UNIT 10: ACCOUNTING PRIME BOOKS
Key unit competency: To be able to record accounting transactions
Introduction
Accounting is an ancient art, as old as money itself. In the beginning, accounting has been elementary. The modern system of accounting owes its origin to Fra Luca Bartolomeo de Pacioli, (commonly known, Luca Pacioli), an Italian mathematician,who lived in 1447–1517. Luca Pacioli codified rather than invented the system of accounting and he is widely referred to as the “Father of Accounting and Bookkeeping”. Even in our country, businesses development and different activities either in public or in private sector have clearly indicated the need of Accounting and Bookkeeping. The Rwandan system of accounting is as scientific and systematic just as in the developed countries.
Most organizations if not all run on information. A family, a church, a school, a hospital or governments, and of course, people who own their own businesses must keep records none of them can operate without record of such information especially monetary one. Accounting is therefore considered as the art of handling record, analyzing and interpreting accounting information.
The chances are that no matter what kind of job you take when you graduate, you will need to know how to keep records. When you study record keeping, you will be learning how to keep many different kinds of records. After you have learned to record accounting transactions, you will be able to take care of both your personal or even organization and business affairs.
It is in this vein that most of companies either private or public recruit professionals accountants to help them in such activity. Accounting requires application of different skills and tools to measure the business performance. In order to assess the business’ performance, there is a need to provide answers to many questions such as:
i. What does the business own?
ii. What does the business owe?
iii. Whether the business has earned profit or suffered loss over a period?
iv. What is the business’ financial position? Is it better off or moving towards
bankruptcy?
To find answer to the above questions, this unit will enhance your understanding of business transactions, accounting systems namely single entry and double entry, books of original entry namely general journals and special journals and trial balance where, errors will be discussed and corrected accordingly. This information will be useful in recording accounting transactions and draw trial balance to verify if transactions have been correctly recorded, if not, then correct errors.
Introductory Activity: A Case study
In our daily life, we have many professions and careers to be engaged in. Some people become teachers, medical doctors, other people become engineers and yet others work as priests, pastors or sheikhs and traders, agriculturists etc. In the business world, some of the mostly heard of professionals are accountants. What accountants do is very important for every business enterprise because accountants help manage the finances of an enterprise. As an entrepreneur, you need not to be an accountant but you need to have basic knowledge of accounting. The need to know the basics of accounting is crucial even if you are running a small enterprise and cannot afford to employ a full time accountant.
Knowledge of accounting also helps you make informed decisions, because
accounting is the language of business.
Questions
From this case study, answer the following:
1. What do you think accountants do?
2. What do you think the accounting is for?
3. Is it necessary for entrepreneurs to have the basic knowledge of
accounting? Justify your answer?
Recall that Accounting is the art of recording, classifying, summarizing,interpreting and reporting business transactions in a significant manner in terms of money whilebookkeeping is the art of recording business transactions in a set of books of accounts.
Accounting is the language of business.
The main purpose of language is communication of ideas. Similarly, is the purpose and role of accounts for a business. A businessperson has to keep a systematic record of the financial activities of his firm so that he/she can know the financial position. What the business owns are assets and what it owes are the liabilities. It is necessary for every businessperson to know where he/she stands in many respects:
i. What he/she owns?
ii. What he/she owes?
iii. Whether he/she has earned profit or suffered loss over a period?
iv. What is his/her financial position? Is he better off or moving towards
bankruptcy?
10.1. Business Transactions
Activity 10.1
1. What do you think businesses do on their daily basis?
2. What may be the positive impact of selling on cash and credit basis?
3. Identify any business either nearest your school or in the community.
Visit that business and find out how it records its daily Business
Transactions.
Business transactions refer to any dealing between two or more parties that involves exchange of value. It may involve exchange of goods and services for money or goods and services. There are always two or more parties to a business transaction, a party that gives out value and the other party that receives it .
10.1.1. Types of business transactions
1. Cash transaction: Cash is money in form of coins and paper notes. Cash transaction refers to any dealing between two or more people that involves exchange of goods and services for immediate payment in terms of money (cash).
It is also defined as business activity carried out with immediate payment of money on spot in exchange. Note that cash transaction involves cash sales and cash purchases.
a. Cash purchases: A cash purchase is a transaction where goods and services
are bought and money is paid immediately or payment for them is made on
spot.
b. Cash sales: A cash sale is a transaction where goods and services are sold and
payment for them is made on spot.
2. Credit transaction:A credit transaction is business dealing between two or more
parties involving exchange of goods and services where payment for them is
made at a later date. It can also be defined as a business activity carried out with a
view to defer payment to a specific future date. Credit transactions include credit
sales and credit purchases.
a. Credit purchases: A credit purchase is a transaction where goods and services
are bought and payment for them as promised or made at a future date.
b. Credit sales: A credit sale refers to selling of goods or services and payment for
them is promised or expected at a future date.
1. Installment transaction: This is a system that allows a customer to pay a certain portion of the price of the goods or services on the day he/she takes them and promises to pay the remaining amount in agreed portion at regular intervals until the whole amount is settled. Installment transaction can be under hire purchase or deferred system.
10.1.2. Steps for transaction analysis
Accounting transaction analysis can be broken down into six steps:
1. Is the transaction an accounting transaction?
In order to be identified as an accounting transaction, the transaction must
relate to the business and involve a monetary amount. For example, the signing
of a rental agreement is not in itself an accounting transaction as there is no
monetary amount involved. However, the payment of a deposit under the rental
agreement is an accounting transaction, it relates to the business, and there is a
monetary amount involved.
2. Which ledger accounts does the transaction affect?
Identify which accounts the transaction is going to affect. For example, the cash
payment of rent for the accounting period is clearly going to affect the cash
account and the rent expense account.
3. What account type does each of the accounts involved belong to?
Each account can be identified with an account type, assets, liabilities, capital/
equity, income/revenue or expenses. Using the rent example, the cash account
would be identified as an asset account, and the rent expense account is
identified as an expense account.
4. Is the balance on each account going to increase or decrease as a result of
the transaction?
In the example used above, cash is going to leave the business when the rent
is paid, so the cash account should decrease. The amount of rent paid is going
to increase, so the rent expense account should increase as a result of the
transaction.
5. Will this increase or decrease lead to each account being debited or
credited?
The purpose of identifying the type of account in step 3 above, is to make it
easier to decide whether an increase or decrease requires the account to be
debited or credited.
Remember, the extended accounting equation is:
• Assets + Expenses = Liabilities + Capital/Equity + Income/Revenue
Items on the left hand side of the equation are increased by a debit and
decreased by a credit; items on the right of the equation are increased by a
credit and decreased by a debit.
6. What is the amount to be entered into each account?
Identify from the source documents the monetary amount to be entered for
each account.
Accounting Transaction Analysis Table
The accounting transaction analysis described in the six steps above, is best
set out in table format to ensure that important considerations about the
transaction are not overlooked.
In the above example, suppose the cash payment for the rent was the amount of
4,000, using the six step process we have the following analysis of the transaction.
1. This is an accounting transaction as it relates to the business and involves a
monetary amount.
2. The accounts involved are the cash account and the rent expense account.
3. The two accounts types are an asset account (cash) and an expense account
(rent).
4. Cash is decreased and rent is increased by the transaction.
5. A decrease to an asset account is a credit; an increase to an expense account
is a debit.
6. For each account the monetary amount is 4,000
This can then be summarized in the accounting transaction analysis table
as follows:
10.1.3. Accounts affected by the transaction
There are five (4) accounts in accounting that are affected by business transactions
1. Assets accounts,
2. Capital accounts,
3. Liability accounts,
4. Expenses accounts,
5. Income accounts,
• Assets: These are resources controlled by the organization/entity that arise from past transactions or events and from which future economic benefits are expected to flow (inflow) to the firm/enterprise.
