CSEC PRINCIPLES OF ACCOUNTS

HANDOUT # 3

THE CLASSIFIED BALANCE SHEET & BOOKS OF ORIGINAL ENTRY

OCTOBER 2, 2019
MBI HIGH
SPANISH TOWN
Review of Handout 2
KEY POINTS

There are four financial statements produced by accountants, including

• The income statement reports the revenues and expenses of a company and
shows the profitability of that business organization for a stated period of
time. The net income (or loss) calculated is used in the statement of retained
earnings.
• The statement of retained earnings shows the change in retained earnings
between the beginning of the period (e.g. a month) and its end. The ending
retained earnings is used by the balance sheet.
• The balance sheet lists the assets, liabilities, and equity (including dollar amounts)
of a business organization at a specific moment in time and proves the accounting
equation.
• The statement of cash flows which shows the cash inflows and cash outflows for a
company for a stated period of time. The statement of cash flows uses
information from all previous financial statements.

Glossary: Lesson 2
GLOSSARY

Accounting equation Assets = Liabilities + Equity.

Accounts payable Amounts owed to suppliers for goods or services purchased on credit.
Accounts receivable Amounts due from customers for services already provided.
Assets Things of value owned by the business. Examples include cash, machines, and
buildings. To their owners, assets possess service potential or utility that can be measured and
expressed in money terms.
Balance sheet Financial statement that lists a company’s assets, liabilities, and stockholders’
equity (including dollar amounts) as of a specific moment in time. Also called a statement of
financial position.
Business entity concept (or accounting entity concept) The separate existence of the
business organization.
Capital stock The title given to an equity account showing the investment in a business
corporation by its stockholders.
Continuity See going-concern concept.
Corporation Business incorporated under the laws of one of the states and owned by a few
stockholders or by thousands of stockholders.
Cost Sacrifice made or the resources given up, measured in money terms, to acquire some
desired thing, such as a new truck (asset).
Dividend Payment (usually of cash) to the owners of a corporation; it is a distribution of income
to owners rather than an expense of doing business.

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Entity A business unit that is deemed to have an existence separate and apart from its owners,
creditors, employees, customers, other interested parties, and other businesses, and for which
accounting records are maintained.
Expenses Costs incurred to produce revenues, measured by the assets surrendered or
consumed in serving customers.
Going-concern (continuity) concept The assumption by the accountant that unless strong
evidence exists to the contrary, a business entity will continue operations into the indefinite
future.
Income statement Financial statement that shows the revenues and expenses and reports
the profitability of a business organization for a stated period of time. Sometimes called
an earnings statement.
Money measurement concept Recording and reporting economic activity in a common
monetary unit of measure such as the dollar.
Net income Amount by which the revenues of a period exceed the expenses of the same
period.
Net loss Amount by which the expenses of a period exceed the revenues of the same period.
Notes payable Amounts owed to parties who loan the company money after the owner signs
a written agreement (a note) for the company to repay each loan.
Partnership An unincorporated business owned by two or more persons associated as
partners.
Periodicity (time periods) concept An assumption that an entity’s life can be meaningfully
subdivided into time periods (such as months or years) for purposes of reporting its economic
activities.
Profitability Ability to generate income. The income statement reflects a company’s
profitability.
Retained earnings Accumulated net income less dividend distributions to stockholders.
Revenues Inflows of assets (such as cash) resulting from the sale of products or the rendering
of services to customers.
Service companies Companies (such as accounting firms, law firms, or dry cleaning
establishments) that perform services for a fee.
Solvency Ability to pay debts as they become due. The balance sheet reflects a company’s
solvency.
Source document Any written or printed evidence of a business transaction that describes
the essential facts of that transaction, such as receipts for cash paid or received.
Statement of cash flows Financial statement showing cash inflows and outflows for a
company over a period of time.
Statement of retained earnings Financial statement used to explain the changes in
retained earnings that occurred between two balance sheet dates.
Stockholders’ equity The owners’ interest in a corporation.
Stockholders or shareholders Owners of a corporation; they buy shares of stock, which
are units of ownership, in the corporation.
Summary of transactions Teaching tool to show the effects of transactions on the
accounting equation.
Transaction A business activity or event that causes a measurable change in the items in the
accounting equation, Assets = Liabilities + Equity.

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1. Question
The accounting profession can be divided into three major categories; specifically, the practice of public
accounting, private accounting, and governmental accounting. A somewhat unique and important service
of public accountants is:

o Financial accounting.

o Managerial accounting.

o Auditing.

o Cost accounting.
2. Question
The primary private sector agency that oversees external financial reporting standards is the:

o Financial Accounting Standards Board.

o Federal Bureau of Investigation.

o General Accounting Office.

o Internal Revenue Service.

