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Saturday, October 31, 2009

The Trial Balance

At the end of the accounting period, a balance is struck on each accounting in turn. This means that all the debits on the account are totaled and so are all the credits. If the total debits exceed the total credits there is said to be a debit balance on the account if the credits exceed the debits then the account has a credit balance.

This list is called trial balance. It does not matter in what order the various accounts are listed.
The trial balance is a list of ledger balances shown in debit and credit columns.

There is no foolproof method, but a technique which shows up the more obvious mistakes is to prepare a trial balance.
If the two columns of the trial balance are not equal, there must be an error in recording the transactions in the accounts.

However trial balance not discloses the following types of errors.

  • Error of principal.
  • The posting of a credit or debit to the correct side of ledger but to a wrong account.
  • The complete omission of a transaction.
  • Compensation errors. An error is exactly cancelled by another error elsewhere.


Friday, October 30, 2009

The Sales Ledger and Purchase Ledger

The accounts in the general ledger relate to types of income, expense, asset, liability excreta rather than to the person whom the money is paid or from whom it received. They are called impersonal accounts.

There is also a need personal account most commonly for debtors and creditors. These are contained in the sales ledger and purchase ledger.

Personal accounts include details of transactions which have already been summarized in ledger accounts. The personal account do not therefore form part of the double entry system, as otherwise transaction would be recorded twice over. They are memorandum accounts.

The Sales Ledger

The sales ledger is a ledger for customer’s personal accounts. The sales day book provides a chronological record of invoices sent out by a business to credit customers. A business should also keep a record of how much money each individual credit customers owes, and what is this total debt consists of. The businesses need personal accounts for each customer and it helps,
  • Staff must be able to tell customer how much he currently owes.
  • To send out statements to customers at the each month.
  • The managers of the business will want to keep a check on the credit position of each customer.
  • Need to match payments received against debt owed.

The Purchase Ledger

The purchase ledger is a ledger for supplier’s personal accounts. There is separate account for each individual supplier.
After entries are made in the purchase day book, cash book of purchase retains day book they are posted to the supplier’s personal accounts in the purchase ledger.


Thursday, October 29, 2009

Double Entry Bookkeeping

Double entry bookkeeping is the method by which a business records financial transactions. An account is maintained for every supplier, customer, asset, liability, income and expenses.

Every transaction is recorded twice so that for every debit there is an equal, corresponding credit.

Double entry bookkeeping is the method used to transfer totals from our books of prime entry into the normal ledger. In ledger accounts we saw debt and credit side, are kept in a way which allows the two sided nature of business transactions to be recorded.

The Rules of Double Entry Bookkeeping

The basic rule which must always be always be observed is that every financial transaction gives rise to two accounting entries, one a debt and the other a credit.
Which accounting receives the credit entry and which receives the debit depends on the nature of the transaction.

  • An increase in an expense or an increase in an asset is a debit.
  • An increase in income or an increase in a liability is a Credit.
  • A decrease in an asset is a credit.
  • A decrease in a liability is a debit.


Wednesday, October 28, 2009

Ledger Accounts

It is common sense that a business should keep a record of the transactions that is makes, the assets it acquires and liabilities are incurs. When the time comes to prepare a profit and loss account and a balance sheet, the relevant information can be taken from those records.
The records of transactions, assets and liabilities should be,

  • Dated and in chronological order,
  • Built up in cumulative totals, day by day, week by week, month by month, year by year,

In our previous posts we discussed the first step in this process, which is to list all the transactions in various books of prime entry. Now we must turn our attention to the method used to summarize these records, ledger accounting and double entry.

The general ledger (The normal ledger)

The normal ledger (general ledger) is an accounting record which summarizes the financial affairs of a business. It contains details of assets, liabilities and capital, income and expenses, and so profit and loss. It consists of a large number of different accounts, each account having its own purpose or name and identity or code.

Format of a Ledger Account

There are two sides to the account and an account heading on top and so it is convenient to think in terms of “T” accounts.

  • On top of the account is its name.
  • There is a left side, called debt side.
  • There is right side, called credit side.