Example, if a business sells goods on credit then it has an asset called a debtor. The past event is the sale on credit and the resource is a debtor. This debtor is expected to pay, so that economic benefit will flow towards the firm i.e. in form of cash once the customer pays. Assets are classified into two main types:
i. Non-current assets/fixed assets
Non-current assets are resources acquired by the business to assist in earning revenues and not for resale. They are normally expected to be in the business for a period of more than one year. E.g.
• Land and building;
• Plant and machinery;
• Fixtures, furniture, fittings, and equipment;
• Motor vehicle, etc.
ii. Current assets/non-fixed assets
Current assets are resources not expected to last for more than one year. They are in most cases directly related to the trading activities of the firm. E.g.
• Stock of goods for purpose of selling;
• Trade debtors’/ account receivable;
• Cash at bank;
• Cash in hand
Note: When assets increase, you debit that asset account and vice-versa (when assets reduce, you credit that asset account)
• Liabilities: Liability is obligation of a business as result of past events settlement of which is expected to result to an economic outflow of amount from the business.
E.g. when a business buys goods on credit, then the firm has a liability called a creditor. The past event is the credit purchase and the liability being the creditor. The firm will pay to the creditor and therefore there is an outflow of cash from the business.
Liabilities are classified into two main classes:
i. Non-current liabilities or long term liabilities
Non –current liabilities are obligations that are expected to last or be paid after
one year. This includes long-term loans from bank or other financial institutions.
ii. Current liabilities
Current liabilities are obligations that last for a period of less than one year and
therefore will be paid within one year. E.g.:
• Trade creditors or account payable (owed amounts as a result of buying
goods on credit)
• Other creditors (owed amounts for services supplied to the firm)
• Bank overdraft (amounts advanced by the bank for a short-term period)
Note: When a liability increases, you credit that liability account and viceversa (when liability reduces then, you debit that liability account)
• Capital: Capital is the residual amount on the owner’s interest in the firm after
deducting liabilities from the assets.
Recall the accounting equation:
Assets = Liabilities + Capital
Then,
Capital = Assets – Liabilities
The accounting equation can be expressed in a simple report called the “balance
sheet”
Note: When capital increases, you credit capital account and vice-versa (when
capital reduces, you debit that capital account)
• Income: income account shows income received by the business from its
operations and from elsewhere. It contains all cash and credit sales, different
fees, commissions, grants that have been received by the business.
Note: When income increases, you credit that income account and vice-versa
(when income reduces, you debit that income account)
• Expenses account: This account records the expenses of the business and this
can be categorized as follow:
- Cost of goods sold (raw materials, direct labor)
- Administrative expenses like salaries, rent, depreciation, operating expenses
etc.
- Selling expenses like advertising, promotion, discount, etc
Note: When expense increases, you debit that expense account and vice-versa
(when expense decreases/reduces, you credit that expense account)
Application Activity 10.1
1. Discuss the disadvantages of selling on credit to a business
2. Differentiate the debtor’s obligations from those of creditors
3. Briefly, discuss the types of accounts
4. Using the steps of transaction analysis, evaluate what would happen if
the cash receivable for renting business assets was 60,000Frw?
10.2. ACCOUNTING SYSTEMS
Activity 10.2.1
1. What do you understand by accounting?
2. Consider any school canteen keeper or even a retailer who properly
records his/her transactions. Which system do you think that school
canteen keeper uses in record keeping?
10.2.1. Types of book keeping
There are two types of book keeping; namely
a. Single entry system
b. Double entry system
1. Single entry system of bookkeeping
An entry refers to the business’ process of entering some financial information
in an account.
Single entry system is a system or a method where transactions are recorded once in the books of accounts. Incomes and expenses are recorded but changes in assets and liabilities are not recorded. The transactions are recorded in the cashbook only and they are not posted to the ledger for the second recording. Only cash in (revenues) and cash out (expenses) are recorded.
When all transactions have been fully recorded, both the debit and credit columns are totaled, then, the totals are shown after underlining the last amounts on the same row. The total is then underlined with double lines. The difference between the two sides is then added to the smaller side as balance carried down (bal. c/d) or balance carried forward (bal. c/f) so that both columns balance. The balance c/d or c/f is then placed below the totals but on the opposite side (if it was on the debit, then placed on the credit side and vice-versa). This balance is then known as the balance brought down or forward (bal b/d or b/f) to start the following period.
• If there is use of bal.c/d, you should use bal. b/d consistently.
• If you use bal .c/f, you should use bal. b/f as well. Make sure that this is
followed through the accounting practice.
Advantages of the single entry system
1. It is very simple and straightforward. It is at times referred to as selfemployment accounting because it does not require trained accountants
to handle;
2. Single entry bookkeeping saves times because you need to record each
transaction only once;
3. Single entry system is usually less expensive to maintain than double entry
system. It does not require the services of a trained person;
4. Single entry system is suitable for small businesses because they cannot
afford the cost of double entry.
Limitations of single entry system
1. Comparing the current operations of the business with the previous records
may not be possible because of unsystematic record keeping;
2. A trial balance cannot be extracted to check on the arithmetic accuracy of
the entries in the ledger;
3. Profits and losses cannot be determined because it is hard to prepare a
profit and loss account in the normal way;
4. The financial position of a business is not determined because the
information on assets and liabilities is not complete;
5. Theft and other losses are less likely to be detected.
Application Activity 10.2.1
1. Is single entry system important in accounting? Justify your answer
2. Discuss what would happen if accounting would only use this system.
2. The double entry system of book keeping
Activity 10.2.2
1. What do you understand by double entry system?
2. What do you understand by an account?
Double entry principle
Double entry is a system of keeping records, which involves making two entries for every transaction. It is one of the most important principles in accounting. This principle stresses that for every transaction; there should be both a debit entry and a corresponding credit entry. The double entry system is derived from the double entry principle, which is also known as the Golden rule that states “every debit entry must have a corresponding credit entry and vice-versa’’.
T-accounts, crediting and debiting
Debiting and crediting of accounts is best seen in the T-accounts. T- Accounts divide each account into two sides; the left hand side called the debit side and the right hand side called the credit side. The effect of transaction is recorded on the appropriate side of that account based on the double entry rules explained above.
1. Debiting an account: is the process of recording a transaction on the debit side
of an account
2. Crediting an account: is the process of recording a transaction on the credit side
of an account
N.B - Debit is shortened as (Dr)
- Credit is shortened as (Cr)
Thus, from every transaction, at least two accounts are involved. Then, these
questions must be answered:
1st question: What are these two accounts to be affected or involved?
2nd question: What type of account are they?
3rd question: What account is to be debited and what account is to be credited?
10.2.2. An Account
Refers to the record or statement in the ledger where transactions of similar nature
are expressed in financial or monetary terms as recorded in chronological order.
Note: The name or title of an account must always be indicated at the top of Taccount.
Debiting an account means increasing or decreasing the value of the account
depending on the nature of account.
Crediting an account means reducing or increasing the value of an account by a
way of a credit entry depending on the nature of that account
Column format or open format
Each side of the column comprises of the date, details, folio, and amount. The debits are entered on the left side and the credits on the right side.
• From the above columns, the title is the name of the account, which is written
on top of the account and at the Centre as shown above;
• The date column records the date when the transaction took place;
• The details or particulars column gives a brief explanation and records the
name of the other account affected by the same transaction(s);
• Folio column or reference column shows the page number of the other account
affected by the same transaction where the corresponding double entry was
recorded;
• Amount column shows the financial or monetary value of the transaction.
Application Activity 10.2.2
1. Describe the rule of debiting and crediting
2. Discuss the importance of using double entry
10.3. BOOKS OF ORIGINAL ENTRY
10.3.1 JOURNALS
Activity 10.3Identify one business at school or in your community. Visit that business and find out if the business keeps any records. Identify the records that are kept and the kind of business information such records capture. Identify the required records that this business needs to keep to be able to earn desired profit.