3. Question
Which of the following equations properly represents a derivation of the fundamental accounting
equation?

o Assets + liabilities = owner's equity.

o Assets = owner's equity.

o Cash = assets.

o Assets – liabilities = owner's equity.

4. Question
Wilson Company owns land that cost $100,000. If a “quick sale” of the land was necessary to generate
cash, the company feels it would receive only $80,000. The company continues to report the asset on the
balance sheet at $100,000. Which of the following concepts justifies this?

o The historical-cost principle.

o The value is tied to objective and verifiable past transactions.

o Neither of the above.

o Both "a" and "b".

5. Question
Retained earnings will change over time because of several factors. Which of the following factors would
explain an increase in retained earnings?

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o Net loss.

o Net income.

o Dividends.

o Investments by stockholders.
6. Question
Which of these items would be accounted for as an expense?

o Repayment of a bank loan.

o Dividends to stockholders.

o The purchase of land.

o Payment of the current period's rent.

7. Question
Which of the following transactions would have no impact on stockholders’ equity?

o Purchase of land from the proceeds of a bank loan.

o Dividends to stockholders.

o Net loss.

o Investments of cash by stockholders.

8. Question
Which of the following would not be included on a balance sheet?

o Accounts receivable.

o Accounts payable.

o Sales.

o Cash.

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Classified Balance Sheets

The balance sheet reveals the assets, liabilities, and equity of a company. In examining a balance
sheet, always be mindful that all components listed in a balance sheet are not necessarily at fair value.
Some assets are carried at historical cost, and other assets are not reported at all (such as the value of a
company’s brand name, patents, and other internally developed resources). Another name is “The
Statement of Financial Position”.

Assets

The asset side of the balance sheet may be divided into as many as five separate sections (when
applicable): Current assets; Long-term investments; Property, plant and equipment; Intangible assets; and
Other assets. The contents of each category are determined based upon the following general rules:

• Current Assets include cash and those assets that will be converted into cash or consumed in a
relatively short period of time; specifically, those assets that will be converted into cash or
consumed within one year or the operating cycle, whichever is longer. The operating cycle for a
particular company is the period of time it takes to convert cash back into cash (i.e., purchase
inventory, sell the inventory on account, and collect the receivable); this is usually less than one
year. In listing assets within the current section, the most liquid assets should be listed first (i.e.,
cash, short-term investments, and receivables). These are followed with inventories and
prepaid expenses.
• Long-term Investments include land purchased for speculation, funds set aside for a plant
expansion program, funds redeemable from insurance policies (e.g., cash surrender value of life
insurance), and investments in other entities.
• Property, Plant, and Equipment includes the land, buildings, and equipment productively in use
by the company.
• Intangible Assets lack physical existence, and include items like purchased patents and
copyrights, “goodwill” (the amount by which the fair value of an acquired business exceeds that
entity’s identifiable net assets), rights under a franchise agreement, and similar items.
• Other Assets is the section used to report asset accounts that just don’t seem to fit elsewhere,
such as a special long-term receivable.

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Liabilities
Just as the asset side of the balance sheet may be divided, so too for the liability section. The liability
section is customarily divided into:

• Current Liabilities are those obligations that will be liquidated within one year or the operating
cycle, whichever is longer. Normally, current liabilities are paid with current assets.
• Long-term Liabilities relate to any obligation that is not current, and include bank loans, mortgage
notes, certain deferred taxes, and the like. Importantly, some long-term notes may be classified
partially as a current liability and partially as a long-term liability. The portion classified as current
would be the principal amount to be repaid within the next year (or operating cycle, if longer). Any
amounts due after that period of time would be shown as a long-term liability.

Equity
The appropriate financial statement presentation for equity depends on the nature of the business
organization for which it is prepared. Businesses generally may be organized as sole proprietorships,
partnerships, or corporations. The illustrations in this book generally assume that the business is
incorporated. Therefore, the equity section consists of:

• Capital Stock includes the amounts received from investors for the stock of the company. The
investors become the owners of the company, and that ownership interest is represented by shares
that can be transferred to others (without further involvement by the company). In actuality, the
legalese of stock issues can become quite involved, and one is apt to encounter expanded capital
stock related accounts (such as preferred stock, common stock, paid-in-capital in excess of par,
and so on). Those advanced issues are covered in subsequent chapters.
• Retained Earnings should be familiar, representing the accumulated income less the dividends.
In essence, it is the profit that has been retained and plowed back (reinvested) into expansion of
the business.

THE BALANCE SHEET EQUATION

TOTAL ASSETS = CAPITAL + TOTAL LIABILITIES

However, lets do some Maths!

1. If Total Assets of Josh Auto Shop is $150,000, and Josh Initially invested $100,000, we
should be able to determine his Total Liabilities

150,000 = 100,000 + Liabilities =➔ Then we can change formula to

LIABILITIES = ASSETS – CAPITAL

LIABILITIES = 150,000 – 100,000 => $50,000

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 2. If Sameerah Inc. owes Raheemah Beauty Supplies $20,000 and Sameerah Inc has total
assets of $80,000, how much Equity (Capital) did Sameerah invest in her business?

