Accounting is regarded as the language of business.

It can be divided into two sections:

Book-keeping is a process of detailed record of all financial transactions of a business. If the records are
not maintained, it is more than probable that something will be forgotten or overlooked; this being the
main reason that even small businesses should make a record of every transaction which affects the
business. The basis of maintaining these detailed records in double entry book-keeping. The records
maintained by each business may differ from those of other businesses, as each business is different.
However, all businesses apply the same principles.

Accounting uses the detailed record of book-keeping to prepare a financial statement at regular
intervals. The owner needs to know whether the business is making a profit or loss, and they get to
know this through an income statement. This shows the calculation of the profit or loss earned by the
business.

The statement of financial position (also known as the financial statement) shows what the business
owns and what is owing to it, it’s assets; and what the business owes; it’s liabilities. The progress of the
business can be measured by comparing the financial statements of one year with the previous year, or
with those of other similar businesses.

Assets-Any resourced owned by a business.

Capital- Any resourced provided by the owner of the business for the business; investments.

Liabilities-The amount owed by a business to a person(s) or business(s).

The accounting equation-

Capital + Liabilities = Assets

Double entry book-keeping Part A

A business would find it impossible to prepare a statement of financial position after every single
transaction. The day-to-day transactions are recorded in the book of a business using the double entry
book-keeping method. This method gets is name from the fact that it shows both the accounts affected
during a transaction. A business maintains a separate ledger for each type of asset, expense, liability and
income and also for each individual debtor and creditor. Every transaction is recorded in a ledger
account relating to that particular person or item.

A ledger is a bound book where each amount appears on a separate page. Over the years, the ledger
has developed into a loose-leaf folder with separate sheets, each containing a ledger account. Recent
developments have seen the introduction of computer file divided into separate ledger accounts.

Drawings- whenever the owner of a business takes value from the business for his/her own use.

At the end of the month, it is usual to balance any account of assets and labilities which contain more
than one entry. The balance is the difference between the two sides of the account and represents the
amount which is left in that account.
Carriage- Cost of carrying or transporting goods.

Carriage inwards- cost of purchasing goods as it occurs when a business has to pay for goods it has
purchased.

Carriage outwards- occurs when a business pays for goods to be delivered to the customer’s premises.

Trial Balance

A trial balance is the list of the balances on the accounts in the ledger at a certain date. The name of
each account is listed in a trial balance. The balance on each account is shown according to whether it
isa debit balance or credit balance. This is prepared to check the arithmetical accuracy of the double
entry book-keeping and is useful in preparing financial statements.

When a trial balance balances, it simple means that the total of the debit balance is equal the total of
the credit balances. It does not imply that the double entry is error-free. The trial balance will still be
balanced if any of the following errors occur:

1. Error of Commission: A transaction is recorded incorrectly but in the right account (e.g., $200
recorded as $20).
2. Error of Complete Reversal: A transaction is recorded the opposite way (e.g., a debit recorded as
a credit).
3. Error of Omission: A transaction is completely left out of the records.
4. Error of Original Entry: A transaction is recorded wrongly from the start, affecting related
accounts.
5. Error of Principle: A transaction violates accounting rules (e.g., an expense recorded as an asset).
6. Compensating Error: Multiple errors cancel each other out, leaving the financial statements
unaffected.
Double entry book-keeping Part B

Sales ledger-(debtor’s ledger or trade receivables ledger) All the personal accounts of credit customers
are kept in the sales ledger.

Purchase ledger-(Creditors ledger to trade payables ledger) All the personal accounts of credit suppliers
are kept in the sales ledger.

Nominal ledger-(general ledger)- The primary accounting record that summarizes all financial
transactions of a business. It contains accounts for assets, liabilities, equity, revenues, and expenses,
providing a complete picture of the company's financial health.

Cashbook-These contain the main cashbook, and petty cashbook.

Contra entries- Contra entries are transactions that involve two accounts where one account is debited
and the other is credited, effectively canceling each other out. Common examples include transferring
money between a bank account and cash or recording a return of goods. They help maintain balance
and clarity in the accounting records.
A two-column cash book is a financial record that tracks cash transactions. It features two main
columns: one for cash receipts (debits) and one for cash payments (credits). This format helps
businesses monitor cash inflows and outflows, providing a clear view of their cash position.

A three-column cash book includes three columns: one for cash receipts, one for cash payments, and a
third for bank transactions. This format allows businesses to track cash, bank deposits, and withdrawals
all in one place, providing a comprehensive view of their cash flow.

Journal entries and correction of errors

Journal entries are the initial recordings of financial transactions in accounting. They serve as the
foundation for maintaining accurate financial records.Each journal entry includes several key
components: the date of the transaction, the accounts being affected (both debit and credit), the
amounts involved, and a brief description of the transaction to provide context.

There are various types of journal entries. Regular entries capture daily transactions such as sales and
purchases, while adjusting entries account for accruals, deferrals, and estimates. Closing entries are
used to prepare accounts for the next accounting period.

Errors in accounting can take several forms. An error of omission occurs when a transaction is not
recorded at all. An error of commission involves entering an incorrect amount in the correct account.
Errors of principle violate accounting principles, while complete reversal errors mistakenly switch debits
and credits. Errors of original entry involve incorrect initial recordings, and compensating errors are
those that offset each other.

o correct errors, first identify the mistake by reviewing account statements and transaction history.
Then, make the necessary adjusting entries in the journal to reflect the corrections. This process is
crucial for ensuring that financial statements are accurate.

Maintaining accurate records is vital for the integrity of financial data. It helps businesses analyze
performance, make informed decisions, and comply with legal and regulatory requirements.

Business documents

Business documents are essential written records that facilitate transactions and communication within
a business. They ensure clarity and provide legal evidence of agreements and exchanges.

An invoice is a document issued by a seller to a buyer that requests payment for goods or services
provided. It includes details such as item descriptions, quantities, prices, total amount due, and payment
terms. Invoices are crucial for tracking sales and managing accounts receivable.

A debit note is a document sent by a buyer to a seller, indicating a return of goods or a request for a
reduction in the amount owed. It serves as a formal request for an adjustment in the buyer's account,
often due to issues like defective or unsatisfactory goods.

A credit note is issued by a seller to a buyer to acknowledge a return of goods or to adjust the amount
owed. It reduces the buyer's liability, effectively providing a credit that can be used against future
purchases or to offset the invoice amount.
A statement account summarizes all transactions between a buyer and a seller over a specific period. It
provides a detailed overview of outstanding balances, payments made, and any credits or debits
applied, helping both parties track financial relationships.

A cheque is a written order directing a bank to pay a specific amount from the issuer's account to the
payee. It serves as a secure method of payment and includes details such as the amount, date, and
signature of the account holder.

A receipt is a document issued by a seller to confirm that payment has been received for goods or
services. It serves as proof of transaction for both the buyer and seller and typically includes the date,
amount, and description of the transaction.

Sales of prime entry

The sales journal records all credit sales of goods or services. It captures essential details such as the
date, customer name, invoice number, and total sales amount, helping businesses track revenue
effectively.

The sales returns journal tracks merchandise returned by customers. It includes information on the date
of return, customer details, and the amount credited, allowing businesses to manage returns and
adjustments efficiently.

The purchase journal documents all credit purchases made by the business. It includes key details like
the date, supplier name, invoice number, and total purchase amount, aiding in expense tracking and
supplier management.

The purchase returns journal records items returned to suppliers. It captures the date of return, supplier
information, and amount credited, facilitating accurate inventory management and financial reporting.