Meaning of a journal
A journal is a daily book of original entry used in recording the day-to-day transactions of the business. These are books where transactions are first recorded before they are posted to the ledgers (accounts). The data used to write up these books is got from the source documents like invoice, pay slips, voucher.
There are two categories of journals and these are:
1. The general journal
2. Special journals
Types of special journals include;
i. Purchases journal /purchases day book
ii. Sales journal /sales day book
iii. Purchases return journal/return outwards book/journal
iv. Sales return journal/return inwards book/journal
Uses / functions of a journal
1. It is used to record the purchase and sale of fixed assets on credit;
2. It is used in correction of errors made in other subsidiary books;
3. It is used to record opening entries. Opening entries represents all those
items a business begins with;
4. It is used to record closing entries. These include transfers from one account
to another in the ledger;
5. It is used to record bad debts and depreciation;
6. Bad debts are partor all debts, which debtors either fail or refuse to pay;
7. Depreciation simply means loss of value of the assets of the business.
8. It is used to record provisions and reserves;
9. Provisions are part of profits set aside to meet losses arising from specific
causes e.g. provision for discount allowed;
Reserves are part of profits that are set aside to meet losses arising from
unspecific causes e.g. death, sickness and accident;
10. It is used to record other types of transactions that have no specific
subsidiary books.
Advantages of using journals
1. It is the diary of the business in which events are recorded as they occur;
2. It is a book of prime entry for correction of errors;
3. It is a book of summaries for the business;
4. It acts as a book of explanation for the business. After every transaction is
entered, a brief explanation/ description is made;
5. It reduces risks of transactions being omitted as that of making only a single
entry;
6. It shows the financial position of the business by comparing the debit side
to the credit side;
7. It makes it easy to detect errors since all entries are listed in order of dates
and supported by a simple explanation of the transaction.
Lay out of the general journal: This indicates the following:
The date: This is a column for the year, month and date
Details /particulars: For names of two accounts affected
Debit and credit: These are two cash columns for debit and credit amounts
respectively.
Format of a general journal
Heading: (e.g. General journal)
Rules of Journal Entries
• Debit the receiver and credit the giver.
• Whenever an asset is bought, we are supposed to debit that particular asset
account.
• Whenever an asset is sold we credit that account (asset).
• While making entries in the journal we start with accounts to be debited and
those to be credited later.
Example:
Make the necessary journal entries to record the following transactions in the books
of George 2010.
April 1st: Sold a car for 12,000,000Frw on credit to Eric
5th: Bought a new building on credit 13,500,000Frw from David
15th: Purchased a computer on credit at 4,000,000Frw from Johnson
GEORGE’S GENERAL JOURNAL FOR APRIL 2010
• If an asset is sold for more than its book value: e.g. if a car had been bought at 12,000,000Frw and is sold at 12,200,000Frw to Mugisha on 16th April, making a profit of 200,000Frw. the journal would look as bellow:
Journal entries
• Special Journals: these are journals that are used to record specific business transactions theyinclude the sales journal, purchase journal, return in ward and the return out ward journal.
1. Purchases journal/purchases day book
Purchases daybook/journal is a daybook that records all the credit purchases of the business before being posted to the ledger. It is a list of credit purchases from purchases invoice in the order which they happen (their chronological order naming the creditors or suppliers and the value of the credit purchases for any period).
When recording transactions in the purchases daybook, it should be noted that fixed assets bought or sold on credit are not recorded in this book. They are recorded in the general journal. Each page of the purchases daybook has a number that helps in posting the transactions to the ledger. The net amount to be paid to each creditor is posted to the credit side of each creditor’s individual account in the purchases ledger.
Format of a purchase journal
Example
The following information relates to the books of Akeza for year 2011
1st March bought goods on credit from Mukasa invoice number 06: 48,000Frw
5th March bought goods on credit from Bikorimana 36,000Frw
10th March received an invoice from Mutabazi 50,000Frw
15th March bought on credit from Munezero number 110:26,000Frw
25th March credit purchases from Kwizera 34,000Frw
Required: Prepare Akeza’s purchases daybook
Post the information into the purchases ledgers
Post into the purchases account in the general ledger.
Akeza’s Purchases Day Book for the Month of March 2011
N.B:All ledger accounts in the purchases journal are credited except in thegeneral purchases ledger.2. Return outwards/ purchases returns journal
This is the book in which goods returned by the business/entrepreneur to the
supplier/creditor and their value are recorded in chronological order. It records or
lists the names of suppliers/creditors and the value of the goods returned to each.
It records entries supported by the credit notes received from suppliers or creditors.When entrepreneur returns goods supplied to him or her on credit, the supplier issues a credit note to the entrepreneur to reduce the amount charged on him or her on the original invoice. Individual entries are posted on the debit side of the creditor/supplier’s account in the purchases ledger and the total to the credit side of the returns outwards
Reasons why goods may be returned
An entrepreneur or buyer may return goods previously bought due to a number of reasons some of which include the following:
• In case they are supplied in the excess of the amount ordered for. This distorts
the business budget as it demands payment beyond planned expenditure;
• In case they are defective or expired;
• If they are not of the size and quality ordered for;
• When they do not match with the purchases order placed (when they are
different from the quotation);
• In case the goods get damaged while being transported by the supplier or any
transporter contracted by the supplier, they will be returned;
• When goods are supplied at a higher price than that agreed on before placing
the order.
Example:
1. Kimironko wholesalers returned goods to the following suppliers during the
month of November 2010 and received credit notes from suppliers.
2nd Nov. returned 5boxes of tiptop bread to hot loaf limited because it had grown
molds each box 16,000Frw, credit note number 96;
6th returned two bags of sugar to Scoul limited each 100,000Frw it was wet credit
note number 98;
22nd returned 5boxes of soap to Mukwano company because it was damaged @
box 80000Frw credit note number 100.
28th received a cred it note from Sam number 47 for juice which was expired worth
30,000Frw
Required: Prepare KimironkoWholesaler’s purchases returns daybook
Post the information into the purchases returns ledgers
Post into the purchases returns accounts in the general ledger.
Purchases Return Journal/Return Outward Journal for Kimironko Wholesalers for the Month
of November 2010
3. Sales day book/ sales journal
This is a book of original entry where credit sales are first recorded before being posted to the ledger accounts. It records credit sales made by the business in their chronological order. The information used to record transactions in sales daybook is obtained from the copies of the sales invoices sent to the customer (s) who buy goods on credit from the business. The individual entries in the sales journal are posted to the debit side of the customer/ debtor’s accounts in the sales ledger and the total is posted on the credit side of the sales account in the general ledger.
Example:
1. Enter the following transactions into the sales daybook of Alain. Post them
to sales ledger and show the transfer in the general ledger in month of
January 2016 and balance off all accounts:
5thJan: Credit sales to Peter 10,000Frw
6thJan: Issued an invoice to Tom 20,000Frw
9thJan: Credit sales to Mubiru16,000Frw
17th Jan: Gave out an invoice to Emma 10,000Frw
4. Sales return journal or return inwards book
This is the book in which goods returned by the customer are recorded before being posted to the ledger accounts. It records the name of each debtor/customer who has returned goods previously bought on credit and the value of the goods returned by each in a chronological order.
The information recorded in returns inwards book is obtained from the credit notes issued to the customers who return the goods. When goods bought by customer (s) on credit are returned, a credit note is issued to the customer (s) to reduce the amount charged in the original sales invoices. The business normally accepts these returned goods to maintain good reputation and customers.
Example:
The following goods were returned to Gakuba wholesalers and thereafter credit
notes were issued to customers.
Jan 1st 2013 Mugisha and company limited returned two rolls of cotton material
because they were not of the right colour. 100,000Frw credit note number 97.
8thJan St. Michael primary school returned 2 dozens of books because they
were of poor quality each 18,000Frw credit note 101
Required:
Record the above transaction in the sales return book, post to the personal
account in the sales ledger and transfer the transactions to the general ledger.
