TOPIC

8 The accounting cycle

In this topic, you will learn about FINANCIAL LITERACY.

We will look at:
transactions
source documents
subsidiary journals
the General Ledger
the Trial Balance
the Income Statement
the Balance Sheet
the Cash Journals of a service business their purpose and
importance
Key concepts
accounting cycle " transactions source documents
subsidiary journal Cash Receipts Journal
Cash Payments Journal General Ledger
ledger account Trial Balance Income Statement
Balance Sheet receipts payments

9 Used to create OTransaction

Income Statement takes place
and Balance Sheet

Recorded on
9 Balances taken source document
to Trial Balance

Recorded in ORecorded in
General Ledger subsidiary journal
Figure 8.1 The accounting cycle

» Discuss in class
The accounting cycle indicates the route a business transaction
follows from the moment the transaction takes place to when all
transactions are recorded to show the financial position of the
business.
In Grade 8 so far, you have learnt about transactions and
source documents. In class, discuss what these are. We are only
going to deal with cash transactions and how to record them.
Can you think of some cash transactions you did lately? Can you
remember what a subsidiary journal is? We learnt about them in
briefly in Topic 5. Discuss in class.

78 Term 2 Topic 8
 Transactions

As you have already seen, a transaction takes place every time

money exchanges hands between the business and another party.
This is a record of every income and expense action that took
place within the business. As abookkeeper, youneed to record
every transaction from a source document.
Transactions are done on a daily basis.
Transactions Source documents

Every transaction should be recorded on a source document.

This could be a receipt, invoice, cheque, deposit slip etc. The
bookkeeper uses the source documents to record the transactions
in the books of the business. We learnt more about source
documents in Topic 6.
The following source documents are used:
For cash receipts For cash payments
" Copies of receipts "Original receipts
" Cash register rolls Cash or till slips
"Copies of cash invoices Original cash invoice
"Deposit slips Cheque and cheque counterfoil

Source documents are updated on a daily basis.

Transactions Source documents Subsidiary journals

In a services business, two types of cash transactions take place

on a continuous basis: cash receipts and cash payments.
This is why two types of subsidiary journals are used to
summarise these transactions:

Cash Receipts Jour nal(CRJ) Cash Payme nts Journal (CPJ)

"The CRJ records all cash receipts The CPJ records all cash
transactions of the business payments transactions of the
"Receipts are all money received business
by the business and deposited " Payments refer to all cheques
into the business's bank drawn against the current bank
account account of the business

Journals serve a dual purpose:

to summarise similar transactions
to decrease the number of transactions recorded in the
General Ledger (only totals are posted to the Ledger).
Journals are updated on a daily or weckly basis, depending on
the number of transactions.

Term 2 Topic 8 79
 Transactions Source documents Subsidiary journals
General Ledger

Glossary The General Ledger (GL)contains all the accounts of a

business. An account is where all transactions of a similar nature
General Ledger:
a record of all - all stationery, for example - are recorded. An account in the
transactions in a General Ledger looks like a capital T and is called a T-account.
business
Dr Ledger account Cr

Debit side Credit side

The General Ledger has two sides, namely the debit side on the
left and the credit side on the right.
The double-entry principle means that for every transaction
entered on the debit side of an account, the same transaction
must be recorded on the credit side of another account.
The General Ledger is the central focus of any bookkeeping
system. It contains information about each activity in which the
business is involved. The information in the two journals (CRJ
and CP) must be posted to the General Ledger. Posting takes
place when transaction information is transferred from a journal
to the General Ledger using the double-entry principle.
Transactions Source documents Subsidiary journals
General Ledger Trial Balance

When a General Ledger has been drawn up and balanced, it

is important to check whether the double-entry principle has
been correctly applied and the accounts have been drawn up
accurately. To do this, you draw up aTrial Balance.
Obviously, if every debit transaction entry had a credit entry,
then all the debit balances in the General Ledger should equal al
the credit balances. To check this, you record all the ledger account
balances in a Trial Balance, the debit balances in one column the
credit balances in another. Total the columns. The totals should be
exactly the same.
If they are, we say that the Trial Balance balances. If they do
not balance, there is definitely a mistake that could have occurred
at any step, from recording the transaction right through to
transferring GL totals to the Trial Balance. You have to find the
mistake(s) before drawing up the Income Statement and
Balance Sheet.