Let’s re-arrange the formula:

CAPITAL = ASSETS – LIABILITIES
CAPITAL = 80,000 – 20,000 => $60,000

ORDER OF LIQUIDITY vs ORDER OF PERMANENCY

Liquidity means near cash or easily converted to cash. Assets such as stock, debtors and cash are liquid
assets. In many businesses, these items are arranged on the balance sheet in their order of liquidity.

See illustration below:

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On the other hand, some businesses will arrange the balance in the order of permanency. That is, the
item that is most difficult to be converted to cash is placed first on the balance sheet and the one which
can be converted most easily to cash, is placed last.
See illustration below:
Shuaib & Salama Industries

Notes to the Financial Statements

Financial statements, by themselves, may not tell the whole story. Many important details about a company
cannot be described in money on the balance sheet. Notes are used to describe accounting policies, major
business events, pending lawsuits, and other facets of operation. The principle of full disclosure means
that financial statements result in a fair presentation and that all facts which would influence investors’ and
creditors’ judgments about the company are disclosed in the financial statements or related notes.
Oftentimes, the notes will be more voluminous than the financial statements themselves.

DIFFERENCES IN ACCOUNTING TERMS

Stock → Inventory, Debtors → Accounts receivable, Creditors → Accounts payable,

Capital→Equity

PRACTICE QUESTIONS: EXERCISES 1 – 8 (CARLONG POA FOR CSEC, PAGES 50 – 52)

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BOOKS OF ORIGINAL ENTRY

INTRODUCTION
In many businesses today, some form of documentation usually supports business transactions. These
source documents, as they are called, are used to record information in daily journals or books of original
entries. These journals are the first form of official records of any transaction. Generally, they are not part
of the double entry system. With the exception of the cash book and the general journal the terms debit
and credit do not appear in any other book of original entry.

What are Source Documents in Accounting?

Just as the name suggests, it is a document that serves as the proof or source of the transaction.

In the past, source documents were always some sort of physical paper copy. However,
today source documents can also exist in electronic form.

The Importance of Source Documents

Bookkeepers and other accounts personnel are adamant that a business
keeps records of everything.

Source documents are those records.

They are the only real evidence of a transaction taking place, on a specific day and at a specific
amount.

If source documents don't exist for a transaction - because they've been lost or thrown away or
not recorded in the first place - then accounting for the transaction becomes difficult.

Additionally, auditors check the annual financial statements of a business to ensure their
accuracy. Part of their audit involves reviewing the details of various transactions, which are
originally shown in the source documents. The source documents serve as proof of amounts
accurately recorded in later steps of the accounting cycle, from the accounting
journals and ledger to the final financial reports.

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What Information Should a Source Document Contain?
A source document should generally contain the following:

• The business name and logo

• The date of the transaction
• A description of the transaction
• The specific value of the transaction

Types of Source Documents

Here are some of the most common source documents in accounting:

Invoices
Invoices are documents listing goods or services provided, as well as their prices.

They are the primary source documents for sales and similar forms of income.

Receipts
Receipts are documents confirming that cash or goods have been received.

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Receipts thus normally relate to payment that has been made by cash or through a
debit or credit card.

Receipts are the normal source document for an income transaction where cash is received
immediately, or where we receive a payment from a debtor.

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Deposit Slips
Deposit slips are documents that serve as proof that cash has been deposited into a
bank account.

So if your business receives cash payments and then wants to deposit this, you would
make a deposit at the bank and keep a copy of the deposit slip.

Cheque and Cheque Counterfoil

A cheque is a common form of payment, instructing a bank to transfer money from one
bank account to another.

Where checks are used by a business to make payments, check counterfoils serve
as the source documents.

A cheque counterfoil is the part of the cheque (or check in the U.S.) kept by
the drawer (writer) of the cheque as a record of the transaction - a record that the
cheque was written and the payment was made.

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Each check would have a counterfoil or stub on the same page of the checkbook.

The image above shows the check (on the right), which would be torn out, while
the counterfoil (on the left) is the stub that would remain in the checkbook.

Some checkbooks don't have counterfoils. Instead they have separate pages at the
back of the checkbook (behind all the checks) where you can hand-write the details of
checks you have issued, including the check number, the value and who/what they
were for.

Payment Confirmations
Instead of making payments by check, a business can make payments online or by
other electronic means.

When this is the case, a payment confirmation would be the source document.

Payment confirmations are documents serving as proof that payment has been made
by electronic transfer/ internet banking

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Since more and more payments are made online these days, the payment
confirmation is becoming more common as a source document.

