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Accounting Workbook 9

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0% found this document useful (0 votes)

39 views168 pages

Accounting Workbook 9

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syedmuhammadabdulmoiz

We take content rights seriously. If you suspect this is your content, claim it here.

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1

Contents
1. THE FUNDAMENTALS OF ACCOUNTING

 Definition
 Purpose/objectives
 Users of accounting information
 Differences between Accounting and Book keeping
 Significance of measuring profit/loss
 Types of Accounts
2

1. THE FUNDAMENTALS OF ACCOUNTING

DEFINITION:
ACCOUNTING can be defined as “The process of identifying, measuring, and communicating
economic information to permit informed judgements and decisions by users of that information”.

PURPOSE /OBJECTVES OF ACCOUNTING:

Accounting plays a crucial role in running a business because it helps you track income and

outgoings, ensure required compliance, and provide investors, management, and business decisions

can be made by using quantitative financial information with Government.

Financial accounting is the branch of accounting that is concerned with

(i) recording business transactions,

(ii) preparing financial statements that report on how an entity (a business, charity, club,

society, government department, etc.) has performed and,

(iii) reporting on its financial position. It has many objectives, including letting people and

entities know:

• if they are making a profit or a loss;

• what the entity is worth;

• what a transaction was worth to them;

• how much cash they have;

• how wealthy they are;

• how much they are owed;

• how much they owe;

• enough information so that they can keep a financial check on the things they do. However,

the primary objective of financial accounting is to provide information for decision-making.

DIFFERENCES BETWEEN ACCOUNTING AND BOOK-KEEPING:

BOOK-KEEPING ACCOUNTING

Accounting refers to the process

Bookkeeping deals with
of summarising, interpreting and
1. DEFINITION identifying and recording
communicating the financial data
financial transactions only
of an organisation.

Data provided by bookkeeping Management can take important

2. Decision making is not sufficient for decision decisions based on the data
making obtained from accounting

Preparation of Not done in the case of Financial statements are a part of

3.
Financial Statement bookkeeping the accounting proces

No analysis is required in the Accounting analyses the data and

4. Analysis
bookkeeping creates insights for the business

The person concerned with The person concerned with

5. Persons Involved bookkeeping is known as a accounting is known as an
bookkeeper. accountant

Accounting helps in showing a

Determining Bookkeeping does not show the
6. clear picture of the financial
Financial Position financial position of a business
position of a business
4

Purposes of measuring business profit and loss

Measuring profitability is to know the ability of the company in various stages of its activities. Profit is
the financial return or reward that firms or entrepreneurs aim to achieve to reflect the risk that they take.
Given that most firms and entrepreneurs invest in order to make a return, the profit earned by a business
can be used to measure the success of that investment. Company managers and investors use P&L
statements to analyze the financial health of a company.

1. To determine the amount of cash a company brings in on an average in a month.

2. To analyze specific expenses to look for cost cutting measures.
3. To measure a company’s ability to pay the highest dividend relative to its competitors
4. To measure a company's ability to earn profit and continue to grow in the short-term and long-term.

TYPES OF ACCOUNTS:

Although businesses have many accounts in their books, every account falls under one of the following
five categories:

 Revenue
 Expenses
 Capital (equity)
 Assets
 Liabilities

DEFINITIONS:
1. ASSETS

Assets are the resources owned by the business.

An asset is a resource with economic value that an individual, corporation, or country owns or
controls with the expectation that it will provide a future benefit.

TYPES OF ASSETS:

a. CURRENT ASSETS:

In accounting, some assets are referred to as current. Current assets are short-term economic
resources that are expected to be converted into cash or consumed within one year. Current assets
include cash and cash equivalents, accounts receivable, inventory, and various prepaid expenses.

b. NON CURRENT ASSETS/FIXED ASSETS:

Non current assets are resources with an expected life of greater than a year, such as plants,
equipment, and buildings
5

2. LIABILITIES:

Liabilities represent anything owed by the business.

Total of funds owed for assets supplied to a business or expenses incurred not yet paid.

a. CURRENT /SHORT TERM LIABILITIES:

Current liabilities (also called short-term liabilities) are debts a company must pay within a normal
operating cycle, usually less than 12 months.

For example: creditors

b. LONG TERM /NON CURRENT LIABILITIES:

Long term liabilities are payable beyond 12 months for example mortgage.

3. CAPITAL/OWNER’S EQUITY:

The total of resources invested and left in a business by its owner.

Is the total resources provided by the owner and represents what the business owes the owner or the
total money invested by the owner of the business.
6

TEST YOURSELF

(I) Which of the items in the following list are liabilities and which of them are assets?

(a) Loan to A. Sangster

(b) Bank overdraft
(c) We are owed by a customer
(d) Inventory of goods held for sale
(e) Equipment
(f) Loan from F. Wood

(II) Classify the following items into liabilities and assets:

(a) Computers
(b) Cash in bank
(c) Buildings
(d) Bank overdraft
(e) Accounts payable for inventory
(f) Loan to D. Pratt
(g) Inventory
(h) Vans

Assets Liabilities

(III) Give two examples of each of the following

a. Asset

Example 1 _____________________________________

Example 2 _____________________________________

b. Liability

Example 1 _____________________________________

Example 2 _____________________________________
7

2 Explain the meaning of each of the following terms:

a. Trade payable

_____________________________________________________________________________________

b. Trade receivable

_____________________________________________________________________________________

PRACTICE EXERCISES

1. Which of the items in the following list are liabilities and which of them are assets.
a) Loan to A. Sangster
b) Bank overdraft
c) We are owed by a customer.
d) Inventory of goods held for sale.
e) Equipment
f) Loan from F. Wood

2. Classify the following items into liabilities and assets:

a) Computers
b) Cash in bank
c) Buildings
d) Bank overdraft
e) Accounts payable for inventory
f) Loan to D. Pratt
g) Inventory
h) Vans
i) Accounts receivable
8

1. THE ACCOUNTING EQUATION

 Introduction
 Statement of financial position
 The statement of financial position and the effects of business transactions

THE ACCOUNTNG EQUATION

Assets, liabilities and capital

It is important to remember that the accounting records of a business relate only to the business. From an
accounting viewpoint, the owner of that business is regarded as being separate from the business. When a
person decides to start a business he will have to provide the necessary funds (resources). This is often in
the form of monetary funds, but may consist of buildings, motors, goods and so on. Any resources
provided by the owner of the business are known as capital. This represents the amount owed by the
business to the owner of that business. Once the business is formed and capital introduced, the business
will own the money or other items provided by the owner. Things owned by the business (or owed to the
business) are regarded as the resources of the business or the assets of the business. In addition to the
owner, other people may also provide assets to the business. The amount owed by the business to these
people is known as liabilities.

Applying the accounting equation.

The accounting equation Like any other mathematical equation, the two sides of the equation will always
be equal. The formula for this equation is:

Assets = Capital + Liabilities.

Capital is sometimes referred to as owner’s equity. So the previous equation can also be written as:

Assets = Owner’s equity + Liabilities.

Like any mathematical equation, the accounting equation can be used to find any one of the three
elements if the other two are present. This equation illustrates that the assets of a business (the resources
used by a business) are always equal to the liabilities and capital of a business (the resources provided for
the business by others). The assets represent how the resources are used by the business and the liabilities
and capital represent where these resources come from.
9

Walkthrough 2.1

20–7 January
1 Leena set up a business to trade under the name of The Dress Shop. She opened a business bank
account and paid in $20 000 as capital.

1 The business purchased premises, $15 000, and paid by cheque.

2 The business purchased goods, $3 000, on credit.
3 The business sold goods, at the cost price of $1 000, on credit. Show the accounting equation after
each of the above transactions

Test yourself:

Fill in the missing figures in the following table.

Assets Capital Liabilities
$ $ $
35,000 12,500
44,400 19,300
67,300 55,000

PRACTICE EXERCISES

2. Complete the gaps in the following table:

3. Complete the gaps in the following table:

4. Basil Yamey is setting up a new business. Before selling anything, he bought a van for £9,000; a
transportable market stall for £1,800; a computer for £280; and an inventory of goods for £11,200. Fie
did not pay in full for his inventory of goods and still owes £5,000 for them. Fie borrowed £8,000 from
Luca Pacioli. After the events just described, and before trading starts, he has £900 cash in hand and
£6,300 in the bank.
Calculate the amount of his capital.

_____________________________________________________________________________________

5. Flint is starting a business. Before starting to sell anything, he bought fixtures for £1,200, a van for
£6,000 and an inventory of goods for £2,800. Although he has paid in full for the fixtures and the van,
he still owes £1,600 for some of the inventory. B. Rub lent him £2,500. After the above, Flint has £200
in the business bank account and £175 cash in hand. You are required to calculate his capital.

_____________________________________________________________________________________

_____________________________________________________________________________________
11

TEST YOURSELF:
a) Complete the columns to show the effects of the following transactions:

(a) We pay a creditor £310 by cheque.

(b) Bought fixtures £175 paying in cash.
(c) Bought goods on time £630.
(d) The proprietor introduces another £1,200 cash into the business.
(e) J. Walker lends the business £2,500 in cash.
(f) A debtor pays us £50 in cash.
(g) We return goods costing £90 to a supplier whose bill we had not paid.
(h) Bought an office computer paying £610 by cheque.

S.NO ASSETS LIABILITIES CAPITAL

b) Complete the columns to show the effects of the following transactions:

.
(a) Bought a van on time £8,700
(b) Repaid by cash a loan owed to F. Duff £10,000.
(c) Bought goods for £1,400 paying by cheque.
(d) The owner puts a further £4,000 cash into the business.
(e) A debtor returns to us goods worth £150. We agree to make an allowance for them.
(f) Bought goods on time £760.
(g) The owner takes out £200 cash for his personal use.
(h) We pay a creditor £1,150 by cheque.