Application Activities 10.3
1. The following transactions were extracted from the books of BASASA
enterprise limited for month of July 2003. In “000,000” Frw
1st Bought goods on credit from Santu 300
2nd Bought goods on credit from Tom 340
3rd Sold goods on credit to Ssali 430
5th Some of the goods were returned to Santu 30
8 th credit sales to Mwangiwere worth 52
10th Ssali returned some goods worth 230
11th Bought some goods from Musa on credit 630
14th Sold some goods on credit to Mukasa 360
16th Credit purchases fromGoba were 230
19th Some goods were returned to Tom 90
21st Mukasa returned goods worth 450
23rd Credit sales to Muta 320
25th Credit purchases from Dan 210
27th R eturned some goods to Goba 250
28th Muta returned goods worth 190
29th Credit purchases from Sam 530
31st Returned goods to Sam worth 350
You are required to prepare BASASA enterprise Limited’s
i. Purchases day book
ii. Sales day book
iii. Return out ward book
iv. Return inward book
2. The following details relate to the books of Karekezi and sons limited for the
month of May 2017
1st Received an invoice from peter numbered 02, amounting to 30,000Frw
2nd Received an invoice from John numbered 05, amounting to 34,000Frw
3rd Issued an invoice to Phillip numbered 01, amounting to 43,000Frw
5th Received a credit note from peter numbered 011, amounting to 3,000Frw
7th John issued a credit note for expired goods 012, amounting to 23,000Frw.
9th Issued an invoice to Michael 02, amounting to 23,000Frw
10th Issued a credit note to Phillip 030, amounting to 5,200Frw
9th Issued an invoice to Michael 02, amounting to 23,000Frw
10th Issued a credit note to Phillip 030, amounting to 5,200Frw
11th Received an invoice from Okyani 042, amounting 63,000Frw
15th Issued an invoice to Denis 03, amounting 36,000Frw
16th Got a purchase invoice from Joseph 055, amounting 4,500Frw
18th Returned goods to John and received a credit note 066, amounting to 32,000Frw
20th Issued a credit note to Denis 025, amounting to 4,500Frw
23rd Gave out a sales invoice to Philip 043, amounting to 32,000Frw
25th Received a purchases invoice from Okyani 07, amounting to 20,000Frw
27th Received a credit note from Joseph 059, amounting to 13,000Frw
30th Issued a credit note to Denis 033, amounting to6,000Frw
You are required to prepare Karekezi and sons Limited’s
v. Purchases day book
vi. Sales day book
vii. Return out ward book
viii. Return inward book
10.4. THE CASH BOOK
Activity 10.4
1. What do you understand by the term cashbook?
2. Explain any two form of cashbook that you know
The cash book is defined as a book which records all receipts (cash and cheques from customers and debtors or other sources), and all the payments (to creditors or suppliers and other expenses) for a particular financial period.
A cashbook is one of the subsidiary books or books of original entry. It is a subsidiary book because entries are posted from it to ledgers. It has two sides i.e. the left side denoted Debit and the right side denoted Credit. This means that if a debit entry is made within a cashbook a corresponding credit entry is to be made in the respective ledger account. Similarly, if a credit entry is made in the cashbook then a debit entry is made in the respective ledger account.
There are four forms of cashbook i.e.
• Single column cash book
• Two columns cash book
• Three columns cash book
• Petty cash book
Note: Only cash transactions are recorded in cash books and credit transactions are
recorded in other various journals.
1. SINGLE COLUMN CASH BOOK
This is one with only one amount column on either side. It is like a cash account; this type of cashbook is mainly used by small businesses that do not have bank account or which do not normally carry out transactions involving cheques. It records only cash receipts and cash payments.
2. TWO COLUMN CASH BOOK
The two columns cashbook is referred to as the double columns cashbook. This is a
cashbook, which has both cash account and bank account each side.
Cash account: This is an account that records receipts and payment of cash. Receipts
are debited while payments are credited.
Bank account: This is an account that records deposits into the bank and withdraws
from the bank. Deposits are debited while withdraws are credited to the bank
account.
It is called a two columns cash book because it has two columns on each side where
the amount is recorded
Note: Two columns cash has columns for date, detail/ particulars, folio, cash and
bank for both credit and debit sides.
1. The cash column represents cash account while the bank column represents
bank account.
2. The particulars column states the name of the account in which double
entry will be recorded in the ledger.
3. The debit side records all receipts and the credit side records all the
payments.
Posting entries from the Cash Book to the Ledger Accounts to complete double entry
All entries, except contra entries and balances, are posted to the appropriate accounts in the ledger to complete double entry. All debit entries are posted to the credit side of the ledger account named in the particulars/details of the cash book. All credit entries are posted to the debit side of the ledger account named in the particulars/details of the cashbook.
Special Entries in the Two Columns Cash Book
There are entries in the 2-columns cashbook that require special consideration and these include:
Contra Entries
Contra entries are entries of transactions, which complete their double entry within the cashbook. This means that there is both credit and debit entries for every transaction in the cash book. Contra entries are clearly indicated by letter “C” placed in the folio column. There are two types of contra entries in the cashbook i.e. Cash paid into the bank or cash taken from the business and banked. These are recorded using contra entry form
i. Cash withdrawal from the bank for business use or office use. The double entry
is recorded as follows:
DEBIT cash column
CREDIT bank column
ii. Deposit of cash into the bank; this transaction is contra and its entries will be:
DEBIT the bank with cash in detail column
CREDIT the cash account with Bank in detail column
Note:
• Cash sales paid directly into the bank is not a contra entry so it is recorded on
the debit side of the cashbook in the bank column.
• Drawing for personal/private use. Drawing refers to the money or cash
removed out of the business by the owner for private or personal use. This
action reduces the cash of the business. Drawings in form of cash from the
business for personal use are NOT contra entries. It affects the cash account or
bank account
Example involving contra entries:
From the details given below write up a two columns cashbook of PETER as per
January, 2016 and balance off at the end of the month
June 1st started a business with 70,000Frw in the bank.
2nd Paid for furniture using a cheque 8,000Frw
5th Cash sales 12,500Frw
6th Paid for postage by cash 450Frw
7th Received a cheque from Binno 8,200Frw
9th Withdrew cash from the bank 6,300Frw for business use
12th Ssali paid us in cash 1,400Frw
16th Paid wages in cash 2,200Frw
18th Paid Mutema by cheque 2,900Frw
20th Drawings 2,700Frw
23rd Paid electricity account by cheque 1,700Frw
26th Lini paid us by cheque 7,700Frw
28th Paid sundry expenses by cash 1,000Frw
30th Sold goods for cash 4,800Frw
The information means that there will be no ledgers for the 9th in the bank account because letter “C” indicates contra entry and therefore double entry is complete.
3. THREE COLUMNS CASHBOOK
The two columns cash book can be enlarged further and converted into a three
columns cash book by including a separate column for recording discounts,
(discount allowed and discount received) hence the expression of three columns
cashbook. This statement means that a three columns cashbook has three columns
for amounts on both debit and credit sides.
Discount allowed is an allowance extended to a debtor when he/she pays promptly.
I.e. within a specified period of time and it is therefore debited in the cashbook as an
expense while
Discount received is an allowance received from suppliers or creditors when the
enterprise pays promptly and therefore it is credited in the cashbook as an income
Discounts: This is an allowance given to a trader/customer on goods purchased. It
takes the following forms.
i. Trade discount
ii. Cash discount
Trade discount: It refers to a reduction in the usual price of a product that is given to customers who buy goods and services for resale. It is important to note that the net price is entered as sale value by the seller in the accounts. Equally, the net price is entered as purchase amount by the buyer in the accounts. In other words, no entry is made for trade discount separately in books of accounts of the seller and buyer. It has to be mentioned in the narration about the trade discount given on the list price.