Statements
A statement or statement of account is an itemized report showing the amount owed
by one business to another, as well as details of transactions between the two
businesses.

It is essentially a summary of the financial relationship between two businesses, including any amounts
owing.

Another common type of statement and source document is the bank statement, which
shows the monthly transactions in your bank account.

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 BOOKS OF ORIGINAL ENTRY
The following table shows a list of the books of original entry as well as the source document (s) which
form the basis of the recording in the books.

BOOK OF ORIGINAL TRANSACTIONS RECORDED SOURCE DOCUMENT USED

ENTRY

SALES DAY BOOK CREDIT SALES OF INVENTORY (STOCK) SALES INVOICES

PURCHASES DAY BOOK CREDIT PURCHASES OF INVENTORY (STOCK) PURCHASES INVOICES

CASH BOOK ALL CASH AND BANK TRANSACTIONS, FOR BANK DEPOSIT AND WITHDRAWAL
EXAMPLE, CASH SALES, RECEIPTS FROM SLIPS, CHEQUES DEBIT AND CREDIT
DEBTORS (ACCOUNTS RECEIVABLES), CARD RECEIPTS
PAYMENTS TO CREDITORS

RETURN INWARDS JOURNAL GOODS RETURNED BY CUSTOMERS CREDIT NOTE SENT

RETURN OUTWARDS GOODS RETURNED TO SUPPLIERS CREDIT NOTE RECEIVED

JOURNAL

PETTY CASH BOOK CASH TRANSACTIONS OF SMALL VALUE PETTY CASH VOUCHERS, CASH BILLS

GENERAL JOURNAL ALL TRANSACTIONS WHICH CANNOT BE BILLS, RECEIPTS, VOUCHERS,

RECORDED IN ANY OTHER BOOK OF ORIGINAL CANCELLED CHEQUES.
ENTRY

CASH AND CREDIT TRANSACTIONS

Cash transactions occur when payment is received or made when the transaction takes
place. This includes the use of credit cards and debit cards. A credit transaction is one where payment
is to be made some time in the future, after the transaction.

(Activity 3.1)

Robert is the owner of an Auto Part shop located in Papine, Kingston. He purchases 500 carburetors
from Massey Marketing at $35 each, together with 100 shock absorbers at $10 each and 75 disc pads
at $25 each. The goods were delivered one week after the order was placed. On checking the order
Robert discovers that the disc pads were the wrong brand and he returns them to Massey
Marketing. On checking, Massey Marketing did not have the correct brand in stock and so Robert was
forced to purchase the disc pads for cash at Car Tech Limited.

Answer the following questions which are based on the scenario above:

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 1. a) Identify the document Robert receives from Massey Marketing with his order.

2. b) Name the document Massey Marketing would issue to Robert after he returns the disc pads.

3. c) What document would Robert receive from Car Tech Ltd when he purchases the correct brand of
disc pads?

4. d) Name the prime entry books in Robert’s business where the above transactions would be recorded.

Feedback

(a) The document received would be a Sales Invoice

(b) Credit Note
(c) ( c ) Cash Bill

(d) ( d ) Purchases Journal, Return Outwards Journal, Cash Book

Debit Cards
These are issued by commercial banks to customers allowing them to access their accounts using automatic
banking machines (ABM’s). I am sure you have seen commercials for debit cards. In Trinidad and Tobago
they are referred to as ‘LINX’cards. The customer’s account is immediately debited at the point of sale and
the seller’s account is credited. This type of payment has become more popular to avoid a large amount
of cash on the premises. The receipts from debit cards are used to make records in the cash book.

Credit Cards
Credit cards allow customers to charge their purchases of goods and services instead of paying cash. When
the credit card is presented to the seller, it must be verified to ensure the sale does not exceed the approved
amount. The use of computers allows the sellers’ account to be credited with the amount. A percentage
of the sale price is charged by commercial banks for all credit card transactions. Popular credit card
companies include VISA, Master Card and American Express.

(Activity 3.2)

Grey Singh received an order from Jim Young, a credit customer with the following details on
September 30 2007:

6x20 inch planter @ $18.00 each; 12kgs Fertilizer @12.50 per kg; 20 bottles of Liquid Grow @ $18.50

The following terms and conditions applied:

Trade discount 10%; 5½% 7 days; 2½% 30 days

E&OE

1. a) You are required to prepare the invoice to be sent to Jim Young & b) Explain the meaning
of the terms and conditions outlined.

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Feedback

INVOICE

GREY SINGH Invoice No:

Orange Valley Road 1245

San Juan
DATE
30/09/07

Customer Name Address Order No.

