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?

DR CR

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 Documents Books of First Entry

Sales invoices Sales Book

Credit notes sent Sales Returns/Returns Inwards Book

Purchases invoices Purchases Book

Credit notes received Purchases Returns/Returns Outwards Book

Lodgement slips, cheques, receipts

Cash Book

Petty cash vouchers Petty cash book

Financial correspondence General Journal

Accounting is recorded in the following sequence

1.Books of First Entry2.Ledger Accounts3.Trial Balance4.Final Accounts

a. Trading Accountb. Profit and Loss Accountc. 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 ExampleMartin’s Ltd had the following Assets and Liabilities on 1st January 2012;Premises €350,000, Land €120,000, Stock €50,000, Bank Overdraft €40,000, Share Capital €480,000 Click to access General Journal questions

2012 General Journal

1Jan Premises GL €350,000

Land GL €120,000

Stock GL €50,000 €520,000

Bank Overdraft CB €40,000

Share Capital GL €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 €5,4004 June Sold goods on credit to T Reilly Invoice 2 €6,500

Sales Day BookDate Details F In.

No.Net Sales

VAT @ 23%

Total Sales

1 June J Knox DL1 1 €5,400 €1,242 €6,642

4 June T Reilly DL2 2 €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 damaged2.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 €4008 June T Reilly returned goods Credit note 2 €200

Sales Returns Day Book

Date Details F Cr. No.

Net Sales

VAT @ 23%

Total Sales

5 June J Knox DL1

1 €400 €92 €492

8 June T Reilly DL2

2 €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

NET VAT TOTAL

€ € €

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 July Purchased goods on credit Invoice No. 34 from J. Clarke €3,0004 July Purchased goods on credit Invoice No. 35 from T. Jones €2,400

Date Details F In. No.

Net Purchases

VAT @ 23%

Total Purchases

1 July J. Clarke CL1 34 €3,000 €690 €3,690

4 July T. Jones CL2 35 €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 July Returned goods to J. Clarke Credit Note No. 21 €2009 July Returned goods to T. Jones Credit Note No. 22 €140

Purchases Returns Day Book

Click here to access Day Books questions

Date Details F Cr. No.

Net Purchases

VAT @ 23%

Total Purchases

6 July J. Clarke CL1

21 €200 €46 €246

9 July T. Jones CL2

22 €140 €32.20

€172.20

€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 Receipts Cheque Payments

Bank StatementsCopy of receiptsLodgements

Cheque book Bank StatementsReceipts received

Cash Receipts and Payments Book

Worked Example

Record the following transactions of Smith Ltd using the following headings:Debit Side: Debtors, SalesCredit Side: Creditors, Purchases, Wages

1 April Cash at bank €3,500 1 April Purchased goods by cheque (No. 23) €1,4503 April Paid wages by cheque (No. 24) €1,2305 April Paid Clarke Ltd by cheque (No. 25) €1,3306 April Cash Sales lodged €4,5009 April Purchased good by cheque (No. 26) €55010 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

Date Details F Bank Debtors

Sales

1 April Cash b/d €3,500

Date Details F Bank Creditors

Purchases

Wages

Purchases PB €1,450

€1,450

Wages €1,230

€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 April Cash on hand (imprest) €2003 April Stamps Voucher No. 1 €3.005 April Coffee Voucher No. 2 €1.507 April Charity donation Voucher No. 3 €5.008 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

Date Details F Cash

1 April Balance b/d €200

Date Details Voucher No.

Cash Postage

Canteen

Sundries

3 April

Stamps 1 €3.00 €3.00

5 April

Coffee 2 €1.50 €1.50

7 April

Charity 3 €5.00 €5.00

8 April

Stamps 4 €1.80 €1.80

Balance €184.20

€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 Side Cr Side

Increase (+) Decreases (-)

Dr Side Cr 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 Side Cr Side

Increases (+) Decreases (-)

Dr Side Cr 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 transactionDetails: Other account involved in the transactionFolio: 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

Date Details F € Date Details F €

Double-entry Bookkeeping

With every transaction there is a debit and credit side entry

Rule: Debit ReceiverCredit Giver

Example:

1st June: Paid insurance by cash €450

See Worksheet for additional QuestionsDouble entry questions.docx

Dr Insurance Account Cr

1/6 Cash €450

Dr Cash Account Cr

1/6 Insurance

€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

Details F Debit Credit

Sales GL €230,000

Bank CB €230,000

€230,000

€230,000

Summary: An Overview