Monday, October 26, 2009

Source Documents and the Books of Prime Entry

Source Documents
Whenever a business transaction take place, involving sales or purchases, receiving or paying money, or owing or being owed money, it is usual for the transaction to be recorded on a document. These documents are the source of all information recorded by a business.
Examples –

  • Sales order – A customer writes out an order or signs an order for goods or services he wishes to buy.
  • Purchase order – A business makes an order from another business for the purchase of goods or services.
  • Invoice – An invoice relates to a sales order or a purchase order. When a business buys goods or services on a credit customer it sends out an invoice. The details on the invoice should match up with the details on the sales order. When a business sells buys goods or services on credit it receives an invoice from the suppliers. The details on the invoice should match up with the details on the purchase order.
  • Credit note – A credit note is a document relating to returned goods or refunds when a customer has been overcharged. It can be regarded as a “negative invoice”.
  • Remittance advices – A customer sends this with a payment.
  • Cheque stubs – A business record of payments it has made.
  • Petty cash vouchers – A claim for reimbursement out of petty cash.

Books of Prime Entry
The details on these source documents need to be summarized, as otherwise the business might forget to ask for some money, or forget to pay, or even accidentally pay some twice.
Books of prime entry are books in which we first record transactions. They are sometimes called books of prime entry.
The main books of prime entry which we need to use are as follows

  1. Sales day book – The sales day book is the book of prime entry for credit sales.
  2. Purchase day book – The purchase day book is the book of prime entry for credit purchase.
  3. Sales returns day book – The sales returns day book is the book of prime entry for goods returned by the customers.
  4. Purchases returns day book – The purchases return day book is the book of prime entry for goods returned to suppliers.
  5. Cash book – The cash book is the book of prime entry for cash and bank receipts and payments.
  6. Petty cash book – The petty cash book is a cash book for small payments.
  7. The journal – The journal keeps a record of unusual movement between accounts. It is used to record any double entries made which do not arise from the other books of prime entry. For example, journal entries are made when errors are discovered and need to be corrected.


Sunday, October 25, 2009

The Accounting Process

Most organizations exist to provide products and services in the ultimate hope of making a surplus or profit for their owners, which they do by receiving payment in money for goods and services provided. The role of accounting system is to record these monetary effects and create information about them.

In our previous two posts you understand the basic principles underlying the balance sheet and profit and loss account and have an idea of what they look like. Before preparing these financial statements business need to know about events and transactions in business and summarized them that process called accounting process.

The accounting process using steps given below,

  1. Identify events and transactions using source documents.
  2. Enter them into prime entry books (day books).
  3. Analysis day books and copy them into ledger accounts using double entry system.
  4. Summarized all ledger accounts balances using trial balance.
  5. Identifying errors in accounting and correct them.
  6. Preparing corrected trial balance.
  7. Doing adjustments for financial statements needed.
  8. Preparing adjusted trial balance.
  9. Preparing the financial statements.
  10. Analyzing financial statements using other techniques.

In our next posts you can read all these steps with description please are kind enough let we know about your questions through comments.


Saturday, October 24, 2009

The Trading Profit and Loss Account

The trading profit and loss account is a statement showing in detail how the profit or loss of a period has been made.
The two parts of the statement may be examined in more detail

  1. The trading account – This shows the gross profit for the period. Gross profit is the difference between the value of sales and the purchase or production cost of the goods sold.

  2. The profit and loss account – This shows the net profit of the business. Net profit is the gross profit plus any other income from sources other than the sale of goods minus other expenses of the business which are not included in the cost of goods sold.

Relationship between the profit and loss account and the balance sheet

  • The net profit is the profit for the period, and it is transferred to the balance sheet of the business as part of the proprietor’s capital.
  • Drawings are appropriations of profit are not expenses.


Friday, October 23, 2009

Financial Statements – The Balance Sheet

Balance sheet is a statement of the liabilities, capital and assets of a business at a given moment in time. A balance sheet is prepared to show the liabilities, capital and assets as at the end of the accounting period to which the financial accounts relate.


We define liabilities in our previous post,
The various liabilities should be itemized separately; in addition a distinction is made between current liabilities and long term liabilities.

Current Liabilities

Current liabilities are debts of the business that must be paid within a fairly short period of time.

  • Loans repayable within one year
  • A bank overdraft
  • Trade creditors
  • Accrued charges
  • Taxation payable

Long Term Liabilities

A long term liabilities is a debt which is not payable within the short term and so liability which is not current must be long term.