Jim Young Railway Road 005

Sea View

Telephone: 640 8767 Fax: 989 2007

Unit
Qty Description Total
Price

12 kgs Fertilizer $12.50 $150.00

6 20” Planters - green $18.00 $108.00

20 Bottles Liquid Grow $18.50 $370.00

$628.00

Payment: Less 10% Trade discount $62.80

Total $565.20

Terms & 5½% 7 days E&OE

Conditions
2½% 30 days Carriage Paid

b) The Terms of payment suggest a cash discount of 5½% if the total of $565.20 is paid within 7
days after receipt of the invoice. If the total due is paid within 30 days, Mr. Young is entitled
to a 2½% discount. E&OE stands for errors and omissions excepted. It allows the seller the
right to alter the invoice even after it has been sent to the buyer if any errors or omissions are
discovered.

RECORDING TRANSACTIONS

Specialized Journals for Stock

A Journal is a daily record of business in chronological order. The Sales, Purchases and Return Journals,
also called books of original entry or day books, record transactions dealing only with stock/inventory.

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The Sales journal record only credit sales of stock and the Purchases Journal records credit purchases of
stock.

The Returns Journals records goods previously bought or sold on credit that have been returned to
suppliers or by customers.

Cash sales and purchases of goods are not recorded here, neither the purchase nor sale of fixed assets.
These are recorded in the Cash book and the General Journal, respectively.

The layout of the journal is shown below.

Illustration: Format of Journal

Date Details Folio Amount

Any business involved in a large amounts of credit transactions would find it advantageous to use
specialized journals. Managers can quickly get totals regarding credit sales and purchases. The
Purchases and Return Inwards Journal record increases in stock whilst the Sales and Return Outwards
Journals records decreases in stock.

Example

Demonstrating the recording of transactions in Books of Original Entry

J. Flowers is the sole owner of The Plant Emporium. Her records show the following transactions for the
month of June 2006.

June 01 Sold goods on credit to Green Leaf $110, R. Fig $689 and S. Tato $725

June 05 Received Invoices from T. Tin $1 750 and S. Steel $1 105

June 10 Bought goods on credit from Planters Place $1875

June 13 S. Tato returned $125 worth of goods

June 18 Sold goods on credit to R. Fig with a list price of $1800, allowing a 2.5% Trade discount

June 20 Returned goods to T. Tin $250

Record the above transactions in the appropriate books of original entry.

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Feedback to Example

SALES JOURNAL

Date Details Folio Amount ($)

06/01/06 Green Leaf SL 110.00

R. Figg SL 689.00

S. Tato SL 725.00

06/18/06 R. Figg SL 1800

Less 2½% trade discount (45) 1 755.00

Total Credited to the Sales A/C 3279.00

PURCHASES JOURNAL

Date Details Folio Amount Amount

06/05 T. Tin PL 1 750.00

S. Steel PL 1 105.00

06/10 Planters Place PL 1 875.00

06/30 Total Debited to Purchases A/C GL 4 730.00

RETURN OUTWARDS JOURNAL

Date Details Folio Amount Amount

06/20 T. Tin PL 250

Total Credited to Return Outwards a/c 250

RETURN INWARDS JOURNAL

Date Details Folio Amount Amount

06/13 S. Tato 125

Total Debited to Return Inward a/c 125

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(Activity 3.3)

Now that you are familiar with the recording procedures of the day books you are to enter up the sales,
purchases, and returns day books from the following details for the month of May 2006.

May 1 Sold goods on credit to L. Long $800, S. Short $1250 and B. Stone $1 620

May 3 Bought goods on credit from S. Lewis $730, J. Makoy $950

May 4 S. Short returned goods to us $370

May 8 Bought goods on credit from A. Ladi $840, B. Ready $1750

May 9 Returned faulty goods to B. Ready $500

May 10 Sold goods on credit to Tovadis Limited $1 290 less 10% trade discount

May 15 Credit purchases from S. Lewis $510, J. Makoy $ 450

May 18 Returned goods to J. Makoy $190

May 24 Credit sales to L. Long $2 700, B. Stone $970

May 28 B. Stone returns some of the goods purchased on May 24, $180

May 30 Tovadis Limited returned goods with a list price of $200

Record the above transactions and determine the amount to be transferred to the Sales a/c,
Purchases a/c, Return Inwards and Return Outwards a/cs.

Feedback

Total credit sales $8 501

Total credit purchases $5 230

Total return inwards $730

Total return outwards $690

The General Journal

Specialized journals are used to record transactions dealing with credit sales and purchases
of stock. Other transactions that are unable to fit into those categories, such as the credit
purchase or sale of fixed assets, are recorded in the General Journal.

GENERAL JOURNAL

A/C A/C
Date Details Folio
Debited Credited

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 Journalising is the process of recording entries in the Journal. The accounts involved are identified
and the account to be debited is written first. Indented on the second line is the account to be credited. A
special feature of the general journal is the narration, which follows every journal entry. The narration
briefly explains the transaction recorded.

Example

Demonstrate the use of the General Journal in recording varying transactions.

