Introduction to Accounting

Book- keeping- is the detailed recording of all the financial transactions of a business. Book keeping activities
includes recording transaction in the daybooks or journals, transferring or posting those transactions to ledger
accounts and balancing those accounts after each month or a year.

Double entry book-keeping- is recording the same amount as debit in one account and credit in another account for
a transaction.

Accounting- is using the book keeping records to prepare financial statements and to assist in the decision making
for the business. Financial statements include income statement and statement of financial position at the end of a
year.

Income statement includes the revenue and expenses for the year and shows the gross profit and profit for the year.

Statement of financial position- shows the assets, liabilities and capital of the business on a certain date.

Assets represent anything owned by the business. Example- Land, building, premises, equipment, vehicles, trade
receivables, inventory, computers, cash and bank etc.
Inventory is the goods a business has available for resale
Trade receivables represent the amount owed to the business by its credit customers. It is also known as trade
debtors.

Liabilities represent anything owed by the business. Example- Loan, trade payables, bank overdraft etc.
Trade payables represent the amount business owes to its credit suppliers of goods. It is also known as trade
creditors

Capital is the total resources provided by the owner in the business. It is also known as owner’s equity. Example- an
owner can introduce cash, vehicle or other assets in to the business as capital.

Income or revenue- Example- Sales, interest receivables, rent receivables, commission receivables, fees receivables,
decrease in PDD, profit on disposal etc.

Expenses- Example- Purchases, interest payable, rent payable, advertising, salary, wages, stationary, depreciation,
light and heat, insurance, increase in PDD, loss on disposal etc.

Drawing- is any money or goods take out of the business by the owner for personal use.

If any of the following items If any of the following items increases

increases as a result of a transaction as a result of a transaction - Credit
– Debit
Assets Capital
Expenses Liabilities
Drawings Income/ Revenue
Provision
Example-
1. If we purchase a motor vehicle for $5000 paying cash, then one of the asset- motor vehicle is increasing- so
debit and another asset is decreasing- cash- so credit.
2. If we take a loan from a bank for $1000, then one asset- cash is increasing- so debit and liability-loan is
increasing – so credit
3. If an owner introduces $2000 as capital into his business, then an asset- cash is increasing-so debit and
capital is increasing- so credit
4. If an owner takes $500 cash from the business for his personal use, then one asset- cash is decreasing- so
credit and drawings is increasing- so debit.
5. If a business pays rent of $500 by cheque, then one asset - bank is decreasing- so credit and one expense –
rent payable is increasing- so debit.
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 6. If a business sells goods for $3000 and receives a cheque- then an asset – bank is increasing- so debit and an
income - revenue is increasing – so credit.

Inventory- is the goods a business purchases and keeps to resale. It’s a current asset of the business.
Trade receivables- are the amount owed to the business by credit customers. It’s a current asset of the business.
Trade payables -are the amount owed by the business to its credit suppliers. It’s a current liability of the business.

Solution-
a) Assets- Premises, inventory, trade receivables, cash at bank, motor vehicle, office fixture and furniture
Total assets= 180000+ 23420+ 21710+ 32600+ 2550+ 15900= 276180
b) Liabilities= trade payables and loan from bank
Total liabilities= 26180+ 80000=106180
c) Accounting equation: Assets = Capital + Liabilities
 -Capital = -Assets +Liabilities
 -Capital = -(assets- Liabilities)
 Capital = Assets- Liabilities
=276180-106180 =170000

Effects on assets $ Effects on Liabilities $

b) Inventory increase Trade payables increase
c) Bank Increase No effect
Trade receivables decrease

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d) Trade receivables Increase No effect
Inventory decrease
e) Cash decrease Loan decrease

Non-current assets (NCA) are those that will be used for more than one accounting period. Example- motor vehicles,
furniture and fixtures, land and building, Premises, equipment, computer, machineries.
Current assets (CA) are those that will be used up by the business within 12 months or an accounting period.
Example- cash, Bank, trade receivables, inventory, and other receivables- prepaid expenses and accrued income etc.
Non-current liabilities (NCL)- are those liabilities that the business has to repay within more than one accounting
year. – Example- Long term loans, Debentures etc.
Current liabilities (CL)- are those liabilities that the business has to repay within one accounting year. Example- short
term loan, bank overdraft, trade payables, other payables- accrued expenses and prepaid income.

