LaiACCT1200/fall20 (lecture 4)

ADA University, School of Business

ACCT1200 Principles of Financial Accounting, Fall 2020
Lecture 4 – Accounting Cycle 2

 Books of original entries:

o When the firm is small, all original entries can be kept in one book of journal (or
just one ledger). As the firm gets bigger, not practical to keep all entries in one
book, thus requiring several books to be used (division of work among several
book-keepers is possible).
o A logical way to “divide” or categorize the different books is by nature of
transactions; that is, one book for credit sales only, another book for credit
purchases and yet another for cash receipts and payments only.
● Types of books of original entry:
Book Use for recording
o Sales journal credit sales
o Purchases journal credit purchases
o Cash book receipts and payments of cash
o Return inwards journal return inwards
o Return outwards journal return outwards
o General journal other items.

return inwards- recording for sales, customers who returned goods to you
return outwards- recording of goods that you buy from suppliers, and for
example, they sent the wrong good or it has a defect, so when you send them
back it is recorded in return outwards journal

● Sales journal
o The sales journal is used to record credit sales only; cash sales are not recorded
in the sales journal.
o Most business entities sell on credit due to competition, tradition and goodwill.
o Sales invoice – document showing full details of the goods sold and the prices of
the goods; buyer’s and seller’s names and addresses; and the terms of payment
(for example, 3/10 net 30, payed within 10 days, then you’ll have 30 percent).
o Recording – a common format of the sales journal is as follows:
Date Name of customer Invoice no. Folio Amount of invoice ($)
01.02 Sevara 0001 SL 45 1,000
02.02 Shakira 0002 SL 15 1,500
03.02 Madonna 0003 SL 30 900

o At the end of the period, the posting is done:

o Each individual credit sale is posted to the debit side of each customer’s
account in the sales ledger.

1
 o The total of the invoice amount is posted to the credit side of the sales
account in the general ledger.
o The folio column is used to record to which page of the sales ledger the record is
transferred to, that is, used for cross-reference. Cross reference is when you want
to check the objectivity of financial accountant. So, you go back to the first page
where all are recorded, search for the specific page and cross-refer.

LaiACCT1200/fall20 (lecture 4)

● Rationale for having sales journal (or other journals):

o Work saving.
o Division of work is made possible.
o Use of journals helps to prevent errors. If the transactions were recorded directly in
the ledger, it could be easy to make errors such as omitting the debit or the credit
entry, or entering the debit or credit entry twice. Such errors are less likely to be
made with the use of the journal.
o Use of journals helps to reduce the incidence of fraud. Auditors normally cross-
check between journals and ledgers.

● Details about the other books of original entries (purchases journal, cash-book, etc.) can
be found in the suggested readings listed below.

 Definition of ledger account: the form of record used to record increases and decreases
in a single accounting item is called an account or a ledger account. The entire group of
accounts or the book containing the ledger accounts is commonly referred to as the
ledger.

 Types of ledgers – as in the case of journals, there are various types of ledgers as follows:
Book Use for recording
 Sales ledger customers’ personal accounts
 Purchases ledger suppliers’ personal accounts
 General ledger contains all other accounts relating to assets, liabilities,
equity, revenue and expenses.
 Cash- Book

 In its simplest form, a ledger account has only 3 elements:

o a title consisting of the name of the account;
o a left side which is called the debit side;
o a right side which is called the credit side.

 The standard format of a ledger account is as follows:

Title of Account Account no. ( )
Date Description Page Amount Date Description Page Amount
($) ($)

2
Each side of the account has identical columns as follows:
 Date column – the date of the transaction is recorded here.
 Description column – this column is needed only for unusual items and is seldom used
for this particular purpose. It is normal to record the name of the corresponding debit
or credit account in this column for easy cross-reference.
LaiACCT1200/fall20 (lecture 4)

 Page column – the page or folio number of the journal on which the transaction is
recorded is listed in this column, thus making it possible and easy to trace ledger entries
back to their source. This information is particularly useful for auditors who often need
to check the authenticity (validity) of ledger entries by referring to the journals (also
known as establishing the audit trail). A cross-reference between the ledger and journal
is therefore essential to the efficient audit of the records.
 Amount column – the amount of the entry is recorded here.
 This form of the ledger account is also called a T-account (why?).

 Debit and credit terminology – debit, debit entry or debiting; credit, credit entry or
crediting (make sure you know what they mean).

 Uses of the ledger: ledger accounts are a means of accumulating information on specific
items needed by management in directing the business. For example, by maintaining
the sales ledger accounts, management can easily obtain information about the amount
each of the customers (debtors) owe the company. This information may not be “readily
available” from the sales journal.

 Examples:
The following transactions relate to Farmer’s business for the month of December
2017:
01.12.17 Started the business with $10,000 in cash.
02.12.17 Bought goods on credit from the following suppliers:
Grass $6,000
Seed $7,000
10.12.17 Sold goods on credit to the following customers:
Fog $3,000
Mist $4,000
12.12.17 Returned goods to the following suppliers:
Grass $1,000
Seed $2,000
15.12.17 Bought additional goods on credit from Grass for $3,000 and from Seed for
$4,000.
20.12.17 Sold more goods on credit to Fog for $2,000 and to Mist for $3,000. - debit
24.12.17 Paid office expenses of $5,000 in cash.

3
 29.12.17 Received $4,000 in cash from Fog and $6,000 in cash from Mist.
31.12.17 Farmer paid Grass and Seed $6,000 and $8,000 respectively, in cash.

Enter the above transactions in Farmer’s ledger accounts.

 Balancing the ledger accounts – calculating and entering the difference between the total
of the two sides of an account.

