Upeksha Pinto

Accounting
Accounting means preparing financial statements at regular intervals.
Accounting uses book keeping records to prepare financial statements and assists in decision
making
Accounting mainly deals with
1.
2.
3.

Book keeping
Book keeping means the detailed recording of all the financial transactions of a business.
Book keeping mainly deals with
1.
2.
3.

A ledger is where all the accounts are kept

A ledger account contains the detailed records of financial transactions

Ledger can be divided in to 2 types

1. General ledger
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2. Personal ledger (Sales and Purchases Ledger)

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Q1. Categorize the following ledger accounts
General ledger Sales ledger Purchases ledger
Capital account
Tomson (customer account)
Sales account
Watson (supplier account)
Electricity account
Commission account
Drawings account

Q2. Stefan had provided the following information

1st January – Purchases of machinery $1450 from Abdul on credit
2nd January – Sold goods to Fiona who pays by cheque
7th January – Purchased goods from Zaheer for $520 on credit
10th January – purchased goods from Joanne $65 on cash

Enter the above transactions to ledger

Financial statements of the business

Income statement
It is a statement which shows the business profit or loss for the financial year
Income statement has 2 components
1. Gross Profit
 It is the difference between sales revenue and the cost of sales
 Gross profit = Revenue – Cost of Sales

2. Profit for the year

 It is the excess of the total income over the total expenses
 Net profit = Gross Profit + Other income – expenses
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Statement of financial position
It is a statement which shows the assets, liabilities and equity of the business

Capital expenditure
It is the cash which is spent on purchase of non-current assets, increase of capacity, value added
to the asset and that are intended to benefit in future financial year.
Ex: ………………………………………………………………………………………………………………………………………………………………………
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Revenue expenditure
It is the cash spent on day to day activities for the running cost that benefit the business only in
that particular financial year
Ex: …………………………………………………………………………………………………………………………………………………………………………..
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Capital receipt
It is the cash receipt for an intention of using for a long time and not for routine transaction of the
business
Ex: ……………………………………………………………………………………………………………………………………………………………………………
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Revenue receipt
It is the cash received on day-to-day business transactions
Ex: ……………………………………………………………………………………………………………………………………………………………………………..
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Q3. Complete the following table

Capital Revenue Capital Revenue
expenditure expenditure receipt receipt
Cash sales
Bank loan received
Repairs to building
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Wages paid
Purchase of machine
Installation charges

Business documents and books of prime entry

Trade discount

▪ it is the reduction in the list price which can be given as a reward for buying in large
quantity (bulk quantity) in order to enhance customer loyalty.
▪ Trade discount is not recorded in the ledger because it is already deducted from the list
price

Q4. Following are some of the prices of kitchen items as charged to different customers
Customer name Item name List price Trade discount
Hay Bee Co Rack 1 450 5%
Sea Dee Table 4 600 10%
Henn Plc Cupboard 3 500 2%
Pee Que Ltd Table 2 200 5%

Calculate the amount to be entered in the Sales Journal

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Q5. Following are some of the prices of Hardware Items as charged to different customers
Customer name Item name List price Trade discount
Royal Traders Cement 2 250 5%
Lucky Traders Iron bar 1 200 15%
Mike Traders Tiles 3 200 10%
Pee Gee Bricks 1 500 5%

Calculate the amount to be entered in the Sales Journal

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Cash discount
It is a reduction in the amount paid by the credit customer or the credit supplier when the amounts
are settled within the agreed time (Prompt Payment)
Cash discount can be divided into 2 types
1. ……………………………………………………………………………….
2. ………………………………………………………………………………..

Business documents
It is a written document that provides information from which the accounting records are
prepared.
There are different types of source documents prepared by a business
1. Invoice
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2. Debit note
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3. Credit note
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4. Receipt
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5. Cheques and cheque counterfoil
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6. Statement of account
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7. Payment Voucher
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Books of prime entry
Book of prime entry Definition
1. Sales day book
2. Purchases day book
3. Sales returns day book
4. Purchases returns day book
5. Cash book
6. Petty cash book
7. General journal

Q7. Enter the following transactions to the general journal

- Tim purchased a machine from Dason Traders for $12 600
- Husaim sold vehicle to Greg Garage $6 500
- Melina started a business by paying cheque $25 000 in to the business
- Purchased a new machine on credit $4 500 from Fracture Ltd

Debit Credit

Q8. The following balances were obtained from Jeft’s business on 1st January 2019
Cash in hand $ 5,750
Bank balance $ 450 Credit
Trade receivable balances David $ 2,800
James $ 3,200
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Trade payable balances Marvin $ 4,500
Mark $ 5,100