Accounting equation
 Assets= Capital + Liabilities
 NCA+ CA= Capital + NCL + CL
Example – show the effect of the following transaction on the accounting equation
1. Alisha started her business with $3000 cash and a vehicle worth $4000
2. She purchased goods for $500 paying cash
3. She purchased goods $ 400 on credit from a supplier.
4. She took a bank loan of $1000
5. She sold goods on cash for $700 which cost her $400
Solution
Asset = Capital + Liabilities
1. Cash 3000+ Vehicle 4000 = 7000 + Liabilities
2. Inventory 500 + Cash(3000 - 500)+ Vehicle 4000 = 7000 + Liabilities
3. Inventory(500+ 400)+ Cash 2500+ Vehicle 4000 = 7000 + Trade payables 400
4. Inventory 900+ cash (2500+ 1000)+ Vehicle 4000= 7000 + Trade payables 400+ loan 1000
5. Inventory (900-400) cash (3500+700) )+ Vehicle 4000= 7000 + 300 + Trade payables 400+ loan 1000

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 Journal entry
If any of the following items If any of the following items increases
increases as a result of a transaction as a result of a transaction - Credit
– Debit
Assets Capital
Expenses Liabilities
Drawings Income/ Revenue
Provision

Example-
2019
June 1- Alisa started her business by introducing $2000 cash as capital into her business,
June 2- She purchased a motor vehicle for $1000 paying cash,
June 3- She paid rent of $200 by cash
June 4- She bought goods for $300 in cash
June 8- She sold goods for $800 cash
June 10-She took a loan of $3000 from a bank
June 15- She took $500 cash from the business for her personal use

Journal entry
Date Details Debit $ Credit $
2019
June
1 Cash Dr. 2000
Capital Cr. 2000
2 Motor vehicle Dr. 1000
Cash Cr. 1000
3 Rent payable Dr. 200
Cash Cr. 200
4 Purchases Dr. 300
Cash Cr. 300
8 Cash Dr. 800
Sales Cr. 800
10 Bank Dr. 3000
Loan Cr. 3000
15 Drawings Dr. 500
Cash Cr. 500
Total 7800 7800

Ledger “T” Account

Dr. Cash book (Cash) Cr.
Date Details $ Date Details $
2019 Capital 2000 2019
June 1 June
8 Sales 800 2 Motor vehicle 1000
10 Bank loan 3000 3 Rent payables 200
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 4 Purchases 300
15 Drawings 500

30 Balance cd 3800
5800 5800
July 1 Balance bd 3800

“T” accounts or ledger accounts are contained in the ledger books. There are three ledger books.
1. Sales ledger- contains only the accounts of credit customers
2. Purchases ledger- contains only the accounts of credit suppliers
3. General ledger – all other accounts are contained in the general ledger. Example- Sales, purchases,
rent, wages, motor vehicles, equipment accounts.
Dr. Cash book account (“T” account) Cr.
Date Details Cash $ Bank $ Date Details Cash $ Bank $
2006 Capital 20000 2006 Rent 650
Dec 1 Dec 2
9 Bank (contra) 150 9 Cash (contra) 150
14 Advertisement 90
23 Lodi road traders 9500
26 Motor vehicle 5760
28 Drawings 3000
31 Balance cd 60 940
150 20000 150 20000
2007
Jan 1 Balance bd 60 940

Dr. Purchases account (“T” account) Cr.

Date Details $ Date Details $
2006 Lodi road Traders 9500 2006 Income statement (balancing 9500
Dec 5 Dec 31 figure)
9500 9500

Dr. Sales account (“T” account) Cr.

Date Details $ Date Details $
2006 Income statement (balancing 4120 2006 Central Dealer 4120

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Dec 31 figure) Dec 18
4120 4120

Dr. Lodi Road Traders (purchases ledger) Cr.

Date Details $ Date Details $
2006 Bank 9500 2006 Purchases 9500
Dec 23 Dec 5
9500 9500

Journal entry
Date Details Debit $ Credit $
2006
December
1 Bank Dr. 20000
Capital Cr. 20000
2 Rent payable Dr. 650
Bank Cr. 650
5 Purchases Dr. 9500
Lodi Road Traders Cr. 9500
9 Cash Dr. 150
Bank Cr. 150
14 Advertising expense Dr. 90
Cash Cr. 90
18 Central Dealers Dr. 4120
Sales Cr. 4120
23 Lodi Road Traders Dr. 9500
Bank Cr. 9500
26 Motor Vehicle Dr. 5760
Bank cr. 5760
28 Drawings Dr. 3000
Bank Cr. 3000
Total 52770 52770

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 Ledger “T” Account
Dr. Cash book (bank) Cr.
Date Details $ Date Details $
2006 Capital 20000 2006 Rent payable 650
Dec 1 Dec 2
9 Cash 150
23 Lodi Road Traders 9500
26 Motor vehicle 5760
28 Drawing 3000
31 Balance cd 940
20000 20000
2007
Jan 1 Balance bd 940

Dr. Sales account (“T” account) Cr.

Date Details $ Date Details $
2008 2008 Cash 64
July July 10
24 B Squire 82
July 31 Income statement (balancing
figure) 146
146 146

Dr. Purchases account (“T” account) Cr.

Date Details $ Date Details $
2008 Cash 110 2008
July 3 July
7 F Herd 320
18 D Exodus 414
July 31 Income statement (balancing

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 figure) 844
844 844

Dr. Cash book (bank) Cr.

Date Details $ Date Details $
2008 July Capital 750 2008 Purchases 110
1 July 3
25 F herd 274
10 Sales 64
31 B squires 82

July 31 Balance cd (balancing

figure) 512
896 896

Aug 1 Balance bd 512

Dr. Sales account (“T” account) Cr.