S.NO ASSETS LIABILITIES CAPITAL

PRACTICE EXERCISES

1. Which task is performed by a book-keeper?

a) analysing the trading results

b) entering transactions in the ledger
c) preparing year-end financial statements
d) providing information for decision-making

2. A trader provided the following information:

$
Premises 180 000
Inventory 23 420
Trade payables 26 180
Trade receivables 21 710
Office fixtures and fittings 32 600
Loan from bank 80 000
Cash at bank 2 550
Motor vehicles 15 900
13

a) Calculate the value of the assets.

_____________________________________________________________________________________

b) Calculate the value of the liabilities.

_____________________________________________________________________________________

c) Use the accounting equation to calculate the trader’s capital.

_____________________________________________________________________________________

3. A business had $9 420 in its bank account.

The following transactions took place:
$
Bought goods on credit 250
Sold goods on credit 1 100
Repaid a loan by cheque 5 000

How much was there in the bank after these transactions?

A $3 570 B $4 420 C $4 670 D $5 270

4. Complete the following table to show the effect of each of the following transactions. The first
one has been completed as an example.

a) Bought a motor vehicle and paid by cheque.

b) Bought goods on credit from a credit supplier.
c) Received a cheque from a credit customer.
d) Sold goods on credit e Paid off a loan in cash.
14

5. The statement of financial position of Bharwani Traders on 31 October 20–4 is shown below.

On 1 November 20–4 the following transactions took place:

A cheque for $3 000 was paid to a credit supplier.
A credit customer paid $500 in cash.
A loan for $8 000, which was paid into the bank, was received from Lenders Limited.
A cheque for $7 000 was paid for an additional machine.

Prepare the statement of financial position of Bharwani Traders on 1 November 20–4 after the
above transactions have taken place.

_____________________________________________________________________________________

_____________________________________________________________________________________
15

3. RECORDING TRANSACTIONS

 Introduction
 Elements of a transaction
 Debit credit rules
 General journal entries
 T-accounts
 Balancing off T-Accounts
 Double entry for Assets, liabilities, capital, expenses and revenues
 Double entry for drawings
 Double entry for purchases and sales
 Double entry for returns
 Double entry for carriage inwards and carriage outwards
 Interpreting ledger accounts and their balances

INTRODUCTION:

Double entry book-keeping is the process of making a debit entry and a credit entry for each
transaction.
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 books of a business using the double
entry system of book-keeping.
The term double entry is used because the two effects of a transaction (a giving and a receiving) are
both recorded in the ledger. A business maintains a separate ledger account for each type of asset,
expense, liability and income and for each individual debtor and creditor.
Every transaction is posted in the T- account relating to that account.

Double entry bookkeeping is therefore all about recording the financial results of transactions.
Examples of transactions include a purchase of a machine, payment of an electricity bill, sale of a
sandwich, and interest received from a bank for money deposited. There is a wide range of possible
transactions for any business, and we need a system of bookkeeping that is flexible enough to record
any of them. We do this by having places where we record each entry. These are called accounts. We
can add a new account whenever we want and there is no limit to the number of accounts we can
have. What we record in accounts are the two 'elements of transactions.'

The elements of a transaction

In accounts we record the outcome of transactions involving two elements: the Item exchanged, such
as a car or a computer; and the Form of settlement, such as cash. So, if you buy a computer with cash,
the Item exchanged is the computer. You need to create an account called 'computer account'. In that
account, you record that you now own a computer, which means that the total value of the account
has increased. You also need an account for the Form of settlement, in this case 'cash'. You call that
account, 'cash account'. In that account, you record that your cash has been reduced because you used
some cash to become the owner of a computer.
16

The amount of each transaction is entered on one of those two sides in the account for the Item
exchanged; and on the other side in the account for the Form of settlement. That is the, double entry,
one entry made in two different accounts for each transaction. When we make these entries, we
describe one as a debit and the other as a credit.

Debit and credit

Debit means 'place on the left of the account called' and credit means 'place on the right of the
account called'. You can see why we just use the words 'debit' and 'credit', instead of the whole eight-
word phrase each time, can't you? These two words 'debit' and 'credit' are central to understanding
double entry bookkeeping. Every time you record a transaction, you debit one account, and you credit
another account. The amount you debit to the first account will always be equal to the amount you
credit to the other account. This is why we call this form of bookkeeping, 'double entry'.

The totals of the debits and credits for any transaction must always equal each other so that an accounting
transaction is always said to be in balance. Thus, the use of debits and credits in a two column transaction
recording format is the most essential of all controls over accounting accuracy.
WHAT TO DEBIT AND WHAT TO CREDIT:

GENERAL ENTRIES:
An accounting journal entry is the method used to enter an accounting transaction into the
accounting records of a business. Each general journal entry lists the date, the account title(s) to be
debited and the corresponding amount(s) followed by the account title to be credited and the
corresponding amount The accounts to be credited are indented.
The purpose of a journal entry is to physically or digitally record every business transaction properly and
accurately. If a transaction affects multiple accounts, the journal entry will detail that information as well.
17

EXAMPLE: Sold a car for cash $4000 on 1 May, 2014

DATE PARTICULARS/DETAILS DEBIT/DR CREDIT/CR
$ $
1 May,2014 CASH 4000
Car 4000
(narration) (To record sale of a car)

A two-line journal entry is known as a simple journal entry, while one containing more line
items is called a compound journal entry.

A compound journal entry is an accounting entry in which there is more than one debit, more
than one credit, or more than one of both debits and credits.

Example: On 1 May,2017 Sana Started business with £1,500 cash and £18,000 in the bank.

DATE DETAILS DEBIT CREDIT

$ $
May, 2017 Cash 18000
1. Bank 1500
Capital 19500
Narration (to record investment by the
owner)

The totals of the debits and credits for any transaction must always equal each other, so that
an accounting transaction is always said to be "in balance." If a transaction were not in
balance, then it would not be possible to create financial statements. Thus, the use of debits
and credits in a two-column transaction recording format is the most essential of all controls
over accounting accuracy.
18

PRACTICE EXERCISES:
A. Complete the following table;

B. Complete the following table:

C. Write up the asset and liability and capital accounts to record the following transactions in the
records of D. Mair:
May 01 Started business with £124,000 in the bank.
02 Bought office furniture by Internet transfer from bank account £7,400.
03 Bought computers £3,420 on time from Ale Ltd.
04 Bought a car paying by standing order £19,600.
08 Sold some of the office furniture - not suitable for the business -for £900 on time to A.
Tree & Co.
15 Paid the amount owing to Ale Ltd £3,420 by Internet transfer from bank account.
23 Received the amount due from A. Tree & Co £900 by cheque.
31 Bought equipment using Mair's debit card £620
19

DATE PARTICULARS/DETAILS DEBIT/DR CREDIT/CR

$ $

(narration)

D. PRACTICE EXERCISE:

1. Prepare the double entries (not the T-accounts) for the following transactions using the format:
Date Account name dr.
Account name cr.
July
1 Started in business with £5,000 in the bank and £1,000 cash.
4 Bought stationery by cheque £75.
5 Bought goods on time from T. Smart £2,100.
6 Sold goods for cash £340.
7 Paid insurance by cash £290.
8 Bought a computer on time from J. Hott £700.
9 Paid expenses by cheque £32.
10 Sold goods on time to C. Biggins £630.
11 Returned goods to T. Smart £550
14 Paid wages by cash £210.
17 Paid rent by cheque £225.
20 Received cheque £400 from C. Biggins.
21 Paid J. Hott by cheque £700.
23 Bought stationery on time from News Ltd £125.
25 Sold goods on time to F. Tank £645.
31 Paid News Ltd by cheque £125.
20

Date Particluar Debit Credit

T-ACCOUNTS

Accountants and bookkeepers often use T-accounts as a visual aid to see the effect of a
transaction or journal entry on the two (or more) accounts involved. A T-Account is a visual
presentation of the journal entries recorded in a general ledger account. This T format
graphically depicts the debits on the left side of the T and the credits on the right side.
This system allows accountants and bookkeepers to easily track account balances and
spot errors in journal entries.

 An account title at the top horizontal line of the T

 A debit side on the left
 A credit side on the right

The layout of a ledger account is as follows:

Format:

Date Details $ Date Details $

Debits are always posted on the left side of the t account while credits are always posted on the right side.
This means that accounts with debit balances like assets will always increase when another debit is added
to the account. Likewise, accounts with a credit balance, like liabilities, will always increase when
another credit is added to the account.
22

Ledger accounts are divided into two sections, this can be shown by a central vertical line, in this text
book the central vertical line is not shown. The left -hand-side is known as the debit side and the right-
hand-side is known as the credit side. The term debit is usually abbreviated to ‘dr’ and the term credit is
usually abbreviated to ‘cr’. On either side of the account there are columns to record the date, details and
amount of each transaction.. In order to record the two aspects of every transaction, every transaction is
entered twice – on the debit side of one account and on the credit side of another account.

Example 1:

2017

January 01 Ajay began business. He opened a business bank account and invested $80 000 as capital

02 Fixtures and equipment costing $30 000 were bought and paid for by cheque (b)

Enter these transactions in Ajay’s ledger.

Double entry records for expenses and income

A ledger account is opened for each type of expense and income. The same double entry principles
applied to assets and liabilities are applied to expenses and income. The account which is receiving the
money is debited and the account which is giving the money is credited.

EXPENSE: An expense in accounting refers to the money spent and the costs incurred by a company in
pursuing revenue. Simply put, account expenses are the costs involved in running a business, and
collectively they contribute to the activities involved in generating profit.

The value of all the assets that have been used up to obtain revenues.

For ex: rent expense, insurance expense

REVENUE: Revenue is the total amount of income generated by the sale of goods or services related to
the company's primary operations.

The financial value of goods and services sold to customers.

For ex: sales

DRAWINGS: Drawings represent any value taken from the business by the owner of that business.

