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1 Financial Accounting- AS Level 2021

Andrew Thomas defines accounting as a process of designing and operating
an information system for collecting, measuring and recording business
transactions, and summarizing and communicating the results of these transactions
to users to facilitate financial / economic decisions.

1.2 The Accounting process

The process of accounting starts with collecting namely receipts, invoices, etc. and
then recording transactions in the books of prime entry, using source
documents. Posting to the Ledger accounts, extracting a Trial Balance, making
adjustments for other payables (accruals), other receivables (prepayments) and
other year-end adjustments will then follow, before preparing Financial
Statements and communicating them to users.

1.3 Transactions
A transaction is an activity involving the exchange of money or anything with an ascertainable
money value
e.g. sale or purchases of goods on cash or credit. There are of two types, Cash
transactions and Credit transactions.
Each transaction will result in two different accounts being affected. Whenever there
is a transaction, one account is either gaining or the other one is losing. The one,
which is gaining, should be debited and the one, which is losing, should be credited.
1.4 Source documents
As the organisation conducts its business on a daily basis, it generates documents,
which are used by the accountant to record transactions in the books of accounts.
These documents are known as source documents in accounting. The examples of
these documents include: receipt, invoice, credit note, debit note, cheque
counterfoil, petty cash voucher and statement of account.

1.1.1 Invoice
An invoice is a business document which is used for all credit transactions. It
applies when the business acquires or sells assets on credit for example the
purchase of goods on credit, acquisition of equipment on credit, purchase of
delivery van on credit.

1.1.2 Debit note

This document is issued by the customer to the supplier when returning goods. It is
also used to report any shortages, overcharges or damages goods.

Note:A debit note can also be issued by the supplier to the customer
when the goods have been undercharged that is to correct an undercharge.

1.1.3 Credit note

A credit note is issued by the supplier to the customer to correct an overcharge. It
is also used by the supplier to reduce the amount owed by the customer
especially when the supplier does not have the right quality and/ quantity to
replace the goods returned.

1.1.4 Statement of account (Statement)

A statement is issued by the supplier to the customer at the end of each month to
show the transactions for that period. Its main purpose is to remind the customers
to pay their accounts.

1.5 Books of original entry/prime entry

These are the first books of accounts where transactions are recorded before being
posted to the ledger. These books include: sales journal, sales returns journal,
purchases journal, purchases returns journal, cash book and general journal, petty
cash book.

1.1.5 Cash book

The cash book is used to record cash and cheque transactions. It is a combination
of the cash and bank accounts.

1.1.6 The sales daybook/Sales journal

The sales day book is used to record sales on credit for goods initially bought for
resale. It is written from the credit sales invoices issued to customers.
 1.1.7 The purchases day book/Purchases journal
This book is used to record purchases on credit for goods bought for resale. It is
written from suppliers’
credit invoices.

1.1.8 Sales returns day book/Sales returns journal/Returns inwards journal.

This book is used to record credit notes issued when customers return goods
or when they have been overcharged.

1.1.9 Purchases returns daybook/Purchases returns journal/Returns

outwards journal.
This book is used to record credit notes received from suppliers relating to goods
that were initially bought for resale now returned back to suppliers.
 1.1.10 The journal (General Journal)
It is used to record the following transactions:

a) Opening entries which are records prepared for the first financial period.
b) Accounting adjustment e.g. corrections of errors and year end adjustments.
c) Transfers between Ledger accounts.
d) It is also used to record transactions that are not appropriate to any other
book of prime entry e.g. the Purchase or sale of non-current assets on
credit.

1.6 The ledger

A ledger is a main book of accounts. This is because all the other books of original
entry are posted to the ledger at the end of each period for example at the end of
every month.

1.7 The trial balance

It is a list of all ledger balances at the end of a particular period. Each ledger account
is balanced at the end of the month and the total transferred to the trial. The trial
balance is therefore used as a control to check errors in the ledger.

1.8 Adjustments to the financial statements

These items are added as additional information to the trial balance. They include
closing inventory, other payments (accruals), other receivables (prepayments),
inventory taken by the owner for personal use, depreciation, Provision for credit
loses and others.

1.9 Financial Statements

Financial statements are sometimes known as final accounts and are prepared at
the end of each financial year. A complete set of financial statements comprises
of the following:

1. an Statement of comprehensive income

2. a Statement of Financial Position
3. a statement of changes in equity
4. a statement of cash flow (IAS 7)
5. notes to the financial statements, comprising a summary of significant
accounting policies and other explanatory notes.

They are used to assess the financial performance (Statement of comprehensive

income) and the financial status (Statement of Financial Position) of the business.
The following information relates to the books of A. Nyathi.

Jan 1. Commenced Business with a capital of $70 000 in cash.

2. Opened a business bank current account with $1 000.
3. Paid Rent $ 2 500 cash
4. Bought stationery $ 500 cash
5. Purchased goods for resale $10 000 paying in cash
6. Sold goods for $30 000 payment received by cheque.
7. Paid wages $ 5 000 cash
8. Bought goods on credit from the following:
M. Mashava $25 000
S. Mudzingwa $19 000
L. Kusano $8 000 less 10% trade discount.
8. Purchased furniture for $8 000 paying by cash
9. Paid transport $1 200 by cheque
10. Paid M. Mashava $23 750 by cheque having deducted 5% cash
discount from the purchase made on 7 January.
11. Paid water $ 200 by cheque
12. Paid telephone $1 900 by cheque
13. Paid wages $ 5 000 by cheque
14. Sold goods on credit to :- W. Chivhengere $42 000 less 20% trade discount
S. Ndlovu $ 8 000
M. Zakeo $ 3 000
15. Paid electricity $1 300 cash
16. Paid L. Kusano $6 840 in full settlement of his account by cheque.
17. We returned goods to S. Mudzingwa worth $3 000.
18. The following returned goods : M. Zakeo $ 500
S. Ndlovu $1 000
19. Received cheques for payment of account from the following:-
W. Chivhengere $31 920 in full settlement
M. Zakeo $1 900 in full settlement
20. Paid stationary $300 by cheque
21. Paid wages $500 by cheque
22. Withdrew $500 cash from the bank for personal use.
23. Received a loan of $28 000 by cheque from J.B Motors for $50 000.
30. Purchased equipment for $30 000 cash.
31. Bought a motor vehicle from J.B Motors for $50 000 on account.

Required: -
(a) Enter the following transactions in the books of prime entry
(b) Post to the following ledgers:-
i. General ledger
ii. Sales ledger
iii. Purchases ledger and
(c) Extract a trial balance.
(d) Prepare the financial statements( Income statement and Statement of financial
position)