LaiACCT1200/fall20 (lecture 4)
 When the total of its debit entries exceeds the total of its credit entries, the account
is said to have a debit balance; when the total of its credit entries exceeds the total of
its debit entries, the account is said to have a credit balance.
 Accounts may be balanced once a week, a month or once a year.

● Example of balancing an account with a debit balance (Farmer’s Example above):

_______________________________Cash account___ _____________________________
$ │ $
01.12.17 Capital 10,000 │ 24.12.17 Office expenses 5,000
29.12.17 Fog 4,000 │ 31.12.17 Grass 6,000
29.12.17 Mist 6,000 │ 31.12.17 Seed 8,000
│ 31.12.17 Balance c/d 1,000
20,000 │ 20,000
01.01.18 Balance b/d 1,000 │
Notes:
 c/d – carried down on the last day of the period; b/d – brought down to start off entries
for the following month.
 Note the compliance with the double-entry rule, $1,000 debited (balance b/d) and $1,000
credited (balance c/d).
 Totals are usually double-underlined although not done above.

 Example of balancing an account with a credit balance (Farmer’s example above):

_________________________________Grass’ account_______________________________
$ │ $
12.12.17 Return Outwards 1,000 │ 02.12.17 Purchases 6,000
31.12.17 Cash 6,000 │ 15.12.17 Purchases 3,000
31.12.17 Balance c/d 2,000 │

9,000 │ 9,000
│ 01.01.18 Balance b/d 2,000

 If an account contains only one entry on each side and they are equal, totals are not
included when balancing the account.
 If an account contains only one entry, it is unnecessary to enter the total after entering
the balance carried down. Double-lining the entries will show that the entries are the
own totals.

4
 T-accounts should always be balanced off / closed off at the end of each period, even
when they contain only one entry.
 Exercise: You are required to balance off the accounts of Farmer’s business (page 3
above) as at 31 December 2017 and bring down the balances as at 01 January 2018.


Readings:
 F Wood & A Sangster, Business Accounting 1, 13th edition, 2015, Pearson, chapters 5,
11, 13 – 17.
 Leiwy, D and Perks, R; “Accounting: Understanding and Practice”, 4th edition, 2013,
McGraw-Hill Education, chapter 9.

LaiACCT1200/fall20 (tutorial 4)

ADA University, School of Business

ACCT1200 Principles of Financial Accounting, Fall 2020
Tutorial 4 – Accounting Cycle 2

 Issue 1:
Brian started in business on 1 January 2018. The following is a list of his transactions
for his first month of trading:

01.01. Opened a business bank account with $25,000.

02.01. Paid one month’s rent of $2,000 by cheque.
03.01. Bought goods costing $5,000 on credit from Linda.
04.01. Purchased motor car from Savoy Motors for $4,000 on credit.
05.01. Purchased goods costing $3,000 on credit from Sydney.
10.01. Cash sales of $6,000.
15.01. More goods costing $10,000 purchased on credit from Linda.
20.01. Sold goods on credit to Ann for $8,000.
22.01. Returned $2,000 of goods to Linda.
23.01. Paid $6,000 in cash into the bank.
24.01. Ann returned $1,000 of goods.
25.01. Withdrew $500 in cash from the bank to open a petty cash account.
26.01. Cheque received from Ann for $5,500; Ann also claimed a cash discount of
$500.
28.01. Office expenses of $250 paid out of petty cash.
29.01. Sent a cheque to Savoy Motors for $4,000.
30.01. Cheques sent to Linda and Sydney for $8,000 and $2,000 respectively. Cash
discounts were also claimed from Linda and Sydney of $700 and $100
respectively.
31.01. Paid by cheque another month’s rent of $2,000.

5
 31.01. Brian introduced $5,000 additional capital into the business by cheque.

Required:
Enter the above transactions in Brian’s ledger accounts for January 2018, balance off
the accounts and bring down the balances as at 1 February 2018.

 Issue 2:
The following transactions relate to the business of Aziza for the month of April
2017:
April 1 Sales on credit to Z Zidane $690, L Ronaldo $153, R Baggio $420.
April 10 Returns inwards from Z Zidane $40, R Baggio $20.
April 18 L Ronaldo paid $153 by cheque.
April 20 R Baggio paid $400 by cheque.
April 30 Z Zidane paid $300 by cash.

LaiACCT1200/fall20 (tutorial 4)

Required:
(i) Enter the transactions in the ledger accounts of Aziza;
(ii) Balance off the debtors’ accounts only at the end of the month.

Issue 3:
Record the following transactions relating to a trading business for the month of
November 2015, and balance off all the accounts as at 30 November 2015:
2015
Nov. 1 Started business with $5,000 in the bank.
Nov. 3 Bought goods on credit from: T Henriques $160; J Smith $230;
W Rogers $400; P Boone $310.
Nov. 5 Cash sales $240.
Nov. 6 Paid rent by cheque $20.
Nov. 7 Paid rates by cheque $190.
Nov. 11 Sold goods on credit to: L Matthews $48; K Allen $32; R Hall $1,170.
Nov. 17 Paid wages by cash $40.
Nov. 18 We returned goods to: T Henriques $14; P Boone $20.
Nov. 19 Bought goods on credit from: P Boone $80; W Rogers $270; D Diaz $130.
Nov. 20 Goods were returned to us by: K Allen $2; L Matthews $4.
Nov. 21 Bought van on credit from AZ Motors $500.
Nov. 23 We paid the following by cheque: T Henriques $146; J Smith $230;
W Rogers $300.
Nov. 25 Bought another van, paying by cheque immediately $700.
Nov. 26 Received a loan of $400 cash from A Williams.
Nov. 28 Received cheques from: L Matthews $44; K Allen $30.
Nov. 30 Proprietor brings a further $300 into the business, by a payment into the
business bank account.

6
7