Double entry records for drawings

Whenever the owner of a business takes value from the business for his/her own use this is known as
drawings. This value may be in the form of money, non-current assets or goods from the inventory held by
the business. It is usual to open a drawings account to record these values so that the capital account does
not have a large number of entries. Any drawings are debited in the drawings account to show the value
going into that account. The credit entry will be in the account giving the value. When money is withdrawn,
either the cash or bank account will be credited. When a non-current asset is withdrawn, the appropriate
non-current asset account will be credited. When goods are withdrawn, the purchases account will be
credited. This is because these goods were originally purchased for resale and the amount of goods available
for resale is reduced when goods are taken by the owner. At the end of the financial year, the total of the
drawings account is transferred to the capital account. This reduces the amount owed by the business to the
owner of the business.
24

PRACTICE EXERCISES

1. Enter the following transactions, completing the double entry in the books for the month of
August 2017:
2017 August
1 Started in business with £31,000 in the bank and £4,000 in cash.
12 Purchased goods £1,160 on time from A. Cliff.
13 Bought fixtures and fittings £4,600 paying by cheque.
14 Sold goods for cash £600.
15 Bought goods on time £1,300 from S. Bell.
19 Paid rent by cash £800.
12 Bought stationery £180, paying in cash.
18 Goods returned to A. Cliff £164.
21 Received rent of £480 by cheque for sublet of corner space.
23 Sold goods on time to R. Coat for £3,200.
24 Bought a van paying by cheque £16,400.
30 Paid the month's wages by cash £1,220.
31 The proprietor took cash for her own personal use £1,020

_____________________________________________________________________________________

_____________________________________________________________________________________
25

_____________________________________________________________________________________

_____________________________________________________________________________________
26

2. Write up the following transactions in the books of J. Dunn:

2017 May
1 Started in business with cash £30,000.
2 Bought goods on time from T. Lamb £700.
3 Paid rent by cash £1,740.
4 Paid £25,000 of the cash of the business into a bank account.
5 Sold goods on time to R. Still £384.
10 Bought stationery £170 paying by cheque.
11 Cash sales £624.
14 Goods returned by us to T. Lamb £80.
17 Sold goods on time to R. Davis £424.
20 Paid for repairs to the building by cash £156.
22 R. Still returned goods to us £62.
27 Paid T. Lamb by cheque £620.
28 Cash purchases £940.
29 Bought a van paying by cheque £7,000.
30 Paid motor expenses in cash £432.
31 Bought a computer £1,460 on time from S. Tims.

_____________________________________________________________________________________

_____________________________________________________________________________________
27

_____________________________________________________________________________________

_____________________________________________________________________________________
28

3. Write up the following transactions in the T-accounts of F. Fernandes:

Feb
1 Started in business with £11,000 in the bank and £1,600 cash.
2 Bought goods on time: J. Biggs £830; D. Martin £610; P. Lot £590.
3 Bought goods for cash £370.
4 Paid rent in cash £75.
4 Bought stationery paying by cheque £62.
4 Sold goods on time; D. Twigg £370; B. Hogan £290; K. Fletcher £410.
5 Paid wages in cash £160.
6 We returned goods to D. Martin £195.
10 Paid rent in cash £75.
13 Hogan returns goods to us £35.
14 Sold goods on time to: T. Lee £205; F. Sharp £280; G. Rae £426.
15 Paid business rates by cheque £970.
15 Paid insurance in cash £280.
16 Paid rent by cheque £75.
17 Bought van on time from B. Black £6,100.
18 Paid motor expenses in cash £24.
19 Paid wages in cash £170.
20 Received part of amount owing from K. Fletcher by cheque £250.
28 Received refund of business rates £45 by cheque.
28 aid by cheque: J. Biggs £830; D. Martin £415; B. Black £6,100

_____________________________________________________________________________________

_____________________________________________________________________________________
29

_____________________________________________________________________________________

_____________________________________________________________________________________
30

4. On 1 July 20–6 Mumtaz started a business. The following are her transactions for the first
two weeks of trading:
July
1 Mumtaz paid capital, $50 000, into the business bank account
2 Bought premises, $25 000, and paid by cheque
4 Bought equipment, $4 000, and paid by cheque
5 Bought goods, $1 500, on credit from Mayur Vihar Traders
6 Paid advertising expenses, $60, by cheque
9 Sold goods, $200, and received a cheque
 Sold goods, $310, on credit, to Ridhima
13 Ridhima returned damaged goods, $20
14 Paid $1 000 by cheque on account to Mayur Vihar Traders

_____________________________________________________________________________________

_____________________________________________________________________________________
31

_____________________________________________________________________________________

_____________________________________________________________________________________
32

5. Katie is a trader. On 1 October 20–4 she had the following balances in her ledger:
$
Capital 15 000
Inventory 3 400
Fixtures and fittings 10 100
Trade receivable – Daisy 1 110
Trade payable – Zara 1 760
Loan from AB Finance 2 000
Bank 4 150 debit

a. Enter these balances in the appropriate accounts.

The following transactions took place in October 20–4:
October
2 Bought goods on credit from Zara, $1 500
3 Returned goods to Zara, $80
5 Repaid the loan by cheque
14 Paid Zara a cheque for the amount owing on 1 October 20–4
21 Cash received from sales of goods, paid directly into the bank, $940
28 Katie took goods for her own use, $140
28 Daisy paid the amount due by cheque

_____________________________________________________________________________________

_____________________________________________________________________________________
33

_____________________________________________________________________________________

_____________________________________________________________________________________
34

6. The following account appeared in the ledger of Marine Drive Stores:

Explain each entry in this account and also state where the double entry for each entry
will be found.
_____________________________________________________________________________________

_____________________________________________________________________________________

_____________________________________________________________________________________
35

_____________________________________________________________________________________

_____________________________________________________________________________________
36

MCQS:

1. Mahela is a trader. He took goods costing $100 for his own use.
How would Mahela record this in his ledger?

2. Jaswant purchased goods from Ali and paid in cash. Which entries would Ali make in
his ledger?

3. Dinesh returned goods to his credit supplier, Thisara. How would Dinesh record this
in his ledger?
37

4. TRIAL BALANCE
 Introduction
 Purpose
 Preparation of a trial balance

INTRODUCTION: A trial balance is a list of the balances on the accounts in the ledger
at a certain date
The name of each account is listed in the trial balance. The balance on each account is
shown according to whether it is a debit balance or a credit balance. The trial balance
will show if the total of the debit balances is equal to the total credit balances.

TIP: A trial balance is a list of balances: it is not part of the double entry system.

PURPOSE:
1. A trial balance is prepared to check the arithmetical accuracy of the double entry book
keeping.
However, the balancing of the trial balance is not proof that the entries in the ledger
accounts are completely free from errors.
2 A trial balance is useful in preparing financial statements.

If the ledger accounts are balanced monthly then a trial balance may also be drawn up at
the end of each month. The trial balance should be headed with the term ‘trial balance’
along with the date on which it was prepared. The layout of a trial balance is as follows:

S.NO Particular Debit Credit

The preparation of a trial balance

All the ledger accounts which are ‘open’ (those which still have an amount of money
showing in the account) are listed together with the balance on each account.

If the debit side of the account is larger in money than the credit side then that account
has a debit balance and the amount of the balance (or difference) is entered in the debit
column of the trial balance.

If the credit side of the account has more money than the debit side then that account has
a credit balance and the amount of the balance (or difference) is entered in the credit
column of the trial balance.

The debit column and the credit column are totaled.

If the totals agree, it indicates that the double entry book-keeping is arithmetically
correct.
38

TIP: The opening inventory is included in a trial balance. The closing inventory does not
appear on the books when a trial balance is prepared so cannot be included in a trial
balance.

• The heading of the trial balance was incorrect and required amending.
• Each item had to be considered to decide whether it was in the correct column or it
required amending.

TEST YOURSELF

(a) Explain what a trial balance is.

(b) State two purposes of preparing a trial balance.
(c) Explain what determines whether the balance of an account is entered in the debit
column or the credit column of a trial balance.
(d) Explain what is indicated if the totals of a trial balance agree.

TEST YOUR SELF

1. State the column of a trial balance in which the balance of each of the following
accounts would appear. Give a reason for your answer in each case.
a) Loan from WQ Loans
b) Motor expenses
c) Motor vehicles
d) Bank overdraft
e) Carriage outwards
f) Commission receivable
39

PRACTICE EXERCSES
1. You are to enter up the necessary accounts for the month of October from the following
information relating to a small printing firm. Then balance-off the accounts and extract a
trial balance as at 31 October 2017. 2017
1 Started in business with capital in cash of £3,600 and £8,400 in the bank.
2 Bought goods on time from: A. Bell £1,220; J. Smith £1,030; T. Hand £348; L.
Smart £690; S. long £1,084
4 Sold goods on time to: P. Hunt £680; A. Dexter £1,440; P. Spin £2,304.
6 Paid rent by cash £820.
9 P. Hunt paid us his account by cheque £680.
9 P. Spin paid us £2,000 by cheque.
7 We paid the following by cheque: T. Hand £348; A. Bell £1,220.
15 Paid carriage in cash £76.
18 Bought goods on time from J. Smith £582; L. Smart £1,880.
21 Sold goods on time to A. Dester £1,620.
31 Paid rent by cheque £980.

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2. Enter the following transactions of an antiques shop in the accounts and extract a trial
balance as at 31 March 2017.

MARCH, 2017
1 Started in business with £8,000 in the bank.
2 Bought goods on time from: L. Frank £550; G. Byers £540; P. Lee £610.
5 Cash sales £510.
6 Paid wages in cash £110.
7 Sold goods on time to: J. Snow £295; K. Park £360; B. Tyler £640.
9 Bought goods for cash £120.
10 Bought goods on time from: G. Byers £410; P. Lee £1,240.
11 Paid wages in cash £110.
12 Sold goods on time to: K. Park £610; B. Tyler £205.
15 Bought shop fixtures on time from Stop Ltd £740.
16 Paid G. Byers by cheque £700.
17 We returned goods to P. Lee £83.
21 Paid Stop Ltd a cheque for £740.
24 B. Tyler paid us his account by cheque £845.
25 Returned goods to L. Frank £18.
28 G. Prince lent us £1,000 by cash.
31 Bought a van paying by cheque £6,250.