1. May 16 2006 The Plant Emporium purchased, on credit, machinery costing $17 890, from Mackal Limited.

2. May 20 2006, the Cashier received a voucher for $1150 to pay the insurance for the owner’s personal car.

3. May 30th 2006, the owner invested a further $21000 into the business from her private savings.

Before these are recorded in the journal, the accounts involved are identified. Then, using double entry
rules of entry they are recorded in the general journal.

A/C A/C
Date Details Folio
Debited Credited

May 16 Machinery GL 17 800

06

Mackal Limited GL 17 800

Fixed asset purchases on credit

May 20 Drawings GL 1 150

06

Cash GL 1 150

Cash paid for owners personal

insurance

May 30 Bank GL 21 000

06

Capital 21 000

Additional investment by owner

The following transactions are usually recorded in the General Journal:

1. Opening entries – this is a list of assets and liabilities used to begin a new accounting period. (See the
example below).

2. The purchase and sale of fixed assets on credit.

3. Correction of errors.*

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4. Closing entries.*

5. Writing off uncollectible debts (bad debts).*

6. Depreciating fixed assets.*

*These topics are to be dealt with in a subsequent section in-shaa-Allah.

The following shows the opening entries of R. Bull at February 01 2006

Debit Credit
Date Details (Account Titles) Folio
$ $

02/01 Motor Vehicles 35 000

Furniture 60 000

Building 120 000

Cash in hand 1 200

Bank 35 490

Stock on hand 14 500

Debtor: R. Syms 8 210

Creditor: Beltronics Limited

26 100
Bank Loan
40 000
Capital
208 300

Being Assets, Liabilities and

274400 274400
Capital as at Feb. 01.06

You should note that the columns are totalled.

(Activity 3.4)

J. Hermanson began his second year of trading as a sole trader on June 01 2006 with the following
balances: Cash $1650; Bank $8200, Debtors: W. Wilde $750, Plant and Machinery $97000; Office
Equipment $34000; Stock $4370; Creditor: S. Sweete $1450.

Journalise the above opening entries.

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Feedback

Debit Credit
Date Details (Account Titles) Folio
$ $

1/6/06 Plant and Machinery 97 000

Office Equipment 34 000

Stock 4 370

Cash in hand 1 650

Bank 8 200

Debtor: W. Wilde 750

Creditor: S.Sweete
1 450
Capital
144 520

Being Assets, Liabilities and

145 970 145 970
Capital as at Feb. 01.06

The Cash Book

I am sure you will agree that cash is the lifeblood of any business. Therefore, care should be
taken when recording transactions relating to cash or bank. This is the only book of original entry that is
balanced and the double entry is completed in the ledger. The cash book records the receipts and
payments of cash and bank. Discounts received and allowed are also recorded in the cashbook for
convenience. All receipts are debited and payments credited.

The illustration below shows the basic format of a three-column cash book, (which includes the discount
columns). A two column cash book is one without the discount column.

THE CASH BOOK

Date Details F Cash Bank Dis Date Details F Cash Bank Dis
All
(RECEIPTS) (PAYMENTS) Rec

DEBIT SIDE CREDIT SIDE

Recording Entries in the Cash Book

When a document is received, the first analysis is to determine where it should be recorded. Any document
relating to cash or bank, such as, cheque vouchers, cash bills and receipts are used to make records in the
cash book. Again it is done in chronological order and the name of the account in the ledger is written in
the details column. If the transaction involves the bank then the amount is written in the bank column. If
it is a cash transaction, then the amount is written in the cash column. Any discount received or allowed
is placed in the discount column.

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(Activity 3.5)

List at least five source documents that can be used to make entries in a three column cash book.

Feedback

Your answer should include: Receipts, Cash bills, Payment vouchers, Deposit slips, Cash register slips,
cheque counterfoil.

Contra Entries

Since both cash and bank accounts are in the cash book, it is possible to complete the double entry in the
cash book if the transaction involves both accounts. When this happens it is described as a contra
entry. These occur when cash is deposited into the bank or cash is withdrawn from the bank for use in
the office.

BALANCING THE CASH BOOK

The Cash Book is balanced to determine the amount of cash in hand and bank. To balance the Cash Book
means making both sides equal. The columns for Cash and Bank on both sides of the cash book are
totaled. The difference (balance) is determined and added to the side with the smaller amount. The
cash column will always carry a debit balance; this means that the debit side will always be greater than
the credit side, since it is not possible to overspend cash. A credit balance (also called an overdraft) on
the bank account signifies that the account has been overdrawn, that is, cheques were written in excess
of the amount in the bank. Sometimes this is done with the permission of the bank.