  • Loans which are not payable for more than one year, such as a bank loan or a loan from an individual to a business.
  • Debentures or debenture loans.
  • A mortgage loans.

We define assets in our previous posts.

Asset in the balance sheet are divided into two groups, as fixed assets and current assets.

Fixed Assets

A fixed asset is an asset acquired for continuing use within the business. A fixed asset is not acquired for sale to a customer. To be classed as a fixed asset in a balance sheet, it must be used by the business and the asset must have a life in use of more than one year.

Assets classified as

  • Tangible fixed assets
  • Intangible fixed assets
  • Long term investments
    A tangible fixed asset is a physical asset and an Intangible fixed asset is an asset which does not have a physical existence.

Current assets

Current assets are either items owned by the business with the intention of turning them into cash within one year or cash including money in bank, owned by the business and they are continually following through business.

  • Stocks
  • Debtors
  • Cash


Thursday, October 22, 2009

The Accounting Equation

The rule that the assets of a business will at all times Equal its liabilities. This is also known as the balance sheet equation.
Assets = Capital + Liabilities

In accounting capital is an investment of money with the intention of earning a return. A business proprietor invests capital with the intention of earning profit. As long as that money is invested, accountants will treat the capital as money owed to the proprietor by the business.

Assets and liabilities we define in our previous post.

Drawings are amounts of money taken out of a business by its owner.

The business equation
The business equation gives a definition of profits earned.
P = I + D – Ci
P = Represents profit
I = Represents the increase in net assets, after drawings have been taken out by the proprietor
D = Drawings
Ci = the amount of extra capital introduced into the business during the period

A creditor is a person to whom a business owes money. A trade creditor is a person to whom a business owes money for debt incurred in the course of trading operation. A creditor is a liability of a business.

A customer who buys goods without paying cash for them straight away is a debtor. A debtor is a asset of a business.


Wednesday, October 21, 2009

Assets, liabilities and The Business Entity

Asset is something valuable which a business owns or has the use of.
Examples of assets are; office building, factories, Lorries, plant and machinery, computer equipment, computer equipment, cash, goods held in store awaiting sale to customers.

A liability is something which owned to somebody else. Liabilities are accounting term for the debts of business.
Examples of assets; Bank loan or overdraft, amount owed to suppliers, taxation owed to government, amounts invested in a business by its shareholders or owners.

Business entity
Entity concept means a business is a separate entity from its owner.
In accounting a business is treated as a separate entity from its owners. This applies whether or not the business is recognized in law as a separate entity,

  • Business entity applies whether the business is carried on by a company a sole trader or a partnership.
  • The law also recognizes a company as a legal entity.
  • The case is different in law when a business is carried on not by a business.
  • But in accounting we treated all business are separate entity from its owners.


Tuesday, October 20, 2009

Expenditure and Income

Expenditure and income can be categorized as shone below,

Capital Expenditure
Capital expenditure is expenditure which results in the acquisition of fixed asset, or an important in their earning capacity.

  • Capital expenditure is not charged as an expense in the profit and loss account, although a depreciation charge will usually be made to write off the capital expenditure gradually overtime.
  • Capital expenditure on fixed asset results in the appearance of a fixed asset in the balance sheet of the business.

Revenue Expenditure
Revenue expenditure in which is incurred for either of the following reasons.

  • For the purpose of the trade of the business.
  • To maintain the existing earning capacity of fixed assets.

Capital Income
Capital income is the proceeds from the sale of non-trading asset. The profits or loss from the sale of fixed assets are included in the profit and loss account of a business, for the accounting period in which the sale takes place.

Revenue Income
Revenue income is income derived from the following sources.

  • The sale of trading asset.
  • Interest and dividends received from investments held by business.
    The categorization of capital and revenue items given above does not mentioned raising additional capital from the owners of the business or raising and repaying loans.

Revenue expenditure results from the purchase of goods and services that will
--Be used fully in the accounting period in which they are purchased, and so be a cost or expense in the trading profit and loss account.
--result in a current asset as at the end of the accounting period because the goods or services have not yet been consumed or made use of. The current asset would be shown in the balance sheet and is not yet a cost or expense in the trading, profit and loss account.