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3. Record the following details relating to a carpet retailer for the month of November 2017 and
extract a trial balance as at 30 November 2017.

November, 2017
1 Started in business with £15,000 in the bank.
2 Bought goods on time from: J. Small £290; F. Brown £1,200; T. Rae £610; R.
Charles £530.
5 Cash sales £610.
6 Paid rent by cheque £175.
7 Paid business rates by cheque £130.
11 Sold goods on time to: T. Potts £85; J. Field £48; T. Gray £1,640.
17 Paid wages by cash £290.
18 We returned goods to: J. Small £18; R. Charles £27.
19 Bought goods on time from: R. Charles £110; T. Rae £320; F. Jack £165.
20 Goods were returned to us by: J. Field £6; T. Potts £14.
21 Bought van on time from Turnkey Motors £4,950.
22 We paid the following by cheque: J. Small £272; F. Brown £1,200; T. Rae £500.
25 Bought another van, paying by cheque immediately £6,200.
26 Received a loan of £750 cash from B. Bennet.
28 Received cheques from: T. Potts £71; J. Field £42.
30 Proprietor brings a further £900 into the business, by a payment into the business bank
account.

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4. Record the following transactions for the month of January of a small finishing retailer,
balance-off all the accounts, and then extract a trial balance as at 31 January 2016.

1 Bought goods for cash £550.

4 Bought goods on time from: T. Dry £800; F. Hood £930; M. Smith £160; G. Low
£510.
5 Bought stationery on time from Buttons Ltd £89.
6 Sold goods on time to: R. long £170; L. Fish £240; M. Singh £326; A. Tom £204.
8 Paid rent by cheque £220.
10 Bought fixtures on time from Chiefs Ltd £610.
11 Paid salaries in cash £790.
14 Returned goods to: F. Hood £30; M. Smith £42.
15 Bought van by cheque £6,500.
16 Received loan from B. Barclay by cheque £2,000.
17 Goods returned to us by; R. Tong £5; M. Singh £20.
21 Cash sales £145.
22 Sold goods on time to: L. Fish £130; A. Tom £410; R. Pleat £158.
26 We paid the following by cheque: F. Hood £900; M. Smith £118.
29 Received cheques from: R. Pleat £158; L. Fish £370.
30 Received a further loan from B. Barclay by cash £500.
30 Received £614 cash from A. Tom.

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5. Jai is a trader. The following balances appeared in his books on 31 March 20–8.
$
Sales 86 000
Purchases 51 500
Bank overdraft 1 100
Cash 50
Trade payables 4 900
Trade receivables 6 900
Furniture and equipment 26 400
Wages 21 300
Sundry expenses 3 100
Rent payable 3 200
Purchases returns 350
Inventory 9 200
Drawings 10 100
Capital 39 400

Prepare Jai’s trial balance at 31 March 20–8.

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6. Sayeeda provided the following list of balances on 30 April 20–4, but was not able to
provide her bank account balance.

Capital 392 000

Drawings 18 000
Premises 210 000
Fixtures and fittings 66 100
Inventory 11 950
Trade receivables 13 160
Trade payables 12 280
Loan from FH 20 000
Cash 100
Sales 157 280
Purchases 143 400
Rates 6 000
General expenses 11 540
Wages 96 750
Bank ?

Prepare Sayeeda’s trial balance at 30 April 20–4, inserting the missing bank balance.

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55

(e) FINANCIAL STATEMENTS

 Sole trader business (advantages and disadvantages)

 Introduction to financial statements
 Income statement of a trading business
 Income statement of a service business
 Statement of financial positon/balance sheet

You're self-employed if you run your own business as an individual and work for yourself. This
is also known as being a 'sole trader'.

Sole proprietorship – advantages and disadvantages

Consider operating as a sole trader if your business is small and capital investment is minimal.

Advantages of sole trading include that:

 you’re the boss

 you keep all the profits
 start-up costs are low
 you have maximum privacy
 establishing and operating your business is simple
 it’s easy to change your legal structure later if circumstances change you can easily wind up your
business.

Disadvantages of sole trading include that:

 you have unlimited liability for debts as there’s no legal distinction between private and business
assets
 your capacity to raise capital is limited
 all the responsibility for making day-to-day business decisions is yours
 retaining high-calibre employees can be difficult
 it can be hard to take holidays
 you’re taxed as a single person the life of the business is limited.

Introduction

When a person is operating a business alone as a sole trader, he/she is entitled to all the profits
the business makes, but will be responsible for any losses the business makes. Business decisions
may be made quickly, as consultation is not necessary, but there is no one with whom to share
the decision-making or the workload. The capital of the business will be restricted to what the
trader is able to invest, whereas other forms of business have access to capital invested by other
owners of the business. When a person starts a business his/her aim is to make a profit. The
profit (or loss) is calculated in the financial statements which are usually prepared at the end of
each financial year. Financial statements basically consist of two parts:
56

1 An income statement is a statement prepared for a trading period to show the gross profit and
profit for the year. An income statement which consists of two sections:

• a trading section in which the gross profit of the business is calculated

• a profit and loss section in which the profit for the year of the business is calculated. The
trading section and the profit and loss section of the income statement are part of the double
entry system.

PROFIT AND LOSS

TRADING SECTION
SECTION

2 A statement of financial position shows the assets and liabilities of the business at a certain
date. The statement of financial position is not part of the double entry system. Financial
statements are usually prepared from a trial balance. Every item in a trial balance appears once in
a set of financial statements. As each item is used, it is useful to place a tick (✓) against the item.
This ensures that no items are overlooked.

PURPOSE:
planning ahead
• obtaining loans from banks, from other businesses, or from private individuals
• telling prospective business partners how successful the business is
• telling someone who may be interested in buying the business how successful the business is
• calculating the tax due on the profits so that the correct amount of tax can be paid to the tax
authorities.
57

INCOME STATEMENT
A. Trading section of the income statement
The trading section is concerned with buying and selling, and its purpose is to calculate the profit earned
on the goods sold. This is known as the gross profit.
The formula for calculating gross profit is:
Gross profit = Selling price of goods – Cost of sales
The selling price represents the total sales less any sales returns. The cost of sales represents the total cost
of the goods actually sold. This is not necessarily the cost of goods purchased during the year:
Some goods may have been in stock at the start of the year, and some of the goods purchased during the
year may remain unsold at the end of the year.
The formula for calculating cost of sales is:
Cost of sales = Opening inventory + Purchases – Closing inventory
The purchases figure represents the total cost of purchases less any purchases returns. If carriage inwards
has been paid on goods purchased this must be added to the purchases as it increases the cost of the
goods. If the owner of the business has withdrawn goods for personal use the cost of these is credited to
the purchases account, so reducing the cost of goods available for sale. If goods taken by the owner have
not already been recorded they must be deducted from the purchases.
The formula for calculating the net purchases figure is:
Net purchases = Purchases – Purchases returns + Carriage inwards – Goods for own use(drawings)
The calculation of gross profit is shown in the trading section of the income statement.
This must have a heading which includes the period of time covered by the statement. It is also usual to
include the name under which the business trades.

TIP The term ‘revenue’ is used instead of ‘sales’ in a trial balance and in an income statement.
B Profit and loss section of the income statement
The profit and loss section of an income statement is concerned with profits and losses, gains and
expenses. Its purpose is to calculate the final profit after all running expenses and other items of income.
This is known as the profit for the year.
The formula for calculating profit for the year is:
Profit for the year = Gross profit + Other income – Expenses
The profit and loss section of an income statement must have a heading which includes the period of time
covered by the statement.
58

Income statement of a service business

A service business is one which does not buy and sell goods, such as an accountant, an insurance
company, a travel agent, a hairdresser and so on. At the end of the financial year, these businesses still
need to prepare financial statements. However, the trading account section of the income statement is not
prepared as no goods are bought and sold. Only the profit and loss section of the income statement and a
statement of financial position are prepared. In the income statement all the items of revenue receivable
such as fees from clients, commission and other income are credited and expenses are debited. The
statement of financial position is the same as the statement of financial position of a trading business.

FORMATS
NAME OF THE Trader
INCOME STATEMENT FOR THE YEAR ENDING____________
$ $ $
Revenue(sales) xxx
Less: Sales return (xx)
Net Sales XXX
Less: Cost of sales (COS)
Opening Inventory XX
Add: Purchases XX
Less: Purchases Return (XX)
Add: Carriage inward XX
Net Purchases XX
Less: Closing Inventory (XX)
Cost of sales (COS) (XXX)
Gross Profit XXX
Add: Other Income
Discount Received XX
Rent Received XX
Commission Received XX
Total Other Income XXX
Less: Expenses
Wages and Salaries (xx)
Rent (xx)
Lighting and heat (xx)
Office Expenses (xx)
Motor Expenses (xx)
Rent and rate (xx)
Depreciation Expenses (xx)
Bad dept Expenses (xx)
Total Expenses (xxx)
Profit/loss for the year xxx/(xxx)
59

PRACTICE EXERCISES
1. From the following trial balance of I. Lamb, extracted after one year's trading, prepare a
statement of profit or loss for the year ending 31 October 2016. A statement of financial position
is not required.

Inventory at 31 December 2016 was £15,600.

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2. From the following trial balance of G. Foot after his first year's trading, you are required to draw
up a statement of profit or loss for the year ending 30 June 2016. A statement of financial position
is not required.

Inventory at 30 June 2016 was £18,000.

_____________________________________________________________________________________

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3. From the following trial balance of F. Dover drawn-up on conclusion of his first year in business,
draw up a statement of profit or loss for the year ending 31 May 2017. A statement of financial
position is not required.

Inventory at 31 May 2017 was £28,972.

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4. Extract a statement of profit or loss for the year ending 30 June 2016 for G. Graham. The trial
balance as at 30 June 2016 after his first year of trading was as follows:

Inventory at 30 June 2016 was £29,304.