80 Term 2 Topic 8
 Transactions Source documents Subsidiary journals ( Financial
General Ledger Trial Balance statements
Income Statement and Balance Sheet are drawn up in
such a way so
The General Ledger contains Balance Sheet accounts and that everyone can
Nominal (Income Statement) accounts. On the Trial Balance, understand them.
the Balance Sheet accounts appear first and then the Nominal This is why there
are no debit or
accounts.
credit columns,
To find the profit (or loss) of the business, you draw up an and no folio
Income Statement using the Nominal account balances on the numbers.
Trial Balance. The Income Statement reflects all the income less
all the expenses of a business.
The net profit or loss on an Income Statement plus all the
Balance Sheet accounts on the Trial Balance are reflected on
the Balance Sheet. The Balance Sheet accounts relate to assets,
owner's equity and liabilities. It reflects the financial position
(worth) of the business at a specific date.
We will look at these in more detail in Topic 18.
Importance and purpose of Cash Journals of
a service business
Cash Journals are used to record all the day-to-day transactions Glossary
of a business. Generally, most small businesses deal in cash Cash Journals:
transactions only - few allow you to open an account (credit used to record daily
transactions). It would take too long to record every single one cash transactions of
of these cash transactions in the General Ledger, with a entry in a business
another ledger account. Imagine how long the General Ledger
print-out will be!
So we use Cash Journals to record our daily transactions.
As you saw earlier in this topic, all transactions are recorded
on a source document of some kind. These source documents
are then recorded in subsidiary journals, which include Cash
Journals. A Cash Journal would record all he cash transactions
of a business - the receipts and payments. At the end of the
month, the totals in the Cash Journals and the sundry accounts
amounts are posted to the General Ledger.
Cash Journals are updated daily. Cash Journals show the
detail of each transaction:
date
invoice/receipt/cheque number
who it was paid to/received from
amount paid/received
what it was for.

Term 2 Topic 8 81
 Cash Journals are a quick reference if you want to trace a
transaction. In aservices business, aCash Journal will show all
the cash you received on a daily basis and what you spent that
cash on. It helps you control the receipts and payments of your
business on a daily basis.
The two main Cash Journals we will look at in Grade 8 is the
Cash Receipts Journal and the Cash Payments Journal.
You will leam more about CRJs in Topics 9 and 13 and
about CPJs in Topic 14.
Activity 8.1
State whether the following source documents are used for
receipts or payments.
1. Deposit slip
2. Cash invoice issued
3. Cheque
4. Receipt
5. Cheque counterfoil
6 Cash register roll (6)

Activity 8.2
Give one word for each of the following.
1. A statement by which we calculate the net results; in other
words, how much profit the business has earned
2 Alist of all the General Ledger accounts showing their
balances
3. A record book for all money received by the business and
deposited in the bank account of the business
4. Transaction data is transferred from a journal to the General
Ledger by means of the double-entry principle
5. Books of original (first) entry
6. Allcheque payment transactions are recorded in this journal
7. Actions carried out in the business, for example an action
between the business and another party
8. An entry has to be made on the debit side (left-hand side) of
one account for EACH entry made on the credit side (right
hand side) of an account
9. A statement by which the financial position of the business
at a specific date is set out
10. Income minus expenses
11. Name given to a particular group of accounts of abusiness

82 Term 2 Topic 8
12. All transactions recording money in the business are
recorded in this journal
13. All cheques drawn against the businesss bank account are
recorded in this journal
14. Has two sides, namely the debit side and the credit side
15. Serves a dual purpose, namely to summarise similar
transactions and to decrease the number of transactions in
the General Ledger (15)

Summary
Transactions take place.
Transactions are recorded in source documents (invoices, slips,
receipts, deposit slips, cheque counterfoils).
Source documents are recorded in subsidiary journals (Cash
Payments Journal and Cash Receipts Journal).

Monthly Totals of CPJ and CRJ are recorded in the General Ledger.

General Ledger account balances are used to draw up the Trial

Yearly Balance.

Trial Balance is used to create the Income Statement and the

Balance Sheet.

Term 2 Topic 8 83