Monday, October 19, 2009

The Regulatory System of Accounting

The following factors can be identified as regulatory framework of accounting,
  • Company law.
    Limited companies are required by law to prepare and publish accounts annually.
  • Accounting concepts and individual judgment.
    Financial statements are prepared on the basis of a number of accounting principles, many figures in financial statements are derived from the application of judgment in putting those concepts into practice. Some of the examples are follows
    -Accounting for inflation.
    -Research and development, it is an investment to generate future revenue.
    -Valuation of buildings in times of rising property prices.
  • Accounting standards.
    In an attempt to deal with some of the subjectivity and to achieve comparability between different organizations accounting standards were developed
  • International influences.
    One of the most important influences on financial accounting is the international accounting standards committee. The international accounting standards committee was setup in 1973 to work for the improvement and harmonization of financial reporting. Its members are professional accounting bodies all over the world.
  • Generally accepted accounting practice. (GAPP)
    This term has sprung up in recent years and signifies all rules, from whatever source, which govern accounting.


Sunday, October 18, 2009

Scope of Accounting

Management Accounting and Cost Accounting
Management or cost accounting is a management information system which analysis data to provide information as a basis for managerial action. The concern of a management accountant is to present accounting information in the form most helpful to management.
Financial Accounting
Financial accounting is mainly a method of reporting the results and financial position of a business. It is not primarily concerned with providing information towards the more efficient conduct of a business.
This is particularly clear in the context of the published accounts of limited companies. Accounting standards and public law prescribe that a company should produce accounts to be presented to the shareholders.

Financial Management
The financial manager is responsible for raising finance and controlling financial resources. Including the following decisions
(a). Should the firm borrow from a bank or raise funds by issuing shares?
(b). How much should be paid as a dividend?
(c). Should the firm spend money on new machinery?
(d). How much credit should be given to customers?
(e) .How much discount should be given to customers who pay early?


The annual accounts of a company must generally be audited by a person independent of a company. In practice, this often means that the members of the company appoint a firm of registered auditors to investigate the financial statements and report as to whether or not they show a true and fair view of the company’s results for the year and its financial position at the end of the year.
Qualities of Good Accounting Information
Below are some features that accounting information should have if it is to be useful,

  • Relevance.
  • Comprehensibility.
  • Reliability.
  • Completeness.
  • Objectivity.
  • Timeliness.
  • Comparability.


Friday, October 16, 2009

The Purpose of Accounting

Accounting is a way of recording, analyzing, and summarizing transactions of a business.
  • The transactions are recorded in “books of prime entry”
  • The transactions are than analyzed and posted to the ledger
  • Finally the transactions are summarized in the financial statements

The need of Accounts
If business runs efficiently, why it have to go through all the bother of accounting procedures in order to produce financial information?
A business should produce information about its activities because there are various groups of people who want or need to know that information. This sounds rather vague, to make it clearer, we should look more closely at the classes of people who might need information about a business. We need also to think about what information in particular is of interest to the members of each class.

Users if financial statements and accounting information
The people who might be interested in financial information about a large public company may be classified as follows,

  • Managers of the company.
  • Shareholders of company.
  • Trade contacts.
  • Providers of finance to the company.
  • The Inland Revenue.
  • Employees of the company.
  • Financial analysts and advisers.
  • Government and their agencies.
  • The public.

Accounting information is organized into financial statements to satisfy the information needs of these different groups,

Non commercial undertakings
It is not only businesses that need to prepare accounts, Charities and Clubs also prepare financial statements every year. Accounts also need to be prepared for public sector organization.

The Main Financial Statements
Transactions are summarized in the financial statements. The two main financial statements are the Balance sheet and the Profit and loss account. Both of the balance sheet and the profit and loss account are summaries of accumulated data.

The balance sheet – is simply a list of all the assets owned and all the liabilities owned by a business as at a particular date. It shows the financial position of the business at a particular moment.
A profit and loss account – is a record of income generated and expenditure incurred over a given period.
The period chosen will depend on the purpose for which the statement is produced, that time called finance year.


Friday, October 9, 2009

Accounting is the way of recording, analysing and summarising transactions of a business.

We covered in this site every part of the financial accountancy.

  • Introduction to accounting.
  • Basic principals.
  • Bookkeeping and principles.
  • Ledger control accounts.
  • Bank reconciliation.
  • Financial statements.
  • Incomplete records.
  • Partnership accounts.
  • Accounting for limited companies.
  • Cash flow statements.
  • Consolidated accounts.

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