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5. Candy provided the following information at the end of her financial year on 30 September 20–3:
$

Capital at 1 October 20–2 198 000

Fees received from clients 82 300
Staff wages 49 600
Rent and rates 7 420
Insurance 3 830
Commissions received 4 810
Light and heat 2 180
Office expenses 1 730
Drawings 18 750

a State whether Candy’s business is a trading business or a service business. Give a reason for
your answer.
b Prepare Candy’s income statement for the year ended 30 September 20–3.

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STATEMENT OF FINANCIAL POSITION/BALANCE SHEET

Introduction
A statement of the financial position shows the assets of a business (what the business owns and
what is owing to the business) and the liabilities of a business (what the business owes) on a
certain date. The assets show how the resources are being used and the liabilities show where
they come from.

Assets
Assets are divided into two types. These are:

1 Non-current assets There are two types of non-current assets:

a) Tangible non-current assets: Tangible non-current assets are long-term assets which are
obtained for use rather than for resale. They help the business earn revenue.
Examples of tangible noncurrent assets include land and buildings, machinery, fixtures and
motors.
In a statement of financial position, it is usual for the non-current assets to be arranged in
increasing order of liquidity. This means that the most permanent assets are shown first.

A typical order for showing tangible non-current assets in a statement of financial position is as
follows:
Land and buildings
Machinery
Fixtures and equipment
Motor vehicles

b) Intangible non-current assets: Intangible non-current assets are long-term assets which do
not have material substance (they cannot be seen or touched). However, they belong to the
business and do have a value. Examples of intangible non-current assets include goodwill, brand
names and trademarks. In a statement of financial position the intangible non-current assets are
shown before the tangible non-current assets.

2 Current assets: Current assets are short-term assets. Because they arise from the normal
trading activities of the business their amounts are constantly changing. These are assets which
are either in the form of cash or which can be turned into cash relatively easily.
Examples of current assets include inventory, trade receivables, bank and cash.
In a statement of financial position, it is usual for current assets to be arranged in increasing order
of liquidity. This means that the assets furthest away from cash are shown first.
A typical order for showing current assets in a statement of financial position is:
Inventory
Trade receivables
Bank
Cash
69

Liabilities
Liabilities are divided into three types. These are:
1 Capital: Capital represents the owner’s investment in the business and is the amount owed by
the business to the owner.

2 Non-current liabilities: Non-current liabilities are amounts owed by the business which are not
due for repayment within the next 12 months.
Examples of non-current liabilities include long-term loan and mortgage.

3 Current liabilities:
Current liabilities are short-term liabilities. Since current liabilities, like current assets, arise from
the normal trading activities of the business, their amounts are constantly changing. They are
amounts owed by the business which are due for repayment within the next 12 months. Examples
of current liabilities include trade payables and bank overdraft.

A statement of financial position must have a heading which includes the date to which it relates.
It is also usual to include the name under which the business trades
NAME OF THE TRADER
STATEMENT OF FINANCIAL POSITION AS AT/ON ____________________
Non-Current Assets $ $
Building/Premises/Shop XX
Equipment’s/Machinery XX
Motor Vehicle XX
Total Non-Current Assets XXX
Current Assets
Inventory(closing) XX
Trade receivable XX
Prepaid expenses XX
Bank XX
Cash XX
Total Current Assets XXX
Total Assets XXX
Total Equities and Liabilities
Equities
Capital(opening) XXX
Add: Profit of the year XX
Less Drawings (XX)
Total Equities XXX
Long term Liabilities
Bank Loan (XX)
Total Long-term Liabilities (XXX)
Current Liabilities
A/C Payable (XX)
Other Payable (XX)
Total Current Liabilities (XXX)
Total Equities and Liabilities
70

TEST YOURSELF
a. Dwayne’s assets and liabilities on 29 September 20–1 were as follows:
$
Fixtures and fittings 49 500
Inventory 9 050
Trade payables 7 450
Trade receivables 8 150
Cash at bank 750

Dwayne invested $10 000 additional capital on 30 September 20–1. What was Dwayne’s
capital after this transaction?
A $62 500 B $67 450 C $70 000 D $77 450

b. A trader took cash from the business for personal use. What effect would this have on the
financial statements?

c. A trader repaid a long-term loan of $10 000. She used all the money in the business bank
account, $7 000, and paid the balance from her personal bank account.
How did this affect the statement of financial position?
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PRACTICE EXERCISES

1. Ayesha is a business adviser. Her financial year ends on 30 September. She provided the
following trial balance at 30 September 20–3:
$ $
Capital 125 000
Drawings 15 200
Premises 95 000
Office equipment 21 600
Fees from clients 65 950
Insurance 3 110
Printing and stationery 2 480
Wages 59 650
Office expenses 3 120
Rent receivable 6 000
Trade receivables 6 150
Bank overdraft 9 510
Cash 206 150
TOTAL 206 460 206 460

Prepare Ayesha’s income statement for the year ended 30 September 20–3 and a
statement of financial position at 30 September 20–3.
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2. Abhinav is a trader. Using the following information taken from Abhinav’s books on 30 June
20-8:

a) Prepare a trial balance at 30 June 20–8

b) Prepare an income statement for the year ended 30 June 20–8
c) Prepare a statement of financial position at 30 June 20–8.
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3. From the following trial balance of G. Still, draw up a statement of profit or loss for the year
ending 30 September 2017, and a statement of financial position as at that date.
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4. The following trial balance was extracted from the books of F. Sorley on 30 April 2017. From it,
and the note about inventory, prepare his statement of profit or loss for the year ending 30 April
2017, and a statement of financial position as at that date.
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5. The following is the trial balance of T. Owen as at 31 March 2016. Draw up a set of financial
statements for the year ended 31 March 2016.
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6. F. Brown drew up the following trial balance as at 30 September 2015. You are to draft the
statement of profit or loss for the year ending 30 September 2015 and a statement of financial
position as at that date.
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7. Ms Porter's business position at 1 July was as follows

£
Inventory 5,000
Equipment 3,700
Creditor (OK Ltd) 500
Debtor (AB Ltd) 300
Bank balance 1,200
Sold goods for cash 3,200
paid to bank 600
Sold goods to AB Limited 3,900
Bought goods from OK Ltd on time Paid OK Ltd by cheque 3,000
Paid general expenses by cheque 500
AB Ltd paid by cheque 300

Inventory at 31 July was £6,200.

Required:
a) Prepare a statement of profit or loss for the period.
b) Prepare a statement of financial position as at 31 July.
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8. From the following trial balance of T angle, extracted after one year of operations, prepare a
statement of profit or loss for the year ending 30 April 2016, together with a statement of
financial position as at that date.
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(f) ACCOUNTING PRINCIPLES

 Historic cost
 Duality
 Business entity
 Money measurement
 Prudence
 Matching
 Realisation
 Going concern
 Materiality
 Consistency

Accounting principles are sometimes referred to as concepts and conventions. A concept is a rule which
sets down how the financial activities of a business are recorded.

1. Historic cost
The historic cost principle requires that all assets and expenses are initially recorded in the ledger
accounts at their actual cost. It is closely linked to the money measurement principle. Cost is a known
fact and can be verified.

2. Duality
The principle of duality is also referred to as the dual aspect principle. It has been explained in Chapter
2 how every transaction has two aspects – a giving and a receiving. The term double entry is used to
describe how these two aspects of a transaction are recorded in the accounting records.

3. Money measurement
The money measurement principle means that only information which can be expressed in terms of
money can be recorded in the accounting records. Money is a recognised unit of measure and is a
traditional way of valuing transactions. It does not rely on personal opinions and it is factual. There
are many aspects of a business which cannot be measured in terms of money and, therefore, do not
appear in the accounting records. The morale of the workforce, the effectiveness of a good manager,
the benefits of a staff training course all play an important part in the success of the business, but they
will not appear in the accounting records as their value cannot be expressed in monetary terms. In a
similar way, the launch of a rival product or increased competition cannot be recorded in the
accounting records as their effects cannot be measured in monetary terms.
95

4. Business entity
The business entity principle is also known as the accounting entity principle. This means that the
business is treated as being completely separate from the owner of the business. The personal assets
of the owner, the personal spending of the owner, etc. do not appear in the accounting records of the
business. The accounting records relate only to the business and record the assets of the business, the
liabilities of the business, the money spent by the business and so on. Everything is recorded from
the viewpoint of the business. If there is a transaction concerning both the business and its owner then
it is recorded in the accounting records of the business. When the owner introduces capital into the
business, it is credited to the capital account (to show the funds coming from the owner). The capital
account shows a credit balance representing the amount owed by the business to the owner. When
the owner makes drawings from the business a debit entry will be made in the drawings account (to
show the value going to the owner) which reduces the amount owed by the business to the owner.

5. Consistency
There are some areas of accounting where a choice of method is available. For example, there are
several different ways to calculate the depreciation of a non-current asset.
Where a choice of method is available, the one with the most realistic outcome should be selected.
Once a method has been selected, the method must be used consistently from one accounting period
to the next. This is known as the consistency principle. If this is not done, a comparison of the
financial results from year to year is impossible, and the profit of a particular year can be distorted.
There may be a good reason why it is necessary to change a method or valuation. In such a situation,
the change may be made, but the effects of this should be noted in the financial statements.

6. Going concern
The accounting records of a business are always maintained on the basis of assumed continuity. This
means that it is assumed that the business will continue to operate for an indefinite period of time and
that there is no intention to close down the business or reduce the size of the business by any
significant amount. This is the going concern principle.