Cash discount: This is a form of allowance given to the buyer by the seller to encourage him/her pay in time and to always pay cash promptly. Discounts can be received from the supplier/manufacturers or can be given away /allowed to the business customers.
Suppose a dealer has made a credit sale, offering one-month period of credit. The buyer is within his/her total right to make the payment on the last date of credit period allowed. So, the buyer can make the payment on 30thday from the date of purchase. To induce the buyer to pay before the expiry of credit period, seller may offer him 1% cash discount, if the payment is made within 15 days from the date of sale. So, here, the buyer can enjoy the cash discount by paying the seller on 15thday from the date of sale. If goods sold are 5,000Frw buyer can pay only 4,950Frw, after enjoying the cash discount of 50Frw. Entry for cash discount is, invariably, made in the accounts of the seller as well as buyer. Cash discount comes into picture as and when credit sales are made. There is no cash discount on cash purchases. Many students, it is observed during teaching, wrongly think that cash discount is allowed on cash sales. This is not the case.
Cash discount comes into picture as and when sales are made on credit. Cash discount and Trade discount may be allowed, simultaneously, in one transaction. Their purposes are different.
Example:
Kigali traders limited had balances cashat hand 220,000Frw at bank 14,000Frw on
1st March 2004.
3rd received a cheque from Juma 12,000Frw less 5% discount.
4th paid cash to Okello 10,000Frw less 12.5% discount.
6th Karekezi paid his account of 40,000Frw by cheque less 3 ¼ % discount
8th bought goods by cheque 20,000Frw
15th paid Mukasa by cheque 19,000Frw having deducted discount 1,000Frw
17th paid Nakure by cheque 14,250Frw in full settlement of his account for
15,000Frw
20th cash sales 14,000Frw
21st paid cash into bank 120,000Frw
Required: Open up Kigali traders Limited’s three columns cash book.
A THREE COLUMN CASH BOOK FOR KIGALI TRADERS LIMITED ON 31ST MARCH 2004
Notes 1: The discount columns are totaled but not balanced.
The total of the discount columns is taken to the discount account as they
are found in the cashbook. This is done so because the discount columns
in the cashbook are not part of the double entry. They are regarded as
memorandum from which we get periodic totals to enter in the discount
account.
2: While posting to ledgers, discount received remains on the credit side as
income and discount allowed remains on the debit side as expenses.
FUNCTIONS OF A CASH BOOK
A cashbook serves the following functions:
a. It is part of the ledger system since it contains the cash account and the
bank account.
b. It is the book in which cash receipts are recorded. Cash receipts are the
amounts of money received in the business.
c. The cash book is also used to record cash payments made in the business
showing to whom it was paid and from which source.
d. It records details of cash, discount allowed and received, and providing
convenient totals at the end of the month.
4. THE PETTY CASH BOOK
A petty cash book is a minor /small cashbook used to record payments regarding minor/small expenses in a business. It is a further extension of the main cashbook.
A petty cash book is used because as the business expands, having several cash transactions daily, the cashbook becomes unnecessarily overcrowded. To avoid this overcrowding of information in the main cashbook, payments of relatively small amounts such as postage, small transport charges like tax hire, meals, purchase of stationery, daily wages, etc. are put in the petty cashbook. The recording of small expenses payments is done by a person called a junior cashier/ petty cashier who receives money for spending from the senior cashier
Advantages of maintaining petty cash book
1. It relieves the main cashbook from being overcrowded with transactions
as small transactions are recorded in the petty cashbook and only big
transactions are entered in the main cashbook,
2. The chief cashier feels relaxed as he/she delegates some of the duties to the
petty cashier, who will be charged with the responsibility of handling and
recording small expenses,
3. Only totals are transferred to the general ledger in the respective expense
account. This saves time and space,
4. The use of analysis columns helps the chief cashier (accountant) to analyze
where money is being spent. This leads to greater control of expenditure.
THE IMPREST SYSTEM
This is a system by which the main cashier gives his/her junior (petty cashier) an adequate amount to meet his/her office requirements for a specific period e.g. a week, a month, etc.
After a given period, the main cashier checks the amount that has been spent and after being satisfied with the accountability, he/she gives the petty cashier an amount equal to that one spent in order to top up the petty cash to its original amount.
Therefore, at the beginning of each period, a balance of petty cash at hand is always fixed and is called “imprest amount”. By definition imprest amount is a fixed amount of money given by the main cashier to the petty cashier at the beginning of each new trading/transaction period.
Advantages of using imprest system
i. It checks on embezzlement of funds. This is simply because as the petty
cashier makes expenses, the imprest amount keeps on reducing. It therefore becomes difficult for the petty cashier to reduce funds for personal interests,
ii. The senior cashier is helped since he/she delegates some of the work to the
petty cashier,
iii. It reduces overcrowding of the main cashbook. This is because the main
cashbook is only used to record big and major transactions,
iv. It provides checkups since the petty cashier is not allowed without vouchers
signed by authorities,
v. It minimizes misappropriation of funds as money in hands of the petty
cashier is limited to the imprest and has to be accounted for in a given
period of time,
vi. Extravagancy is checked by keeping watch on any amount refunded to the
petty cashier period after period and every payment is a companied by a
voucher,
vii. It avoids cash crisis since the imprest amount is always greater than
estimated expenditure, which enables the petty cashier to be on a safer
side,
viii. It reduces unnecessary movements to the bank every time money is
required. This is because the petty cashier is always given enough money
to cater for minor expenses,
ix. The imprest system saves time for covering official expenses,
x. Authority is always recognized in making payments. This is because vouchers
always have to be signed by authorities of the business/ organization,
xi. Since petty cash is issued in specified intervals, it enables the business to
keep desired official standards,
xii. It promotes accountability there by creating efficiency and high degree of
honesty. This becomes easy since cash in hand plus expenses paid for must
be equal to the imprest amount.
Note:
Analysis columns: The above is just an example of a petty cashbook but in most
cases the analysis columns are provided in the question
Details /particulars column: This column is used to record the specific details on
which the expenditure was made
Ledger account: This records transaction to creditors paid from petty cash
Stationery: Records expenses like pens, pencils, papers, stencils, ink etc
Postage: For payment on stamps, envelopes, letters and parcels, telephone charges
and telegram
Reimbursement: This is the amount that is refunded to the petty cashier to top up
the float to start another period.
Travelling expenses: For payment for the different means of transport used by the
business
Sundry: These are expenses, which may not have been catered for in specific column
analysis
Imprest /float: This is the amount kept by the petty cashier estimated to last for a
given period
Voucher number: Every petty cash voucher contains a number, which acts as
reference in order to avoid forgery
Note: Usually when business expands, therefore handling big transactions; `it is not
advisable to keep a lot of cash or money in the office for security reasons
and convenience. A small amount of money therefore should be kept in the
business to meet the day-to-day activities or small/petty expenses that are
frequent. Only the summary totals are recorded in the cashbook.
How to record transactions in the petty Cashbook;
When recording transactions into a petty cashbook the following should be done
1. The amount of imprest received is debited in the cash book under the
receipt column.
2. All payments made out of the petty cash are first entered in the payments
column and then entered under the appropriate analysis column.
3. At the end of the period find the total of each analysis column and over all
payment period made during the that period
4. Determine the cash balance not spent during the period and enter it under
the payments column as balance brought down [b/d]
5. Add the total payments to the cash balance to get the imprest which should
be written under both the payments column and the receipt column.
6. Transfer the cash balance left for starting period and enter it under the
receipt column as balance brought forward [b/f]
7. Enter the total for the payments as reimbursement under the receipt
column.
8. When posting transactions in the petty cash book all the totals in the analysis
columns are transferred on the debit side of the respective accounts except
the column for ledger account.
Example:
Rugina a petty cashier working with BK and company limited was issued with a
cheque of 50,000Frw to be spent on minor expenses.
on 1st May 2004, the following transactions took place.