Date Details $ Date Details $
2007 2007 Cash 1910
July July 4
8 H Rise 1374
10 P Taylor 341
14 G Pate 535
R Sim 262
24 Cash 110
July 31 Income statement (balancing
figure) 4532
4532 4532

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 Dr. Purchases account (“T” account) Cr.
Date Details $ Date Details $
2007 B Brown 1530 2007
July 3 July
I Jess 4162
11 B brown 488
20 Cash 390
July 31 Income statement (balancing
figure) 6570
6570 6570

Dr Cash book (bank) Cr.

Date Details $ Date Details $
2007 R Hughes- loan 5000 2007 Bank 200
July 2 July 6
4 Sales 1910 31 Office furniture 365
24 sales 110
28 Capital 2500
July 31 Balance cd (balancing figure) 8955
9520 9520
Aug 1 Balance bd 8955

Tips- ledger accounts

1. Balance c/d means balance “carried down” at the end of the month
2. Balance b/d means balance “brought down” at the beginning of each month from
previous month.
3. Both debit and credit side of the ledger account must be added at the end of each
month to balance the account. The highest addition between debit or credit side
must be chosen to balance the account and written in the both side. The shortage in
addition of one side is called the balancing figure at the end of each month.
4. If the ledger account is either an income or an expense account then the balancing
figure will be labelled as income statement.
5. If the ledger account is any of the assets , liability or capital, drawing or provision
accounts then the balancing figure will be labelled as balance c/d.

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 Journal entry
Date Details Debit $ Credit $
2007 Bank Dr. 20000
July 1 Capital Cr. 20000
2 Cash Dr. 5000
Loan from R Hughes Cr. 5000
3 Purchases Dr. 5692
B Brown Cr. 1530
I Jess Cr. 4162
4 Cash Dr. 1910
Sale cr. 1910
6 Bank Dr. 200
Cash Cr. 200
8 H Rise Dr. 1374
Sales Cr. 1374
10 P Taylor Dr. 341
Sales Cr. 341
11 Purchases Dr. 488
B Brown Cr. 488
12 Sales return Dr. 65
H rise Cr. 65
14 G Pate Dr 535
R Sim Dr. 262
Sales Cr. 797
15 B Brown Dr. 94
Purchases return Cr. 94
17 Van (motor vehicle) Dr. 4370
Aberdeen Car LTD. CR. 4370
18 Office furniture DR. 1800
J Winter Ltd Cr. 1800
19 I Jess Dr. 130
Purchases return Cr. 130
20 Purchases Dr. 390
Cash Cr. 390
24 Cash Dr. 110
Sales Cr. 110
25 B Brown Dr. 1924
Bank Cr. 1924
26 Sales Return Dr. 34
G pate Cr. 34
27 J winter DR. 180
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 Office furniture Cr. 180
28 Cash Dr. 2500
Capital Cr. 2500
29 Aberdeen Cars ltd Dr. 4370
Bank Cr. 4370
31 Office furniture Dr. 365
Cash Cr 365
Total

Ledger accounts required-cash and bank account, capital account, sales, purchases, van account, purchases
return, Fixture, Firelighters, J Watson, L less, F Holmes loan,
Dr. J Watson Account Cr.
Date Details $ Date Details $
2006 Purchases return 42 2006 Purchases 410
Aug 12 Aug 4
29 Bank 368 _____
410 410

Dr. Purchases return account Cr.

Date Details $ Date Details $
2006 2006 J Watson 42
Aug Aug 12
31 Income statement 42 ____
42 42

Dr. Capital account Cr.

Date Details $ Date Details $
2006 2006 Cash 7400
Aug Aug 1
31 Balance cd 7400 ____

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 7400 7400
Sep 1 Balance bd 7400
Dr. Van account Cr.
Date Details $ Date Details $
2006 Bank 4920 2006 Balance cd 4920
Aug 5 Aug 31
4920 4920
Sep 1 Balance bd 4920

Capital, Hind, H Buchan, Machinery account

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 General ledger
Bank account
Date Details $ Date Details $
Sep 1 Balance bd 1000 Sep 4 Newton and Ridely 4050
M Baldwin 2000 J Duckworth 125
G Platt 250

Sales ledger
M Baldwin account
Date Details $ Date Details $
Sep 1 Balance bd 2500 Sep 1 Bank 2000
Discount allowed 500

A Roberts account
Date Details $ Date Details $
Sep 1 Balance bd 900 Sep 1 Irrecoverable debt 900

G Platt account
Date Details $ Date Details $
Sep 1 Balance bd 250 Sep 3 Bank 250

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 Purchases ledger
Newton and Ridley
Date Details $ Date Details $
Sep 4 Bank 4050 Sep 1 Balance bd 4500
Discount received 450

J Duckworth
Date Details $ Date Details $
Sep 4 Bank 125 Sep 1 Balance bd 125

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