7. Matching
The matching principle is also referred to as the accruals principle. This is an extension of the
realisation principle to include other income and expenses. The revenue of the accounting period is
matched against the costs of the same period (the timing of the actual receipts and payments is
ignored). The figures shown in an income statement must relate to the period of time covered by that
statement, whether or not any money has changed hands. This means that a more meaningful
comparison can be made of the profits, sales, expenses, and so on from year to year.
The matching principle means that the revenue of the accounting period is matched against the costs
of the same period.
96

8. The materiality principle

Means that individual items which will not significantly affect either the profit or the assets of a
business do not need to be recorded separately.
What is material for one business may not be so for another business. A laptop computer may be
regarded as immaterial for a large multi-national business, but would be material for a small sole
trader. A large business may decide that non-current assets costing less than $1 000 will be regarded
as immaterial and be charged as expenses. A small business may have a much lower figure. This
principle is also applied by entering small expenses in one account known as ‘general expenses’ or
‘sundry expenses’ rather than having individual ledger accounts for office expenses like light bulbs,
flower displays and so on. Materiality is also applied in relation to inventories of office supplies like
envelopes when the total cost of envelopes purchased during the year is treated as an expense even
though there are some left at the end of the year.

9. The prudence principle

Means that profits and assets should not be overstated and losses and liabilities should not be
understated. The prudence principle is also known as the principle of conservatism. This principle
ensures that the accounting records present a realistic picture of the position of the business. However,
the exercise of prudence does not allow the deliberate understatement of assets or income, or the
deliberate overstatement of liabilities or expenses. In short, prudence does not permit bias.

10. The realisation principle

Emphasises the importance of not recording a profit until it has actually been earned. This means that
revenue is only regarded as being earned when the legal title to goods passes from the seller to the
buyer.
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Books of Prime Entry

 explain the advantage of using various books of prime entry

 explain the use of and process accounting data in the books of prime entry: cash book, petty cash
book,

sales journal, purchases journal, sales returns journal, purchases returns journal and the general
journal

 post the ledger entries from the books of prime entry

 distinguish between and account for trade discount and cash discounts
 explain the dual function of the cash book as a book of prime entry and as a ledger account for
bank and cash
 explain the use of and record payments and receipts made by bank transfers and other electronic
means
 explain and apply the imprest system of petty cash.

 Also known as Day Books/Books of Original Entry/Journals

 The first book of entry where a business records its transaction.

Types of Book of Prime Entry

Books of Prime Entry Transaction recorded

1. Sales Journal Credit sales of goods
2. Sales Return Journal Returning of goods by credit customers
3. Purchase Journal Credit purchase of goods.
4. Purchases Return Journal Returning of goods to credit customer
5. Cash Book Cash and Bank transactions.
6. Petty Cash Book Petty cash transactions.
7. General Journal All transactions not recorded in the above
journals.
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Diagram of the books commonly used.

Types of Accounts

Some people describe all accounts as personal accounts or as impersonal accounts.

• Personal accounts - these are for debtors and creditors (i.e. customers and suppliers).
• Impersonal accounts - divided between 'real' accounts and 'nominal' accounts:
- Real accounts - accounts in which possessions are recorded. Examples are buildings, machinery, fixtures
and inventory.
- Nominal accounts - accounts in which expenses, income and capital are recorded.
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Cash Book:
Cash book consists of cash account and bank account put together in one book.

In the cash book, the debit column for cash is put next to the debit column for bank. The credit column for
cash is put next to the credit column for bank.

The bank column contains details of the payments made by cheque and direct transfer from
the bank account and of the money received and paid into the bank account. The bank will have a copy of
the account in its own books.
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Format of Two column cash book

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1. Write up a two-column cash book for a bedroom furniture shop from the following details,
and balance it off as at the end of the month:
2016
July 1 Started in business with capital in cash £10,000.
2 Paid rent by cash £1,000.
3 G. Broad lent us £12,000, paid by cheque.
4 We paid J. Fine by cheque £1,800.
5 Cash sales £800.
7 F. Love paid us by cheque £200.
9 We paid A. Moore in cash £300.
11 Cash sales paid direct into the bank £600.
15 P. Hood paid us in cash £700.
16 We took £4,000 out of the cash till and paid it into the bank account.
19 We repaid R. Onions £2,000 by cheque.
22 Cash sales paid direct into the bank £1,200.
26 Paid motor expenses by cheque £460.
30 Withdrew £320 cash from the bank for business use.
31 Paid wages in cash £1,200.
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2. Write up a two-column cash book for a second-hand bookshop from the following:
2017 Nov
1 Balance brought forward from last month: Cash £295; Bank £4,240.
2 Cash sales £310.
3 Took £200 out of the cash till and paid it into the bank.
4 F. Bell paid us by cheque £194.
5 We paid for postage stamps in cash £80.
6 Bought office equipment by cheque £310.
7 We paid L. Root by cheque £94.
9 Received business rates refund by cheque £115.
11 Withdrew £150 from the bank for business use.
12 Paid wages in cash £400.
13Cash sales £430.
14 Paid motor expenses by cheque £81.
16 J. Bull lent us £1,500 in cash.
20 K. Brown paid us by cheque £174.
28 We paid general expenses in cash £35.
30 Paid insurance by cheque £320.
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Cash Discounts
 Discount given to encourage customer to pay promptly.
 Cash discounts are recorded in double-entry.

A business may have two types of cash discounts

1. Discounts allowed: cash discounts allowed by a business to its customers when they pay their
accounts quickly.
2. Discounts received: cash discounts received by a business from its suppliers when it pays what it
owes them quickly.
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108

3. A three-column cash book for a wine wholesaler is to be written up from the following details, balanced-
off, and the relevant discount accounts in the general ledger shown.
2016
Mar 1 Balances brought forward: Cash £620; Bank £7,142.
2 The following paid their accounts by cheque, in each case deducting 5 per cent cash discounts:
G. Slick £260; P. Fish £320; T. Old £420 (all amounts are pre-discount).
4 Paid rent by cheque £430.
6 F. Black lent us £5,000 paying by cheque.
8 We paid the following accounts by cheque in each case deducting a
2 1/2 per cent cash discount: R. White £720; G. Green £960; L. Flip £1,600 (all amounts are pre-
discount).
10 Paid motor expenses in cash £81.
12 J. Pie pays his account of £90, by cheque £88, deducting £2 cash discount.
15 Paid wages in cash £580.
18 The following paid their accounts by cheque, in each case deducting 5 per cent cash discount:
A. Pony £540; B. Line & Son £700; T. Owen £520 (all amounts are pre-discount).
21 Cash withdrawn from the bank £400 for business use.
24 Cash drawings £200.
25 Paid W. Peat his account of £160, by cash £155, having deducted £5 cash discount.
29 Bought fixtures paying by cheque £720.
31 Received commission by cheque £120.
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4. Enter the following in the three-column cash book of an office supply shop. Balance-off the cash
book at the end of the month and show the discount accounts in the general ledger.
2015
June 1 Balances brought forward: Cash £420; Bank £4,940.
2 The following paid us by cheque, in each case deducting a 5 per cent cash discount: S. Braga
£820; L. Pine £320; G. Hodd £440; M. Rae £1,040.
3 Cash sales paid direct into the bank £740.
5 Paid rent by cash £340.
6 We paid the following accounts by cheque, in each case deducting 21/2 per cent cash discount:
M. Peters £360; G. Graham £960; F. Bell £400.
8 Withdrew cash from the bank for business use £400.
10 Cash sales £1,260.
12 B. Age paid us their account of £280 by cheque less £4 cash discount.
14 Paid wages by cash £540.
16 We paid the following accounts by cheque: R. Todd £310 less cash discount £15; F. Dury
£412 less cash discount £12.
20 Bought fixtures by cheque £4,320.
24 Bought lorry paying by cheque £14,300.
29 Received £324 cheque from A. Line.
30 Cash sales £980.
30 Bought stationery paying by cash £56.
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Sales Journal
As you have already learnt, when goods are paid for immediately they are described as 'cash sales', even
where the payment has been made by debit card, credit card, cheque, or transfer of funds from the
customer's bank account into the seller's bank account. For accounting purposes, in such cases we do not
need to know the names and addresses of customers nor what has been sold to them and, as a result, there
is no need to enter such sales in the sales day book. The sales day book (and all the other day books) are
only used for transactions that are to be paid for at some future date, i.e. 'credit' transactions.

Note: For each credit sale, the selling business will give or send a document to the buyer showing full
details of the goods sold and the prices of the goods. This document is an 'invoice'.

Invoice
When a business sells goods on credit it will issue an invoice to the purchaser. Each business has its own
style of invoice, but they all contain the following information:
• the name and address of the supplier
• the name and address of the customer
• the date
• full details, quantities and prices of the goods supplied.

Key term:
An invoice is a document issued by the supplier of goods on credit showing details, quantities and prices
of goods supplied.

Sometimes the supplier allows the customer trade discount. This is a reduction in the price of the goods:
the rate of this discount often increases according to the quantity purchased (so encouraging customers to
buy in bulk). It is also given to businesses in the same trade. Such businesses will not be prepared to pay
the full rate as they need to make a profit when they sell the goods.

Trade Discounts.

 Discount given to encourage customers to buy in bulk.

 No double-entry for trade discounts.
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Key term:
Trade discount is a reduction in the price of goods: the rate often increases.
according to quantity purchased.
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Sample Invoice:
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Fun Fact:

Now you make an invoice containing all important detail one should have 
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Posting of credit sales:

Format of Sales Journal

Date Details Invoice Amount

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1. You are to enter up the Sales Day Book from the following details. Post the items to the relevant
accounts in the Sales Ledger and then show the transfer to the sales account in the General Ledger.
2016
Mar £
1 Credit sales to R. King 600
3 Credit sales to T. Kay 400
6 Credit sales to F. Lamb 30
10 Credit sales to R. King 130
17 Credit sales to V. Ball 1,150
19 Credit sales to N. Rollo 180
27 Credit sales to J. Bell 75
31 Credit sales to S. Moore 205

Date Particular Invoice No Amount

118

2. Enter up the Sales Day Book from the following details. Post the items to the relevant accounts in
the Sales Ledger and then show the transfer to the sales account in the General Ledger.
2017
January £
1 Credit sales to 1. Smith 1,200
3 Credit sales to J. Wilson 630
5 Credit sales to K. Park 40
7 Credit sales to T. Lamb 230
16 redit sales to B. Old 760
23 redit sales to F. Jones 450
30 Credit sales to M. Lyon 3,480

Date Particular Invoice No Amount

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3. F. Benjamin of 10 Lower Street, Plymouth, is selling the following items at the recommended retail
prices as shown: white tape £10 per roll, green felt at £4 per metre, blue cotton at £6 per sheet, black
silk at £20 per dress length. He makes the following sales.
2017
May
1 To F. Gray, 3 Keswick Road, Portsmouth: 3 rolls white tape, 5 sheets blue cotton, 1 dress length black
silk. Less 25 per cent trade discount.
4 To A. Gray, 1 Shilton Road, Preston: 6 rolls white tape, 30 metres green felt. Less 33 1/3 per cent trade
discount.
8 To E. Hines, 1 High Road, Malton: 1 dress length black silk. No trade discount.
20 To M. Allen, 1 Knott Road, Southport: 10 rolls white tape, 6 sheets blue cotton, 3 dresslengths black
silk, 11 metres green felt. Less 25 per cent trade discount.
30 To B. Cooper, 1 Tops Lane, St. Andrews: 12 rolls white tape, 14 sheets blue cotton,9 metres green felt.
Less 33 1/3 per cent trade discount.