2nd May paid transport 1,500Frw and postage 2,000Frw
3rd May bought office stationery for 13,000Frw
4th May paid transport 2,500Frw and telephone 2,500Frw
7th May paid sundry expenses 5,500Frw
Required:
Record the above transactions in Rugina’s petty cash book having analysis
columns for telephone and postage, office stationery, transport and sundry
expenses.
RUGINA’S PETTY CASH BOOK FOR THE MONTH OF MAY 2004
Note: Balance them off.
P.C.B stands forPetty Cash Book
20th May Withdrew cash for business use 100,000Frw
27th May Obtained a loan by cash from the bank 300,000Frw
28th May Bought fixtures by cash 60,000Frw
Required: a. Prepare a 3-columns cashbook for Lucenge Traders Limited
b. Open up the relevant ledger accounts and balance them off.
10.5. LEDGERS
Application Activity 10.4
1. A company’s petty cashier is given an imprest of 1,200,000Frw for a period of
two weeks. The expenditures were as follows:
March 2nd bought 2 reams of duplicating papers each at 60,000
3rd May Paid transport to town 40,000
4th May Bought accompaniments for staff 100,000
5th May Bought 2 dozens of stencils each at 120,000
6th May Paid for compound cleaners wages 60,000
8th May Bought 10 brooms for compound cleaning each at 10,000
10th May Paid for stamps and postage 50,000
11th May Paid money for special hire taxi 12,000
12th May Bought 3 dozen of Omo for cleaners each at 12,000
15th May Bought ink for duplicating machine 150,000
17th May Bought sodas for staff 120,000
Required:
a. Open up a petty cashbook on imprest system with analysis columns for
stationery, travelling, and general expenses
b. Balance the petty cash book and make relevant entries in the general
ledger.
2. The following information shows that transactions that were carried out
by Lucenge traders limited in month of May 2010
May 1st b/f 3,000,000Frw at bank and cash balance b/f 600,000Frw
3rd May Sold goods by cheque allowing a discount of 5% worth 200,000Frw
6th May Purchased goods by cheque receiving 6% discount for cash 800,000Frw
9th May Sold goods for cash allowing a discount 7% of 300,000Frw
11th May Paid rent for premises in cash 100,000Frw
12th May Banked cash 400,000Frw
13th May Paid transport by cheque 100,000Frw
14th May Cash purchases 120,000Frw
15th May Bought stationery paid by cheque 390,000Frw
16th May Sold goods by cheque allowing 8% discount for 400,000Frw
Application Activity 10.4
1. A company’s petty cashier is given an imprest of 1,200,000Frw for a period of
two weeks. The expenditures were as follows:
March 2nd bought 2 reams of duplicating papers each at 60,000
3rd May Paid transport to town 40,000
4th May Bought accompaniments for staff 100,000
5th May Bought 2 dozens of stencils each at 120,000
6th May Paid for compound cleaners wages 60,000
8th May Bought 10 brooms for compound cleaning each at 10,000
10th May Paid for stamps and postage 50,000
11th May Paid money for special hire taxi 12,000
12th May Bought 3 dozen of Omo for cleaners each at 12,000
15th May Bought ink for duplicating machine 150,000
17th May Bought sodas for staff 120,000
Required:
a. Open up a petty cashbook on imprest system with analysis columns for
stationery, travelling, and general expenses
b. Balance the petty cash book and make relevant entries in the general
ledger.
2. The following information shows that transactions that were carried out
by Lucenge traders limited in month of May 2010
May 1st b/f 3,000,000Frw at bank and cash balance b/f 600,000Frw
3rd May Sold goods by cheque allowing a discount of 5% worth 200,000Frw
6th May Purchased goods by cheque receiving 6% discount for cash 800,000Frw
9th May Sold goods for cash allowing a discount 7% of 300,000Frw
11th May Paid rent for premises in cash 100,000Frw
12th May Banked cash 400,000Frw
13th May Paid transport by cheque 100,000Frw
14th May Cash purchases 120,000Frw
15th May Bought stationery paid by cheque 390,000Frw
16th May Sold goods by cheque allowing 8% discount for 400,000Frw
Activity 10.5
The average business person has so many matters to attend to and his/her transactions are so numerous that it is obviously impossible to attempt to remember everything that happens chronologically in journals. Using your prior knowledge related to book keeping and accounting what do you understand by the following terms used to analyse and classify information from the first entries?
• what is meant by a ledger
Meaning of Ledger
Business transactions must be recorded systematically. The place where they are recorded is called Ledger. Ledger is a book, which contains condensed and classified records of transactions transferred or posted from books of original entry. While the journal records all transactions in a chronological order, ledger accounts classify the transactions and record those that are similar in a single place in form of debits and credits. The process of transferring information from the books of original entry to the ledger accounts is called “posting”
Difference between ledger and journal
The journal and ledger are both important books of accounting. Then, their differences are as follows:
CLASSIFICATION OF LEDGER ACCOUNTS
Accounts are classified into:
a. General ledger: Are also called real and nominal accounts (impersonal accounts)
i. Real account: Account for tangible items e.g. land, furniture, cash, etc…
ii. Nominal account: Account for intangible items or expenses e.g. salaries,
electricity, wages. etc
b. Subsidiary ledger: Are also known as sales ledger or debtors’ accounts and
purchases ledger or creditors’ accounts.
Briefly, ledgers are classified into:
a. Sales ledger, which has the accounts of all the debtors,
b. Purchases ledger, which has the accounts of all the creditors
c. General ledger, which has all other accounts known as major accounts
called control accounts i.e. other assets, liabilities, incomes, expenses and
capital.
Note: The ledger has two main types of accounts
• Personal
• Impersonal
1. Personal accounts
These are those accounts that appear in the ledger in the names of a person as an individual and organizations. They constitute either assets or liabilities of business. ex John’s, Abdallah’s, Peter’s accounts, XYZ Limited Company Account,
2. Impersonal accounts
These are accounts, which do not appear in the names of persons. They are accounts that appear in the names of things and are further divided into real and nominal accounts.
• Real/property accounts: These are accounts, which appear in the ledger in
the names of property/tangibles e. g buildings, land, plant, machinery, etc.
• Nominal accounts: These are accounts, which appear in the ledger in the
name of intangibles e.g. expenses, like salaries, wages, depreciation, bad
debtors and gains in form of interest etc
An account may be presented in a ”T” format or in a columnar format.
T- Format the account is divided into two equal parts i.e. the debit and credit sides.
Note: The name or title of an account must always be indicated in the above Taccount.
Debit side: Debit in accounting refers to any transaction of value added to an account. A debit entry indicates receiving of value, which leads to an increase of the value in assets and expenses accounts.
Crediting an account means reducing the value of an account by a way of a credit entry in assets and expenses accounts.
Column or format of open format
Each side of the column comprises of the date, details, folio, and amount. The debits are entered on the left side and the credits on the right side.
• From the above columns, the title is the name of the account which is written
on top of the account and at the Centre as shown above.
• The date column records the date when the transaction took place.
• The details or particulars column gives a brief explanation and records the
name of the other account affected by the same transaction(s)
• Folio column or reference column shows the page number of the other account
affected by the same transaction where the corresponding double entry was
recorded.
• Amount column shows the financial or monetary value of the transaction
Example
On 16th March: Furniture was bought for cash 150,000Frw.
Note: Cash purchase of goods
Dr: Purchase account
Cr: Cash / Bank account
Credit purchase of goods
Dr: Purchases a/c
Cr: Personal (creditor’s) a/c
Sale of goods in cash/cheque
Dr: Cash account /Bank account
Cr: Sales account
Credit sales of goods
Dr: Debtor’s a/c
Cr: Sales a/c
Purchasing of a fixed asset by cash or cheque
Dr: Asset a/c
Cr: Cash / bank a/c
Purchase of a fixed asset on credit
Dr: Respective asset a/c
Cr: Creditor’s personal a/c
Sales of a fixed asset in cash / bank cheque
Dr: Cash / Bank account
Cr: Respective asset account
Sale of a fixed asset on credit
Dr: Debtor’s respective a/c
Cr: Assets a/c
Withdrawal of cash from the business by the owner for his personal use
Dr: Drawings account
Cr: Cash account.
