4 Documents

Name Purpose From To

INVOICE Detail of quantity Supplier Customer

sold with price
and amount

DEBIT NOTE Purchases return Customer Supplier

CREDIT NOTE Sales return, Supplier Customer

opposite to debit
note

STATEMENT OF Transactions of Supplier Customer

ACCOUNT the customer
during the month

7 Books

Name Purpose (Source Document)

CASH BOOK To record receipts and payments (cash or

cheque).

PETTY CASH BOOK To record small value cash expenses

(vouchers).

SALES JOURNAL To record ​only​ credit sales (invoice issued).

PURCHASES JOURNAL To record ​only​ credit purchases (invoice

received).

SALES RETURN JOURNAL To record returns inwards (credit note).

PURCHASES RETURN JOURNAL To record returns outwards (debit note).

JOURNAL To record rectifying/transfer entries.

Cash Discount
It is a settlement discount. Its purpose is to encourage ​credit​ customers for prompt payment.
Example: Discount Allowed/Discount Received.

Trade Discount
It is a reduction on the ​list​ price of the item. Its purpose is to encourage customers to buy more
quantity but it is not recorded as a discount in accounting books.

Prime Cost Formula

Direct Material Used + Direct Labour Applied + Direct Expenses

+Direct Material Used $$$

+Direct Labour Applied $$$

+Direct Expenses $$$

PRIME COST $$$

Cost of Production Formula

Prime Cost + Factory Overheads + Opening Inventory of WIP - Closing Inventory of WIP

+Prime Cost $$$

+Factory Overheads $$$

+Opening Inventory of WIP $$$

-Closing Inventory of WIP ($$$)

COST OF PRODUCTION $$$

Cost of Sales: In Trading Business
Opening Inventory + Purchases + Carriage Inwards - Closing Inventory

+Opening Inventory $$$

+Purchases $$$

+Carriage Inwards $$$

-Closing Inventory ($$$)

COST OF SALES $$$

Cost of Sales: In Manufacturing Business

Opening Inventory of Finished Goods + Cost of Production + Purchases of Finished Goods -
Closing Inventory of Finished Goods

+Opening Inventory of Finished Goods $$$

+Cost of Production $$$

+Purchases of Finished Goods $$$

-Closing Inventory of Finished Goods ($$$)

COST OF SALES $$$

Cost of Sales: In Service Business

There is no cost of sales in a service business; they provide only services.
Financial Statements In Order
Trading Business (Sole Trader)
1. Income Statement (Trading Resul, Gross Profit) / (Operating Result, Net Profit/Net Loss)
2. Statement of Financial Position

Partnership
1. Income Statement (Trading Resul, Gross Profit) / (Operating Result, Net Profit/Net Loss)
2. Profit and Loss Appropriation
3. Partners’ Current Accounts
4. Partners’ Capital Accounts
5. Statement of Financial Position

Limited Companies
1. Income Statement (Trading Resul, Gross Profit) / (Operating Result, Net Profit/Net Loss)
2. Statement of Changes in Equity
3. Statement of Financial Position

Ledgers
Personal Ledger
Contains accounts only of suppliers and customers

General/Nominal Ledger
Contains all other accounts
Bookkeeping Errors
● Omission:​ No record of the transaction
● Commission:​ Wrong name
● Principle:​ Asset/Expense, an error of Capital/Revenue
● Original Entry:​ Wrong amount
● Complete Reversal:​ Debit account is credited, credit account is debited
● Compensating:​ One error cancels out another error

Trial Balance
A summary of ledger account balances. Its purpose is to check the arithmetical accuracy of
accounting books.

Formulas of Ratios
Current Ratio
Current Assets/Current Liabilities

Quick Ratio (Acid Test Ratio)

(Current Assets - Closing Inventory)/Current Liabilities

Collection Period
(Trade Receivables/Credit Sales)*365

Payment Period
(Trade Payables/Credit Sales)*365
Inventory Turnover
Cost of Sales/Average Inventory

Average Inventory = (Opening Inventory + Closing Inventory)/2

Return on Capital Employed

(Net Profit/Capital Employed)*100

Capital Employed = Total Assets - Current Liabilities

Working Capital
Current Assets - Current Liabilities

Gross Profit Ratio (Margin)

(Gross Profit/Sales)*100

Net Profit Ratio

(Net Profit/Sales)*100

Statement of Changes in Equity

1. Share Capital
2. Reserves
3. Retained Earnings
Retained Earnings (At End of Year) Formula
Retained Earnings (At Start of Year) + Current Year’s Profit - Reserves - Dividends

+Retained Earnings (Start of Year) $$$

+Current Year’s Profit $$$

-Reserves ($$$)

-Dividends ($$$)

RETAINED EARNINGS (END OF YEAR) $$$

Surplus and Deficit

Surplus is the alternate name of profit in non-business. Deficit is the alternate name of loss in
non-business.

Formula = Income - Expenditure

+Income $$$

-Expenditure ($$$)

SURPLUS/DEFICIT $$$
Petty Cash Book Imprest System
Imprest Amount - Vouchers = Balance

+Imprest Amount $$$

-Vouchers ($$$)

BALANCE $$$

Voucher amount should be paid back (reimbursed) to restore imprest amount.