You are to (a) draw up a sales invoice for each of the above sales, (b) enter them up in the Sales Day
Book and post to the personal accounts, and (c) transfer the total to the sales account in the General
Ledger.

Date Particular Invoice No Amount

120

4. J. Fisher, White House, Bolton, is selling the following items at the retail prices as shown: plastic
tubing at £1 per metre, polythene sheeting at £2 per length, vinyl padding at £5 per box, foam rubber at £3
per sheet. She makes the following sales:
2016
June 1 To A. Portsmouth, 5 Rockley Road, Worthing: 22 metres plastic tubing, 6 sheets foamrubber, 4
boxes vinyl padding. Less 25 per cent trade discount.
5 To B. Butler, 1 Wembley Road, Colwyn Bay: 50 lengths polythene sheeting, 8 boxes vinyl padding, 20
sheets foam rubber. Less 20 per cent trade discount.
11 To A. Gate, 1 Bristol Road, Hastings: 4 metres plastic tubing, 33 lengths of polythene sheeting, 30
sheets foam rubber. Less 25 per cent trade discount.
21 To L. Mackeson, 5 Maine Road, Bath: 29 metres plastic tubing. No trade discount is given.
30 To M. Alison, Daley Road, Box Hill: 32 metres plastic tubing, 24 lengths polythene sheeting, 20 boxes
vinyl padding. Less 33 Vs per cent trade discount.
Required:
(a) Draw up a sales invoice for each of the above sales.
(b) Enter them up in the Sales Day Book and post to the personal accounts.
(c) Transfer the total to the sales account in the General Ledger.

Date Particular Invoice No Amount

121

Purchases Journal
In Sales Journal, you learnt that an invoice is called a 'sales invoice' when it is entered in the books of the
seller. When an invoice is entered in the books of the buyer, it is called a 'purchases invoice'.
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Practice Questions:
1. A. Jack has the following purchases for the month of May 2016:
2016

May

1 From A. Bell: 4 DVD players at £30 each, 3 mini hi-fi units at £180 each. Less 25 per cent Trade
discount.

3 From C. Gray: 2 washing machines at £310 each, 5 vacuum cleaners at £60 each, 2 dishwashers at
£190 each. Less 20 per cent trade discount.

15 From C. Donald: I home entertainment centre at £400, 2 washing machines at £310 each. Less 25
per cent trade discount.

20 From F. Perry: 6 external 1TB drives at £45 each. Less 33 per cent trade discount.
30 From S. Turner: 4 dishwashers at £215 each Less 20 per cent trade discount.

Required:
(a) Draw up a purchases invoice for each of the above purchases,
(b) Enter up the purchases daybook for the month.
(c) Post the transactions to the suppliers' accounts.
(d) Transfer the total to the purchases account.

Date Particular Invoice No Amount

123

2. J. Glen has the following purchases for the month of June 2016:
2016
June 2 From J. Ring: 3 sets golf clubs at £900 each, 6 footballs at £35 each. Less 25 per cent
trade discount.
11 From F. Clark: 6 cricket bats at £70 each, 8 ice skates at £40 each, 5 rugby balls at £34
each. Less 20 per cent trade discount.
18 From A. Lane: 6 sets golf trophies at £55 each, 4 sets golf clubs at £720. Less 33 1/3
per cent Trade discount.
25 From J. Jack: 5 cricket bats at £48 each. Less 25 per cent trade discount.
30 From J. Wood: 8 goal posts at £95 each. Less 40 per cent trade discount.

Required:
(a) Enter up the purchases daybook for the month,
(b) Post the items to the suppliers' accounts,
(c) Transfer the total to the purchases account.

Date Particular Invoice No Amount

124

3. C. Phillips, a sole trader specialising in material for Asian clothing, has the following purchases
and sales for March 2017:

Mar 1 Bought from Smith Stores: silk £40, cotton £80. All less 25 per cent trade discount.
8 Sold to A. Grantley; lycra goods £28, woollen items £44. No trade discount.
15 Sold to A. Henry: silk £36, lycra £144, cotton goods £120. All less 20 per cent trade
discount.
23 Bought from C. Kelly: cotton £88, lycra £52. All less 25 per cent trade discount.
24 Sold to D. Sangster: lycra goods £42, cotton £48. Less 10 per cent trade discount.
Bought from J. Hamilton: lycra goods £270. Less 33 1/3 per cent trade discount.
Required:
(a) Prepare the purchases and sales day books of C. Phillips from the above,
(b) Post the items to the personal accounts.
(c) Post the totals of the day books to the sales and purchases accounts.

Date Particular Invoice No Amount

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4. A. Henriques has the following purchases and sales for May 2017:
2017
May 1 Sold to M. Marshall: brass goods £24, bronze items £36. Less 25 per cent trade discount.
7 Sold to R. Richards: tin goods £70, lead items £230. Less 33 1/3 per cent trade discount.
9 Bought from C. Clarke: tin goods £400. Less 40 per cent trade discount.
16 Bought from A. Charles: copper goods £320. Less 50 per cent trade discount.
23 Sold to T. Young: tin goods £50, brass items £70, lead figures £80. All less 20 per cent trade
discount.
31 Bought from M. Nelson: brass figures £100. Less 50 per cent trade discount.

Required:
(a) Write up the sales and purchases day books.
(b) Post the items to the personal accounts.
(c) Post the totals of the day books to the sales and purchases accounts.

Date Particular Invoice No Amount

5. A. Jones has the following credit purchases and credit sales for May:

May
1 Sold to J. Swift: brass goods £72, bronze items £108. All less 20 per cent trade discount.
Sold to D. Brown: tin goods £80, lead items £560. All less 30 per cent trade discount.
9 Bought from L. Syme: tin goods £300 less 40 per cent trade discount.
16 Bought from J. Wood: copper goods £460 less 70 per cent trade discount.
23 Sold to M. Peat: tin goods £50, brass items £70, lead figures £170. All less 10 per cent
trade discount.
31 Bought from R. Gold: brass figures £345 less 331/3 per cent trade discount.

Required:
(a) Write up sales and purchases day books.
(b) Post the items to the personal accounts.
(c) Post the totals of the day books to the sales and purchases accounts.

Date Particular Invoice No Amount

Accounting for returns

Sales return and credit notes:

You know that businesses allow customers to return goods they've bought. You've probably done so
yourself at some time or other. Some retail businesses give every customer the right to do so within a few
days of the sale and won't ask why they are being returned.

Credit Note:

When goods are returned, reported faulty, or where there has been an overcharge on an invoice, the
supplier may issue a credit note. As with all documents, each business has its own style of credit note, but
they all contain the following information:
• the name and address of the supplier
• the name and address of the customer
• the date
• full details, quantities and prices of the goods returned or overcharged.

Key term:

A credit note is a document issued by a seller of goods on credit to notify of a

reduction in an invoice previously issued.
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Sample Credit Note:

Purchase return and Debit notes:

If the supplier agrees, goods bought previously may be returned. When this happens a debit note is sent
by the customer to the supplier giving details of the goods and the reason for their return.
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Debit note
The customer should check that goods received are in a satisfactory condition and that they are exactly
what was ordered (in respect of price, quantity and quality). The supplier must be informed of any
shortages, overcharges and faults. This is done by issuing a debit note to the supplier. Each business has
its own style of debit note, but they all contain the following information:

• the name and address of the supplier

• the name and address of the customer
• the date
• full details and quantities (and sometimes the prices) of the goods returned or overcharged.
Key term:

A debit note is a document issued by a purchaser of goods on credit to request

a reduction in the invoice received.
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131

Posting Purchase return and Sales return

132

Practice question
1. You are to enter up the Purchases Day Book and the Returns Outwards Day Book from the following
details, then to post the items to the relevant accounts in the Purchases Ledger and to show the
transfers to the General Ledger at the end of the month.
2017
May 1 Credit purchase from S. Dodd £216.
4 Credit purchases from the following: B. Line £324; F. Town £322; R. Pace £64; T. Pang £130.
7 Goods returned by us to the following: S. Dodd £58; B. Line £63.
10 Credit purchase from P. Town £90.
18 Credit purchases from the following: D. Ince £230; P. Tago £310; R. Scott £405; N. Auld
£220.
25 Goods returned by us to the following: B. Line £140; F. Town £47.