Withdrawing of goods by the owner for personal use
Dr: Drawing a/c
Cr: Stock a/c
Recording of returns in the ledger account using double entry
When goods have been returned by the business to the supplier
Dr: Supplier’s a/c
Cr: Return outwards a/c
When the customer has returned back the goods
Dr: Returns inward a/c
Cr: Customer personal a/c
Example
1. AMOS started a business on 1st February 2004 with 600,000Frw cash, which was
held in the Safe Custody of the office.
On 2nd Feb, he purchased shop premises by cash 340,000Frw.
On 3rd Feb, he purchased equipment by cash 16,000Frw
On 4th Feb he purchased goods by cash 20,000Frw
On 5th Feb, he bought goods for 100,000Frw and promised to settle the next
month.
Required:
Record the above transactions by double entry
BALANCING OFF LEDGER ACCOUNTS
This is the adding of both the debit and credit sides in order to make the two sides equal. In balancing off an account, we try to add and establish a difference between the two sides of an account. When balancing off an account, the following steps are put into consideration:
i. Add the two sides separately to find out the total of each
ii. Subtract the smaller side from the bigger side
iii. Record the differences on the smaller side and call it balance carried
down (c/d)
iv. Now both sides are equal
v. Put balance c/d on the opposite side of the account and call it balance
brought down (b/d)
Application Activity 10.5
1. With the help of an example, differentiate personal ledger from general
ledger
2. Record the following transactions of Muhire’ Business using double
entry and balance them off.
2004 October 1st started a business with cash at hand 100,000Frw and cash at
bank 200,000Frw.
Oct 2nd bought goods for resale and paid by a cheque45, 000Frw
Oct 3rd sold goods for cash 7,000Frw
Oct 7th paid a creditor Muberuka by cheque 10,000Frw
Oct 8th sold goods on credit to Karemera 15,000Frw
Oct 13th bought goods by cheque 30,000Frw
Oct 14th received cash from Karemera 15,000Frw
Oct 15th bought shop fittings by cash 19,000Frw
Oct 16th paid wages in cash 6,000Frw
Oct 16th paid carriage for goods in cash 4,000Frw
Oct 18th received a loan from Microfinance by a cheque 50,000Frw
Oct 24th sold goods to K.K.CO and received a cheque 21,000Frw
10.6. EXTRACTING A TRIAL BALANCE
Activity 10.6
1. At the end of her every accounting period, 31st December, Mukamana
draws a list of accounts to check up if her records were properly recorded
or otherwise; she takes correction measures in her books of accounts if
not appropriately recorded.
i. Referring to what Mukamana does at her every end of accounting
period, how do we call that exercise in accounting?
ii. What do you understand by trial balance?
2. Is the trial balance important in accounting? Justify your answer
Meaning of Trial Balance
In practice many entries will be made in the ledger in the course of the business period. Accuracy is essential but errors may creep in. At one glance you may not be able to know the net effect of those entries. It is important therefore to periodically check on the entries to ensure that they are accurate. This check is known as the Trial Balance.
A trial balance is a list of the debit and credit balances extracted from the ledgers at a particular date. Or a trial balance is a list of all ledger accounts and their balances at a particular time with credit balances totaled separately from debit balances. If the records have been correctly maintained based on double entry system, the totals of the credit and debit would be equal to each other.
Use of a trial balance
1. Used as proof of the arithmetical accuracy of the entries made in the ledger
2. Helps to know the assets and liabilities of a business by just looking at it
3. Used as a platform for preparing the final accounts which are prepared to
determine the profit or losses of the business e.g. trading account and the
profit and loss account this is because it identifies all the expanses and the
incomes of business.
To extract a trial balance means the process of transferring the balances from the ledger account to the debit and credit columns of the trial balance. The debit balances are entered in the debit column while the credit balances on the credit column of the trial balance.
The two columns are totaled up and the totals should be equal. If they are not equal, it means a mistake had been made in the previous accounting books (journals, cash books and ledger).
How to draw a trial balance;
Step 1: Post all the journal entries to the appropriate ledgers.
Step 2: Balance all ledger accounts and determine the credit or debit balances for
each ledger account.
Step 3: List all the ledger accounts with their debit or credit balances. Make sure the
debit balances are in one column and the credit balances are in another column.
Step 4: Add up all the credit balances and add up all the debit balances
Step 5: The total of the debit balances should be equal to the total of the credit
balances. If the totals are not equal, check the process all over again to identify the
errors and correct them
N.B: Totals must be equal otherwise, errors have happened in ledger accounts
In the trial balance, the following should be considered while making list of
accounts.
Fixed assets: Such as land, furniture, building, machinery, office equipment, motor
vehicle, their balances are listed in debit column
Current assets: Such as opening stock, debtors, cash at hand, cash at bank, their
balances are also listed in debit column.
Expenses: Which appear as debit balances include purchases, electricity, insurance,
stationery, carriage inwards, rent payment, carriage outward, return inwards are also
listed in debit column.
Losses debited: Bad debts, depreciation, discount allowed, drawings; their balances
are listed in debit column.
Liabilities, which appear as credit balances include: capital, bank loan, creditors,
bank overdrafts.
Return outwards, bad debts recovered, discount received, sales, subscriptions, interest received, donations, rents receivable, and commissions, their balances are listed in credit column.
NOTE: 1. Contra entries are not entered in the trial balance only balances brought
down (b/d) are entered in the trial balance.
2. Balanced ledger accounts do not affect the trial balance (if both sides are
balancing i.e. when nothing is brought down).
Examples: The following balances were extracted from books of Claudine enterprises as at December 2008. Extract the trial balance from these.
Application Activity 10.6
1. The details below relate to Chantal traders who deal in T-shirts in Frw
1st Nov 2009 balance forwarded cash 700,000 and bank 145,000.
2nd Bought goods for cash 130,000.
3rd Nov Bought goods from Mukamana on credit 100,000
5th Nov Cash sales 400,000.
10th Nov Bought furniture cash 200,000.
11th Nov Sales to Mr. Frog 105,000 on credit.
Frog returned some goods worth 15,000.
13th Nov Withdrew cash from bank for business use 230,000.
15th Nov Sold goods by cheque 500,000.
18th Nov We paid Mukamana’s account in full.
21st Nov Banked cash 690,000.
25th Nov Mr.Frog paid his account cash 90,000.
28th Nov Sold goods and received a cheque in settlement 120,000.
Required:
Open up a cashbook, post the transactions to respective ledgers and extract a
trial balance.
2. The details below relate to Gashora traders limited for the month of June
2013
1st June balance forwarded 700,000Frw cash at hand and 1,000,000Frw at bank
2nd June Bought goods on cash 130,000Frw
3rd June Purchased goods from Sam on credit 100,000Frw
5th June Cash sales 400,000Frw
10th June Purchased a computer cash 200,000Frw
13th June Sales to Kadogo 105,000Frw and gave an invoice
13th June Kadogo was issued with a credit note worth 15,000Frw
14th June Withdrew cash from the bank for personal use 230,000Frw
15th June Sold goods by cheque 500,000Frw
18th June Gashora trader paid Sam in full settlement of the debt
21st June Deposited cash in the bank cash 69,000Frw
25th June Kadogo settled his account in cash.
28th June Sold goods and received a cheque in full settlement 120,000Frw
Required:
a. Journalize the above transactions.
b. Open up relevant ledger accounts for the above transactions in the books
of Gashora traders at the end of the month.
c. Write- up the trial balance.