Residual Profit in Partnership

Net Profit + Interest on Drawings - Interest on Capital - Salary

+Net Profit $$$

+Interest on Drawings $$$

-Interest on Capital ($$$)

-Salary ($$$)

RESIDUAL PROFIT $$$

Bank Reconciliation Statement
Debit Balance Credit Balance

Uncredited Cheques Minus Plus

Unpresented Cheques Plus Minus

Wrong Debit Minus Plus

Wrong Credit Plus Minus

Effects of Errors on Profit (Arrows)

Opening Inventory/Expenses (Inversely Proportional)
Opening Inventory/Expenses Profit Rectification Effect on Profit

Overstated Understated Increases

Understated Overstated Decreases

Closing Inventory/Income (Directly Proportional)

Closing Inventory/Income Profit Rectification Effect on Profit

Overstated Overstated Decreases

Understated Understated Increases

Entry: Acquiring a Non-Current Asset

Non-Current Asset Dr

Cash/Bank Cr
Entry: Depreciation
Income Statement Dr

Accumulated Depreciation Cr

4 Entries for Disposal

Disposal Dr

Asset Cr

Accumulated Depreciation Dr

Disposal Cr

Cash/Bank Dr

Disposal Cr

Profit/Loss Entry

Straight Line Method (Original Cost Method)

(Cost - Residual Value)/Estimate Life

The same amount of depreciation in each year, charged on the original cost of the asset.

Reducing Balance Method

Depreciation on NBV (Net Book Value).

NBV = Cost - Accumulated Depreciation

Revaluation Method
Opening Value of NCA - Closing Value of NCA. Used in non-business.

Entry: Increase Doubtful Debts

Income Statement Dr (Expense)

Allowance for Doubtful Debts Cr

Entry: Decrease Doubtful Debts

Allowance for Doubtful Debts Dr

Income Statement Cr (Other Income)

Entry: Irrecoverable Debt

Irrecoverable Debt Dr

Trade Receivables Cr

Entry: Bad Debts Recovered

Cash/Bank Dr

Bad Debts Recovered Cr

Markup
Percentage of Gross Profit on Cost of Sales

Formula = (Gross Profit/Cost of Sales)*100

Margin
Percentage of Gross Profit on Sales

Formula = (Gross Profit/Sales)*100

Accumulated Fund
Alternate term of capital used in non-business.

Formula = Opening Assets - Opening Liabilities

5 Examples of Capital Expenditure, Revenue

Expenditure and Capital Receipts
Capital Expenditure Revenue Expenditure Capital Receipts

Buying of a building Buying goods Sale of Non-Current Asset

Furniture Discount Allowed Introduction of Capital into

Business
Motor Van Office Rent

Installation Stationary Used

Immediate Expense (Delivery Insurance Premium

Charged of NCA)
Calculation of Profit/Loss When Books Of
Accounting Are Not Maintained
Profit/Loss = Closing Capital + Drawings - Opening Capital - AC

+Closing Capital $$$

+Drawings $$$

-Opening Capital ($$$)

-AC ($$$)

PROFIT/LOSS $$$

Accounting Policies
● Relevant:​ Helpful in economic decisions
● Reliable:​ Free from error and bias
● Understandable:​ Easy to understand
● Comparable:​ Easy to compare

Accounting Principles
Business Entity
Separation of the owner from the business. Example: Capital/Drawings

Consistency
The same method is applied. Example: the same percentage is provided in maintaining doubtful
debts.
Money Measurement
Items of ​only​ monetary value are recorded in accounting. Non-monetary values like discipline
and honest are not recorded.

Matching/Accrual
Revenue of one accounting period is matched with the expenses of the same accounting period.
Example: Accrued/Prepaid Expense

Duality
The transaction is analyzed from two aspects. One is debited, the other is credited with the same
amount.

Prudence
Assets should not be overstated and liabilities should not be understated.

Expected income should be accounted for. Example: Doubtful debts.

Expected expenses should be accounted for.

Realization
Sales should not be recorded unless goods are delivered to the customer.

Going Concern
The business will not be closed down in the near foreseeable future.

Materiality
Non-significant items are immaterial to record. Example: Cost of a small calculator is not a
non-current asset, but an expense.
Calculation of Profit/Loss at Time of Disposal
Formula = Sale Proceed - NBV

Suspense Account
It is created when the trial balance fails to agree.

Inventory Not In Trial Balance

Closing Inventory

Types of Shares in Limited Company

1. Preference Shares
2. Ordinary Shares

Difference Between Shares and Debentures

Shares Debentures

Evidence of ownership in the business Evidence of long-term loan taken by the

company

The dividend is paid to shareholders Interest is paid by debenture holders

Share Capital
● Authorized:​ Maximum limit a company can issue shares.
● Issued:​ Actual amount of share capital a company has issued.
● Called Up:​ Collection of part payment of share value.
● Paid Up:​ Final amount received on the allotment of shares. It is the amount available with
the company to carry on the business.
Goods Taken By Owner For Personal Use
Drawings Dr

Purchases Cr

Users of Financial Statements

Entity Purpose

Owner of Business Profit/Growth

Employees Job Security/Promotion

Bankers To secure the principal amount of loan

Investors To assess investment opportunities

Government To collect taxes

Competitors/Rivals To match their performance.

Limited Liability
Personal assets of shareholders are not responsible to discharge business debts. Liability is
limited only to the extent of share value.

Purpose of Accounting
To check the performance of the business (income statement) and to check financial position of
the business (statement of financial position).

Control Accounts
Receivable Ledger Control (RLC)
Ledger account to record transactions with credit customers.
Payable Ledger Control (PLC)
Ledger account to record transactions with suppliers.

Accruals and Prepaid

Accrued means still to pay or still to receive.

Prepaid means paid in advance or received in advance.

Inventory Valuation
Inventory is valued at lower of cost and NRV (Net Realizable Value)

NRV = Selling Price - Selling Expenses