31 Credit purchases from: R. Pace £174; J. Marsh £170.

Date Particular Invoice No Amount

133

2. Enter up the Sales Day Book and the returns inwards day book from the following details. Then post to
the customers' accounts and show the transfers to the General Ledger.
2016
June 1 Credit sales to: B. Dock £240; M. Ryan £126; G. Soul £94; F. Trip £107.
6 Credit sales to: P. Coates £182; L. Job £203; T. Mann £99.
10 Goods returned to us by: B. Dock £19; F. Trip £32.
20 Credit sales to B. Uphill £1,790.
24 Goods returned to us by L. Job £16.
30 Credit sales to T. Kane £302.
2 Journal format

Date Particular Invoice No Amount

134

3. You are to enter up the sales, purchases, returns inwards and returns outwards day books from the
following details, then to post the items to the relevant accounts in the sales and purchases ledgers. The
totals from the day books are then to be transferred to the accounts in the General Ledger.
2017
May 1 Credit sales: T. Thompson £56; L. Rodriguez £148; K. Barton £145.
3 Credit purchases: P. Potter £144; H. Harris £25; B. Spencer £76.
7 Credit sales: K. Kelly £89; N. Mendes £78; N. Lee £257.
9 Credit purchases: B. Perkins £24; H. Harris £58; H. Miles £123.
11 Goods returned by us to: P. Potter £12; B. Spencer £22.
14 Goods returned to us by: T. Thompson £5; K. Barton £11; K. Kelly £14.
17 Credit purchases: H. Harris £54; B. Perkins £65; L. Nixon £75.
20 Goods returned by us to B. Spencer £14.
24 Credit sales: K. Mohammed £57; K. Kelly £65; O. Green £112.
28 Goods returned to us by N. Mendes £24.
30 Credit sales: N. Lee £55.

Date Particular Invoice No Amount

135

4. You are to enter the following items in the books, post to personal accounts, and show the transfers to
the General Ledger.

2017
July 1 Credit purchases from: K. Hill £380; M. Norman £500; N. Senior £106.
3 Credit sales to: E. Rigby £510; E. Phillips £246; F. Thompson £356.
5 Credit purchases from: R. Morton £200; J. Cook £180; D. Edwards £410; C. Davies £66.
8 Credit sales to: A. Green £307; H. George £250; J. Ferguson £185.
12 Returns outwards to: M. Norman £30; N. Senior £16.
14 Returns inwards from: E. Phillips £18; F. Thompson £22.
20 Credit sales to: E. Phillips £188; F. Powell £310; E. Lee £420.
24 Credit purchases from: C. Ferguson £550; K. Ennevor £900.
31 Returns inwards from: E. Phillips £27; E. Rigby £30.
31 Returns outwards to: J. Cook £13; C. Davies £11.

Date Particular Invoice No Amount

136

Statements:

At the end of each month, a statement of account or, 'statement', should be sent to each debtor who owes
money on the last day of the month. It is really a copy of the debtor's account in the seller's books. It
should show:
1 the amount owing at the start of the month;
2 the amount of each sales invoice sent to the debtor during the month;
3 credit notes sent to the debtor in the month;
4 cash and cheques received from the debtor during the month; and, finally,
5 the amount due from the debtor at the end of the month.

Key term:

A statement of account is a document issued by the seller of goods on credit to summarise the transactions
for the month.
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Sample on Statement of account

138

The Journal

The Journal: the other book of original entry

The other items which do not pass through these five books are much less common, and sometimes much
more complicated. It would be easy for a bookkeeper to forget the details of these transactions if they
were made directly into the ledger accounts from the source documents and, if the bookkeeper left the
business, it could be impossible to understand such bookkeeping entries.
What is needed is a form of diary to record such transactions, before the entries are made in the double
entry accounts. This book is called the journal. For each transaction it will contain:
• the date
• the name of the account(s) to be debited and the amount(s)
• the name of the account(s) to be credited and the amount(s)
• a description and explanation of the transaction (this is called a narrative)
139

1. You are to show the journal entries necessary to record the following items which occurred in
2016:
May 1 Bought a motor bike on credit from Lakeside Garage for £5,500.
3 A debt of £347 owing from T. Reason was written off as a bad debt.
8 Office chairs bought by us for £600 were returned to the supplier UL Furniture Ltd, as
they were unsuitable. Full allowance will be given to us.
12 We are owed £300 by J. Day. Fie is declared bankrupt and we received £190 in full
settlement of the debt.
14 We take goods costing £60 out of the business inventory without paying for them.
28 Some time ago we paid an insurance bill thinking that it was all in respect of the
business. We now discover that £40 of the amount paid was in fact insurance of our
private house.
28 Bought a trailer for £1,700 on credit from C-Land Ltd.
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General entries format

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2. Show the journal entries necessary to record the following items:

2017
Apr 1 Bought office furniture on credit from Durham Brothers Ltd £1,400.
4 We take goods costing £270 out of the business inventory without paying for them.
9 £90 of the goods taken by us on 4 April is returned back into inventory by us. We do not take
any money for the return of the goods.
12 M. Sharp owes us £460. Fie is unable to pay his debt. We agree to take some display cabinets
from him at that value and so cancel the debt.
18 Some of the office furniture bought from Durham Brothers Ltd, £36 worth, are found to be
unsuitable and are returned to them for full allowance.
24 A debt owing to us by T. Lyle of £80 is written off as a bad debt.
30 Computers bought on credit from OIF Ltd for £2,300.
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Exam style questions

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150

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Petty Cash Book

Petty cash are small amount of cash kept in the office to pay for minor recurring expenditure.

Petty Cash Book is used to record transaction involving petty cash funds.

The imprest system is one where the cashier gives the petty cashier enough cash to meet the petty cash
needs for the following period. Then, at the end of the period, the cashier finds out the amounts spent by
the petty cashier, by looking at the entries in the petty cash book. At the same time, the petty cashier may
give the petty cash vouchers to the cashier so that the entries in the petty cash book may be checked. The
cashier then passes cash to the value of the amount spent on petty cash in the period to the petty cashier.
In other words, the cashier tops up the amount remaining in petty cash to bring it back up to the level it
was at when the period started. This process is the imprest system and this topped-up amount is known as
the petty cash float.

Double Entry

Set-up petty cash fund

Date Particular Debit Credit

Petty Cash xyz
Cash xyz

Reimburse petty cash funds:

Date Particular Debit Credit

Expenses xyz
Cash xyz
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157

Questions
1. The following is a summary of the petty cash transactions of Jockfield Ltd for May 2016:
May 1 Received from Cashier £300 as petty cash float £
2 Postage 18
3 Travelling 12
4 Cleaning 15
7 Petrol for delivery van 22
8 Travelling 25
9 Stationery 17
11 Cleaning 18
14 Postage 05
15 Travelling 08
18 Stationery 09
18 Cleaning 23
20 Postage 13
24 Delivery van 5,000 mile service 43
26 Petrol 18
27 Cleaning 21
29 Postage 05
30 Petrol 14
You are required to:

(a) Rule up a suitable petty cash book with analysis columns for expenditure on cleaning, motor
expenses, postage, stationery, travelling.
(b) Enter the month's transactions.
(c) Enter the receipt of the amount necessary to restore the imprest and carry down the balance for
the commencement of the following month.
(d) State how the double entry for the expenditure is completed.
158
159

2. (a) Why do some businesses keep a petty cash book as well as a cash book?
(b) Kathryn Rochford keeps her petty cash book on the imprest system, the imprest being £25. For the
month of April 2017 her petty cash transactions were as follows:
£
Apr 1 Petty cash balance 1.13
2 Petty cashier presented vouchers to cashier and obtained
cash to restore the Imprest. 23.87
4 Bought postage stamps 8.50
9 Paid to Courtney Bishop, a creditor 2.35
11 Paid bus fares 1.72
17 Bought envelopes 0.70
23 Received cash for personal telephone call 0.68
26 Bought petrol 10.00

(c) Enter the above transactions in the petty cash book and balance the petty cash book at 30 April,
bringing down the balance on 1 May.
(d) On 1 May Kathryn Rochford received an amount of cash from the cashier to restore the imprest.
Enter this transaction in the petty cash book.
(c) Open the ledger accounts to complete the double entry for the following:
(f) The petty cash analysis columns headed Postage and Stationery and Travelling Expenses]
(g) The transactions dated 9 and 23 April 2017.
160
161

3. Rule up a petty cash book with analysis columns for office expenses, motor expenses, cleaning
expenses and casual labour. The cash float is £450, and the amount spent is reimbursed on 30
November.
2017 £
November 1 T. Wise - casual labour 36
2 Staples and tape dispenser 19
2 Black Motors - motor repairs 42
3 Cleaning materials 03
6 Envelopes 10
8 Petrol 18
11 1. Dodds-casual labour 12
12 1. Marsh - cleaner 07
12 Paper clips 02
14 Petrol 16
16 Adhesive tape 01
16 Petrol 24
21 Car tyre 63
22 T. Randall - casual labour 15
23 J. Marsh - cleaner 16
24 1. Gray - casual labour 21
25 Paper 07
26 Monday Cars - car puncture repairs 74
29 Petrol 19
30 T. Pointer - casual labour 20
162
163

4. Fine Teas operates its petty cash account on the imprest system. It is maintained at a figure of £140,
with the balance being restored to that amount on the first day of each month. At 30 April 2016 the
petty cash box held £24.37 in cash.
During May 2016, the following petty cash transactions arose:
May £
1 Cash received to restore imprest (to be derived)?
1 Bus fares 0.41
2 Stationery 2.35
4 Bus fares 0.30
7 Postage stamps 6.50
7 Trade journal 0.95
8 Bus fares 0.64
11 Tippex 1.29
12 Typewriter ribbons 5.42
14 Parcel postage 3.45
15 Paperclips 0.42
15 Newspapers 2.00
16 Photocopier repair 16.80
19 Postage stamps 1.50
20 Drawing pins 0.38
21 Train fare 5.40
22 Photocopier paper 5.63
23 Display decorations 3.07
23 Tippex 1.14
25 Wrapping paper 0.78
27 String 0.61
27 Sellotape 0.75
27 Biro pens 0.46
28 Stapler repair 13.66
30 Bus fares 2.09
June
1 Cash received to restore imprest (to be derived)?

Required:
(a) Open and post the company's analysed petty cash book for the period 1 May to 1 June 2016 inclusive.
(b) Balance the account at 30 May 2016.
(c) Show the imprest reimbursement entry on June 1.
164
165

Practice Questions of Book of Prime entry

166
167
168

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