Example

Record the following transactions of Seren Dippity, a retailer, in his three column cash book for the
month of April 2006. $

April 01 Cash at bank 1 800

03 Cash sales 1 490

08 Paid cash for cleaning 124

10 Received a cheque from B. Calm 1 500

15 Purchases paid by cheque 1 380

17 Paid rent by cheque 750

19 Received a cheque from S. Leep to settle his account of $700 less 5% discount

21 Paid cash into bank 1 200

24 Received $900 cash from P. Paine to settle his account of $950

26 Paid D. Serene by cheque to settle account of $840 less 5%

discount.

Balance the cash book and bring down the balance at the end of the
month.

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Feedback to the example

THE CASH BOOK

Date Details F Cash Bank Dis Date Details F Cash Bank Dis
All
(RECEIPTS) (PAYMENTS) Rec

4/1 Balance b/f 1800 4/8 Cleaning 124

4/3 Sales 1490 4/15 Purchases 1380

4/10 B. Calm sl 1500 4/17 Rent 750

4/19 S. Leep sl 665 35 4/21 Bank C 1200

4/21 Cash C 1200 4/26 S. Serene 798 42

4/24 P. Paine 900 50 4/30 Balance c/d 1066 2237

2390 5165 85 2390 5165 42

5/1 Balance b/d 1066 2237

(Activity 3.6)

Write up the three column cash book of S. Sui from the following details and balance the cash
book at the end of the month.

Aug. 01 Started business with $1800 cash in hand and $16 000 in the bank

Aug. 02 Paid rent by cheque $300

Aug. 03 Paid utilities by cheque $1 240

Aug. 05 Cash sale $4 300

Aug. 07 Received a cheque from debtor C. Lebrity $3400 after allowing $135 discount

Aug. 09 Cash sales paid directly into bank $2 980

Aug. 11 Paid cash into bank $4 000

Aug. 15 Paid account at Vendor Ltd the amount owing $2 900 received 5% discount

Aug. 18 Mr. Sui withdrew $1500 from the bank for personal use

Aug. 20 Paid for motor repairs by cash $850

Aug. 25 Withdrew $500 from the bank for office use

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Feedback

CASH BOOK

Date Details F Cash Bank Dis Date Details F Cash Bank Dis
All
(RECEIPTS) (PAYMENTS) Rec

1/8 Balance b/f 1800 16000 2/8 Rent 300

5/8 Sales 4300 3/8 Utilities 1240

7/8 C. Lebrity 3400 135 11/8 Bank C 4000

9/8 Sales 2980 15/8 Vendor Ltd 2755 145

11/8 Cash C 4000 18/8 Drawings 1500

25/8 Bank C 500 20/8 Motor repairs 850

25/8 Cash C 500

31/8 Balance c/d 1750 20085

6600 26380 135 6600 26380 145

5/1 Balance b/d 1750 20085

The Petty Cash Book

Small cash payments and receipts can be omitted from the Cash Book to avoid overcrowding. When this
is done, a Petty Cash Book is used. The format of the PCB facilitates the analysis of transactions so that
certain types of transactions can be posted in aggregate to the ledger. The debit side of the PCB represents
receipts whilst the credit side, which represents payments, is divided into several analysis columns. (See
example below).

PETTY CASH BOOK

Voucher Office
Receipts Date Particulars Total Traveling Postage Stationery
No. Expenses

The PCB operates with an Imprest System. This means that the Petty Cashier is given a float (imprest) at
the beginning of a period from which funds are disbursed. Requests for payment are written on vouchers
which briefly explain the purpose of the payment and indicate the amount. At the end of the period (week
or month) the total cash paid is then reimbursed by the main cashier. This is referred to as restoring the
imprest. This means that the petty cashier is given the exact amount she has disbursed. The totals of the
analysis columns are then posted to the general ledger. Small sums received in the office are also recorded
in the petty cash book on the receipt side, although generally there is no analysis. These small receipts
would reduce the amount to be reimbursed.

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 Example: To determine the amount to restore the imprest

The imprest of a business is $1000 per week. At the end of a week the petty cashier disbursed funds for
the following: car wash $50, Stationery $145, received for telephone calls $15, cleaning $175, Coffee and
Tea $230.

Determine the amount to be reimbursed by the cashier

Solution:

Imprest at the start of the week 1000

Total expenses * 585

Balance of cash remaining 415

Cash required to restore imprest 585

Cash at the start of the following week 1000

*The total sum disbursed = 50+145+175+230=600 less 15 (received) =$585 to restore imprest.

(Activity 3.7)

Enter the following transactions in a petty cash book, having analysis columns for postages and stationery,
traveling expenses, cleaning and miscellaneous.

June 1 Received imprest from the cashier 600

June 3 Bought postage stamps V1 100

June 5 Stationery V2 80

June 9 Taxi fare V3 40

June 10 Office Cleaning V4 72

June 12 Snacks for meeting V5 100

June 14 Paid for weekly newspaper V6 20

June 17 Office cleaning V7 40

June 20 Taxi fare V8 20

June 23 Copy paper V9 30

June 30 Bulbs for the office V10 16

Total the analysis columns and restore the imprest to the original amount. Voucher
numbers are consecutive.