10.7. ERRORS AND ERROR CORRECTION IN A TRIAL BALANCE
Activity 10.7
Nyanja drew a trial balance of her Ubumwe Restaurant as on 31st December, 2017
and the debit and credit totals failed to balance.
a. What do you think happened for the unbalanced trial balance?
b. Is this a challenge? Justify your answer.
c. If yes, what is she supposed to do to overcome that challenge?
One of the functions of the trial balance is to detect errors. The errors could be in the journals or ledgers. Balancing of the trial balance however is no guarantee that the accounts are free from errors. This is because there are certain errors that are not detected by the trial balance.
10.7.1. Errors in Trial Balance
a. Errors not detected/ not disclosed/ not revealed by the trial balance
These are a category of errors that do not prevent the trial balance from balancing, are not detected by the trial balance. This means that the balancing of a trial balance is no proof that the there are no errors in the accounts. The following errors do not affect the equality of the trial balance totals.
i. Error of original entry: This is a type of error where the original figure entered
in any account is not correct yet the double entry is made using that incorrect
figure. It is an error made from source documents up to a trial balance. E.g
cash sales of 23,000Frw is recorded both in cash account and sales account as
32,000Frw.
ii. Error of duplication: This is when a transaction is entered correctly in the
books and the double entry is made in the right accounts and there after a
certain time or date the same transaction is entered/recorded the second time
observing the double entry correctly. One transaction is entered twice or more
in the books of accounts.
iii. Error of principle: This is when an item is entered on the wrong account
though it may appear on the correct side but in principle, it is wrong and
then the double entry is observed. E.g purchase of a motor van posted to the
expenses account or purchases account instead of Motor van account.
iv. Error of omission: This is where a transaction is completely omitted or left out
of the books. This can be due to loss or misplacement of the source document.
E.g an invoice may be misplaced, so there will be no record for the debit or
credit entry of a transaction and as such it will not affect the agreement of the
trial balance.
v. Compensating error: These are errors that cancel out each other. An error on
one side of the trial balance is cancelled out by an equal error on the other
side of a trial balance. Such errors cancel out and the trial balance balances.
E.g if any account on the debit side is over added by 100,000Frw and by the
same coincidence another account (side) is also over added by 100,000Frw.
The two errors cancel out each other and the trial balance then balances.
vi. Error of commission: This is when a transaction is recorded in the double
entry system but in the wrong personal account or other account.
• E.g sale of goods to Mugisha is recorded to (in) Mugabe’s account (all are
our customers).
• If an expense on fuel is incorrectly posted to the stationery account
instead of being in travelling expense account.
vii. Error of complete reversal of entries: Under this, correct accounts are
used but each item’s figure is shown on the wrong side of the account. E.g
if wages worth 10,000Frw is paid using cash and instead of crediting cash
and debiting wages, the person records the transactions debiting cash and
crediting wages.
b. Errors detected/ disclosed/ revealed by the trial balance
Errors revealed by the trial balance once committed, the totals of the debit side and credit side do not agree or cannot be equal, and hence the trial balance does not balance. These errors include the following:
1. Error in double entry: When the double entry system has been ignored, the
resulting error will affect the trial balance. E.g if after selling goods for cash,
and the cash account is debited but the sales account is not credited.
2. Recording or posting on the wrong side of the account: Entry/entries to a
wrong side of the account will make one side of the ledger to be greater than
the other.
3. Error of data entry: These are errors caused by wrong recording of figures.
E.g if a debit in one account is 40,000Frw and the corresponding credit is
recorded as 400,000Frw
4. Mathematical errors: These are errors committed by wrong addition or
subtraction of figures. These occur mostly when balancing off the ledgers.
5. Transposition of figures e.g. writing 9,400Frw instead of 4,900Frw
6. Omission of the balance from the ledgers
7. Balance figures confused due to poor hand writing
10.7.2. Errors Correction
i. Correcting errors not affecting the trial balance
Correction of errors that do not affect the trial balance is done through the journals
and must follow the double entry system or principle as explained below:
• In case a wrong account was credited, then the following correction should be
made
• Debit the account wrongly credited
• Credit the correct account
• In case a wrong account was debited, then the following corrections should
be made
• Debit the correct account
• Credit the account wrongly debited
Correcting error of original entry
For instance, the example where goods were sold to Eric on credit for 4,500Frw as per 10th March, 2018 but were recorded in sales journal as 5,400Frw. To correct this error of original entry, Eric’s account will be credited with the difference between the two figures (900Frw) and the sales account will be debited with the same amount as shown in the journal entries below:
Correcting error of duplication
For instance, the example where cash sales of 20,000Frw were made to Irakoze as per 10th March, 2017 and was correctly recorded in cash book but were also recorded again after a month as it was done on the 10th March, 2017. To correct this error of duplication, sales account will be debited using 20,000Frw while cash account will be credited using the same amount.
Correcting error of principal
For example, in the case where furniture worth 5,000Frw is bought and entered in the purchases account instead of the furniture account. Such an error of principal will be corrected by crediting the purchase account and debiting furniture account
Correcting error of omission
If a source document earlier misplaced is recovered where goods were bought by cash for 2,000Frw as per 5th February, 2017 and the transaction was not recorded in the cash and the purchases accounts to correct this error of omission, cash account should be credited and the purchase account should be debited. The journal entries to correct this mistake would be as shown below:
Correcting error of commission
Let us take an example, where goods worth 3,400Frw were purchased from J. Peter and instead of crediting J. Peter’s account, the amount was credited on S. Peter’s account as per 14th December, 2017. To correct this error of commission, J. Peter‘s account should be credited and S. Peter should be debited as the following:
Correcting compensating error
For example, where an over add or overcast in the purchases account of 400Frw is cancelled by overcast or over add in the sales account of 400Frw as per 15th September, 2017, the journal entries to correct the above errors would be as follow. Here sales account is debited while a purchases account is credited.
Correcting error of complete reversal entries
For example, where cash purchases of 800Frw as per 12th November, 2017were paid and the bookkeeper debited the cash account and credited the purchases account instead of debiting purchases account and crediting cash account. Such errors are corrected by reversing the entry done. Here, the cash account should be credited with a double amount and the purchases account should be debited with the same amount.
ii. Correcting errors affecting the trial balance
Correcting errors affecting the trial balance requires the use of the suspense account. The suspense account is opened and the difference in the trial totals is posited to this account on the side with smaller totals. When the errors are discovered, they are corrected by double entry through the suspense account, correct these errors using the following:
1. a. In case of omission of an account to which a debit entry was to be made, the
following should be made:
• Debit the account previously omitted
• Credit the suspense account
b. In case of omission of an account to which a credit entry was to be made, the following should be made:
• Debit the suspense account
• Credit the account previously omitted
2. a. In case any debit entry has been made on credit side, then to correct it do the
following:
• Debit that account with double amount
• Credit the suspense account with double amount
b. In case any credit entry has been made on debit side, then to correct it do the
following:
• Debit double amount in a suspense account
• Credit that account with double amount
3. a. In case of overcast /over addition on a debited account, then to correct it do the
following:
• Credit the account previously over added using over added amount
• Debit the suspense account using the same amount
b. In case where an overcast/over addition on a credited account, then to correct
it:
• Debit the account previously over added by an overcast amount
• Credit a suspense using the same amount
4. a. In case where an under cast on a debited account, then to correct it do the
following:
• Debit the account previously under cast/under estimated with the amount
under estimated
• Credit a suspense account with the same amount
b. In case where an under cast on a credit account, then to correct it do the
following:
• Debit a suspense account with an under cast amount
• Credit the account previously under cast using under estimated amount
Example Johnson’s trial balance as on 31st December, 2017 showed that the debit
side totals exceeded the credit side totals by 400Frw. Subsequently, the following
errors were discovered.
a. The purchase were over added by 200 Frw
b. An amount paid to Umulisa was debited to his account as 980Frw instead
of 890 Frw
c. The sales were under added by 110 Frw
Required:
Make the necessary journals entries to correct the above errors and prepare a
suspense account showing correction of errors.