Transactions during the month January

1st January Paid to Marvin by cash $ 2,000 and received a discount of 5%
3rd Cheque received from David $ 2,500 and the balance treated as discount
5th Cash sales $ 7,250
7th Bank loan instalment paid in cash $ 250
10th Paid advertising bill by cheque $ 225
11th Cash deposited to bank $ 500
15th Cheque received from James $ 3,000 after receiving a discount of $ 100
18th Credit sales to Marvin $ 2,500 less trade discount 5%
20th Credit purchase from Mark $ 3,000 less trade discount 10%
21st Cash withdrew from bank account $ 150
22nd Cash paid to mark $ 1,500 less cash discount $ 50
25th Paid wages in cash $ 300
Prepare
1. Cash book including discount columns
2. Discount allowed and discount received account
3. Show the accounts of David, James, Marvin and Mark

Q9. The following balances were obtained from Jeff’s business on 1st January 2019.
Cash in hand $ 8,750
Bank balance $ 600 Credit
Trade receivable balances Anne $ 2,800
Basil $ 3,200
Trade payable balances Cyril $ 5,750
David $ 6,250
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Transactions during the month January
1st January Paid to David by cash $ 4,000 and received a discount of 5%
3rd Cheque received from Anne $ 1,500 and the balance treated as discount
5th Cash sales $ 6,500
7th Bank loan instalment paid in cash $ 500
10th Paid rent bill by cheque $ 125
11th Cash deposited to bank $ 1,000
15th Cheque received from Basil $ 2,250 after receiving a discount of $ 125
18th Credit sales to Anne $ 2,250 less trade discount 10%
20th Credit purchase from Cyril $ 3,500 less trade discount 10%
21st Cash withdrew from bank account $ 300
22nd Cash paid to David $ 2,200 less cash discount $ 100
25th Paid Electricity in cash $ 200
Prepare
1. Cash book including discount columns
2. Discount allowed and discount received account
3. Show the accounts of Anne, Basil , Cyril and David

Q10.
Transaction Prime entry book Business document
Sold goods on credit
Goods returned by the
customers
Paid wages in cash
Sold machine on credit
Goods returned to suppliers

Q11. Record the following transactions in the relevant journal

MK Ling runs a business providing equipment for bakeries. Following transactions had been
occurred during the month of August.
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1 August M Bakewell purchases cake tins at a cost of $500
1st August MK Ling purchases equipment at a cost of $2 000 from wholesalers TinPot Ltd.
2nd August MK Ling returns goods costing $150 to another supplier, I Cook
3rd August Jak Flap buys equipment which cost $1 200
3rd August M Bakewell returns $100 of the goods supplied to her
4th August V Sand buys a new oven for $4 000
5th August MK Ling purchases baking trays for $500 from regular supplier TinTin Ltd
8th August MK Ling purchases ovens costing $10 000 from Hot Stuff Ltd
8th August MK Ling returns equipment costing $300 to TinPot Ltd
9th August Pavel Ova purchases goods costing $2 200
11th August M Bakewell buys some oven-proof dishes costing $600

Q12. Record the following transactions in the relevant journals

1st March Purchased goods from Peter on credit, list price $3 200 trade discount 10%
5th Purchased vehicle on credit from Aston Motors for $3 000
7th Sold goods to Mason list price $4500 less trade discount 5%
10th Sold goods to Jamal on credit $800 less trade discount 2%
12th Purchased goods from Hana list price $3000 less trade discount 5%
14th Goods returned to Hana list price $400
18th Goods returned from Mason list price $600

Accounting principles
Accounting principles are the rules that an organization follows when reporting financial
information.
The best-known of these principles are as follows:

01.Business entity
 It means that the business is treated as being completely separate from the owner of the business
 When the owner introduces capital into the business, it is credited to the capital account (to show
the funds coming from the owner).
 When the owner makes drawings from the business a debit entry will be made in the drawings
account (to show the value going to the owner) which reduces the amount owed by the business
to the owner.
 Upeksha Pinto

02.Consistency
 It means that accounting methods must be used consistently from one accounting period to the
next.
 Ex: same method of inventory valuation and depreciation techniques should be continued in the
future as well.
 If a change is made, effects of this should be noted in the financial statements.

03.Duality
 It means that every transaction is recorded twice – once on the debit side and once on the
credit side of two ledger accounts

04.Going concern
 It means that the accounting records are maintained on the basis that the business will
continue to operate for an indefinite period of time and that there is no intention to close down
the business or reduce the size of the business by any significant amount.
 ex:
- non- current assets will appear at their net book value
- Inventory will appear at the lower of cost and net realisable value

05.Historic cost
 It means that all assets and expenses are initially recorded at their actual cost
 Because of the effect of inflation, it makes it difficult to make comparisons about transactions
occurring at different times.

06.Matching Principle
 It means that the revenue of the accounting period is matched against the costs of the same
period so that meaningful comparisons can be made of the profits, sales, expenses and so
on from year to year.