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 FEEDBACK

PETTY CASH BOOK

Voucher Postage& Cleaning Misc.
Receipts Date Particulars Total Traveling
No. Stationery Expenses Expenses

Restore
$600 1/6
Imprest

Postage
3/6 1 100 100
stamps

5/6 Stationery 2 80 80

9/6 Taxi fare 3 40 40

10/6 Cleaning 4 72 72

12/6 Refreshment 5 100 100

14/6 Newspaper 6 20 20

17/6 Cleaning 7 40 40

20/6 Taxi fare 8 20 20

23/6 Copy paper 9 30 30

30/6 Bulbs 10 16 16

518 60 210 112 136

30/6 Balance c/d 82 GL GL GL GL

600 600

82 1/7 Balance b/d

Cash (restored
518 1/7
imprest)

KEY POINTS

• Books of Original Entry are useful in eliminating bulky details from the ledger.

• Credit transactions occur when payment is made some time in the future, whereas a cash transaction is
where payment is immediate.

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• Source documents record the essential elements of any transaction and are kept for future reference.

• Sales and Purchases Invoices, receipts, bills, debit notes and credit notes are examples of source
documents used to make records in books of original entries.

• Trade discounts are reductions in the catalogue price of goods and are not recorded in the books whereas
cash discounts are given as incentive for prompt payment and recorded in the cash book.

• The Sales, Purchases, Return Inwards and Return Outwards journals are used to record the credit stock
transactions.

• The General Journal records unusual and onetime transactions and is unique in the way each transaction
is analyzed and recorded.

• All non-credit transactions involving cash or bank are recorded in the cash book. This would include credit
and debit card transactions.

• The Petty Cash Book is an analysis book that records all small cash transactions such as the purchase of
postage stamps and gas for office car.

REFRESHERS:
- Trade vs Cash discount
- Discount allowed vs Discount received
- Cash vs Credit
- Purchase Orders vs Invoice vs Credit note vs Debit note

CONCLUSION

As a business grows, the number of transactions increases and it becomes necessary to

separate the transactions and record in different journals. The format of the journals,
with the exception of the cash book, is very similar and recording in all the journals is
done from original source documents.

PRACTICE QUESTIONS: EXERCISES 1 – 15 (CARLONG POA FOR CSEC, PAGES 91 – 94)

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What is Accounting Ethics?
Accounting ethics is an important topic because, as accountants, we are the key
personnel who access the financial information of individuals and entities. Such power
also involves the potential and possibilities for abuse of information or manipulation of
numbers to enhance company perceptions or enforce earnings management. Ethics is
also absolutely required in the course of an audit. Without meeting the requirements of
auditing and accounting ethics, an audit must instantly be paused.

Fundamental principles

• Integrity. Being straightforward, honest and truthful in all professional and business
relationships. You should not be associated with any information that you believe
contains a materially false or misleading statement, or which is misleading by
omission.
• Objectivity. Not allowing bias, conflict of interest or the influence of other people to
override your professional judgement.
• Professional competence and due care. An ongoing commitment to your level of
professional knowledge and skill. Base this on current developments in practice,
legislation and techniques. Those working under your authority must also have the
appropriate training and supervision.
• Confidentiality. You should not disclose professional information unless you have
specific permission or a legal or professional duty to do so.
• Professional behaviour. To comply with relevant laws and regulations. You must
also avoid any action that could negatively affect the reputation of the profession.

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 REVIEW QUESTIONS
1. The purchases day book(journal) records all

(a) purchases of assets on credit

(b) credit purchases
(c) goods for resale purchased on credit
(d) purchases

2. A business may offer trade discounts to customers in order to

(a) save money
(b) encourage trade
(c) encourage early payment
(d) discourage late payment

3. The information needed to record transaction in the sales journal is taken from the

(a) bank statement

(b) credit note
(c) debit note
(d) sales invoice

4. The total of the sales journal represents total

(a) sales for the period

(b) creditors for the period
(c) debtors for the period
(d) liability for the period

5. When a customer returns goods, the seller will prepare

(a) a debit note

(b) a credit note
(c) a statement
(d) an invoice

Complete the following sentences with words or phrases taken from the following word list:

Journalising Trade discounts

Cash Discount Credit note
Debit note Return outwards

6. A _____________ is sent by the seller to let the buyer know that the amount on the invoice was overstated.

7. A __________ is issued when too many goods have been supplied to the customer and he agrees to keep
them.

8. As a means of encouraging trade a business may offer _______________ to customers.

9. When a customer pays off the amount owing before the due date a ______________ is allowed.

10. The act of recording transactions in a book of original entry is referred to as ________________________.

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