/L

Cash

receipts day b

ook

Cash book

Cash

p

aymen

tb

oo

k/C

heq

ue

paym

ent

day b

oo

k

The cash receipts book

What you expect to see?

The cash payments book

What you expect to see?

Example

At the beginning of 10 Jan, Peter Jeffries had $2,100 in the bank. During 10 January 20X8:(a) Cash sale: receipt of $220(b) Payment from credit customer

Khan: $3,100 less discount allowed $100 (R/L ref. 07)

(c) Payment from credit customer Likert: $1,480 (R/L ref. 12)

(d) Payment from credit customer Lee: $2,400 less discount allowed $70 (R/L ref. 10)

(f) Cash received for sale of machine: $370

Example

(g) Payment to supplier Price: $1,250 (P/L ref. 27) Discount received $50

(h) Payment to supplier Burn: $2,420 (P/L ref. 16) Discount received $80

(i) Payment of telephone bill: $235(j) Payment of gas bill: $640(k) Payment of $3,400 to Fawcett for

new plant and machinery

Solution

Solution

Question

Which of the following will not be entered in the cash book?

(a) Cheque received

(b) Payment to receivables ledger customers

(c) Supplier's invoice

(d) Credit note

(e) Debit note

(f) Bank charges debited to the bank account

(g) Overdraft interest debited to the bank account

(h) Payment for a non-current asset purchased on credit

(i) Refund received from a supplier

(j) Depreciation

Answer: CDEJ

The bank statement

Text

To reconcile

Bank statement received from bank

Weekly/monhtly basis

Investigate differences

Cash book(internally generated)

The petty cash book

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

There are usually more payments than receipts, and petty cash must be ‘topped-up' from time to time with cash from the business bank account.

The general ledger

vThe general ledger is the accounting record which summarizes the financial affairs of a business.

vIt contains details of assets, liabilities and capital, income and expenditure and so profit and loss.

vIt consists of a large number of different ledger accounts, each account having its own purpose or 'name' and an identity or code

vAnother name for the general ledger is the nominal ledger

The general ledger

The ‘T’ format

The 'T' format accounts:vOn top of the account is its namevLeft hand side called debit sidevRight hand side called credit side

Example

For example: Profit and Loss accounts

Note: No b/f or c/f for profit and losses accounts

Example

For example: Balance sheet accounts

Note: There are always b/f or c/f for profit and losses accounts for balance sheet accounts

Carried

forward

balance

Brought

forward

balance

Double entry book-keeping

The Principles

Every transaction has a two fold effect!!!

Example – Cash transactions

In the cash book of a business, the following transactions have been recorded.

(a) A cash sale (ie a receipt) of $2(b) Payment of a rent bill totalling $150(c) Buying some goods for cash at $100(d) Buying some shelves for cash at $200

How would these four transactions be posted to the ledger accounts? For that matter, which ledger accounts should they be posted to? Don't forget that each transaction will be posted twice, in accordance with the rule of double entry.

How much cash is left?

Example – Credit transactionsRecorded in the sales day book and the

purchase day book are the following transactions.

(a) The business sells goods on credit to a customer Mr A for $2,000.

(b) The business buys goods on credit from a supplier B for $100.

How and where are these transactions posted in the ledger accounts?

More transactions

Identify the debit and credit entries in the following transactions.

(a) Bought a machine on credit from A, cost $8,000DEBIT Machine account (non-current asset) $8,000

CREDIT Payables (A) $8,000

(b) Bought goods on credit from B, cost $500DEBIT Purchases account $500

CREDIT Payables (B) $500

(c) Sold goods on credit to C, value $1,200DEBIT Receivables (C) $1,200

CREDIT Sales $1,200

More transactions

(d) Paid D (a supplier) $300DEBIT Payables (D) $300

CREDIT Cash $300

(e) Collected $180 from E, a customerDEBIT Cash $180

CREDIT Receivables (E) $180

(f) Paid wages $4,000DEBIT Wages expense $4,000

CREDIT Cash $4,000

More transactions

(g) Received rent bill of $700 from landlord GDEBIT Rent expense $700

CREDIT Payables (G) $700

(h) Paid rent of $700 to landlord GDEBIT Payables (G) $700

CREDIT Cash $700

(i) Paid insurance premium $90DEBIT Insurance expense $90

CREDIT Cash $90

Posting from the day books

Posting cash receipts

Impersonal vs. personal

Impersonal accounts: Accounts in the general ledger

Personal accounts: Include details of transactions which have

already been summarized in ledger accounts. Do not form part of the double entry system Memorandum accounts only.

Control accounts: Used chiefly for receivables and payables. Should agree with the total of the individual

balances

Accounting for sales tax

If a business sells goods for $600 + $105 sales tax, ie for $705 gross price, the sales account should only record the $600 excluding sales tax.

DEBIT Cash or AR $705

CREDIT Sales $600

CREDIT Sales tax account (output) $105

Accounting for sales tax

If a business purchases goods on credit for $400 + tax $70

Tax is recoverable

DEBIT Purchases $400

DEBIT Sales tax account (input tax) $70

CREDIT Trade AP $470

Tax is not recoverable

DEBIT Purchases $470

CREDIT Trade accounts payable $470

When is sales tax accounted

Sales tax is accounted for when it first arises:when recording credit purchases/sales in credit transactions

and when recording cash received or paid in cash transactions

Sales tax account

Purchase day book xxx

(input sales tax)

Bank xxx(input sales tax on cash purchase)

C/f: xxx

B/f: xxx

Sales day book xxx

(out put sales tax invoiced)

Bank xxx

(out put sales tax on cash sales)

Sales tax account

Calculating sales tax

Question 1One product has net price of $10,000 and sales tax at 10% is to be added.How much sales tax is?

Answer:Sales tax = 10,000*10%

= 1,000

Calculating sales tax

Question 2The gross price of Product A is $15,000. What is the sales tax at 10% charged on each product?

Answer:Net sale = 15,000/(1+10%)

= 13,636

Sales tax = 13,636*10%

= 1,363

Calculating sales tax

Question 3A company sells goods for $127,350 including sales tax at 17 ½% in a quarter. It buys goods for $101,290 including sales tax. What amount will it pay to or receive from the tax authorities for the quarter (round to the nearest $)?

Calculating sales tax

Answer:

Question 1

Which of the following business documents is the source of information for purchases made on credit?A InvoiceB Goods received noteC Credit noteD Bank statement Answer: A

Question 2

A document from a seller notifying the purchaser that an overcharge has been made is called:A An advice noteB A credit noteC A consignment noteD A debit note Answer: B

QB 5

Net profit was calculated as being $10,200. It was later discovered that capital expenditure of $3,000 had been treated as revenue expenditure, and revenue receipts of $1,400 had been treated as capital receipts.

The correct net profit should have beenA $5,800B $8,600C $11,800D $14,600

Answer: D

QB 6

A credit balance on a ledger account indicates

A An asset or an expenseB A liability or an expenseC An amount owing to the organisationD A liability or a revenueAnswer: D

QB 7

Which ONE of the following is not a book of prime entry?

A The petty cash bookB The sales returns day bookC The receivables ledgerD The cash bookAnswer: C