07.Materiality
 It means that individual items which will not significantly affect either the profit or assets of
a business do not need to be recorded separately.
 Eg: a laptop computer may be regarded as immaterial for a large multi-national business,
but would be material for a small sole trader. So, the large business might record as an
expense while the small firm might record as non-current asset.

08.Money measurement
 It means that only information which can be expressed in terms of money can be recorded
in the accounting records.
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 Eg: the morale of the workforce, the effectiveness of a good manager, the benefits of a staff
training course all play an important in the success of the business, but they will not appear
in the accounting records as their value cannot be expressed in monetary terms.

09.Prudence
 It means that profits and assets should not be overstated and loses and liabilities should
not be understated.

10.Realisation
 It means that revenue is only recorded as being earned when the legal title of goods
passes from the seller to the buyer.
 Eg: when an order is placed by a customer no goods change hands, and no profit is earned.
Profit is regarded as being realised when the goods actually change hands.

11. Substance over form

 The transactions must be recorded by considering their commercial substance rather than
its legal form
 Eg: A motor vehicle is purchased using leasing, will be recorded as a non- current in the
statement of financial position, even though it is leased, so is owned by the leasing
company

International accounting standards

International accounting standards ensure that financial statements are prepared using the
same rules and guidelines internationally.
The quality of information can be measured in terms of four factors.

Comparability
The information contained in the financial statements can be useful if it can be compared
with similar information about other businesses or at another point in time.
In order to make comparisons, it is necessary to be aware of any different policies used in
the preparation of the financial statements.

Relevance
It is important that the information is relevant to users of the financial statements. This
means that it can be used to confirm, or correct, prior expectations about past events and
also help forming, revising or confirming expectations about the future.

Reliability
The information provided in financial statements can be reliable if it is:
- Free from bias
- Free from significant errors
- Capable of being independently verified
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Understandability
It is important that financial statements can be understood by the users of those statements.
This depends on the clarity of the information provided and the abilities of the users of the
financial statements.

Q13. State the accounting concept which is violated in the following situations
Situation Concept
The total cost of the furniture is treated as
depreciation for the year
Employees skills, knowledge included to the
financial statements
Motor vehicle to be depreciated using straight
line method and reducing balance method
next year
Inventory should not be valued at lower of
cost and net realisable value
Provision for depreciation is excluded on non
– current assets

Advantages and disadvantages of maintaining full set of accounting records

✓ Assists in quicker decision making
✓ Allows for easier preparation of financial statements
✓ Reduces inaccuracies
✓ Assists in obtaining finance from external sources
But:
▪ Costly
▪ Time consuming
▪ Needs training / qualified staff

Computerised accounting system

A computerised accounting system is an accounting information system to record and process
financial transactions and event to produce financial statements and reports

Advantages
 Cost effective
 Improved accuracy
 Flexibility
 Lesser storage space
 Error detection
 Potential fraud
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But (drawbacks):
 Technical issues
 Initial start-up cost
 High labour training cost

Inventory valuation
Inventory should be valued at lower of cost or net realizable value. (NRV)
This is an application of the prudence concept.

Q14. Explain the prudence concept in relation to the inventory valuation

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Q15. State the basis on which inventory should be valued.

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Q16. Explain the meaning of the term Net Realizable Value.

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Q 17. A company has 2 different products called A and B. The following information available as
at 31 st March 2019.
Type Units Cost NRV
A 100 $ 25 $ 30
B 150 $ 35 $ 25
Additional information:
1. Product A, 5 units were damaged and it cost additional $ 3 to repair the products which
were damaged.
2. Product B, 10 units were damaged and now it can sell at $ 20 each.

Value the inventory of product A and B

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Trial Balance
It is a list of balances recorded in a statement to check the arithmetical accuracy of the
ledger.
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State 3 uses of Trial balance
1. ……………………………………………………………………………………………………...
2. …………………………………………………………………………………………………….…
3. …………………………………………………………………………………………….………….

Q18: Prepare the trial balance and calculate capital of the business.
$
Building 55,000
Equipment 35,500
Trade receivables 18,250
Trade payable 32,250
Inventory 22,500
Bank loan 25,000
Advertising expenses 2,750
Revenue 255,000
Purchases 113,500
Discount received 5,500
Discount Allowed 6,750
Irrecoverable debts 3,250
Rent receivable 11,500

Q19.Roy is a trader. The following balances appeared in his books as at 31st December 2018.
$
Sales 86,000
Purchases 51,500
Bank overdraft 1,100
Cash 50
Trade payable 4,900
Trade receivable 6,900
Furniture 26,400
Wages 21,300
Sundry expenses 3,100
Rent payable 3,200
Purchases returns 350
Inventory 9,200
Drawings 10,100
Capital 39,400

Prepare a trial Balance as at 31st December 2018