Recording Financial Transactions

Financial Accounting 1 (FA1)

Course Notes
For exams from 1 September 2021

ISBN: 1781 4728 0004 4

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 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any
form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written
permission of BPP Learning Media Ltd.

The contents of this book are intended as a guide and not professional advice. Although every effort has been made to
ensure that the contents of this book are correct at the time of going to press, BPP Learning Media makes no warranty
that the information in this book is accurate or complete and accept no liability for any loss or damage suffered by any
person acting or refraining from acting as a result of the material in this book.

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 FA1 Recording Financial Transactions
Study Programme
Page
Introduction to the exam and the course ................................................................................................................. 4
Skills bank ............................................................................................................................................................. 11

1 Business transactions and documentation ................................................................................................... 29

2 Assets, liabilities and the accounting equation ............................................................................................. 49
3 Recording, summarising and posting transactions....................................................................................... 65
4 Ledger accounts and double entry ............................................................................................................... 89

Checkpoint 1 Additional study guidance 105

5 Completing ledger accounts and financial statements ............................................................................... 109

6 Manual and computerised systems ............................................................................................................ 141
7 Correction of errors..................................................................................................................................... 153
8 Receiving and checking money.................................................................................................................. 169
9 Banking monies received ........................................................................................................................... 183
10 Recording monies received........................................................................................................................ 199
11 Authorisation and making payments .......................................................................................................... 209
12 Recording payments .................................................................................................................................. 223
13 Maintaining petty cash records................................................................................................................... 233

Checkpoint 2 Additional study guidance 251

14 Bank reconciliations.................................................................................................................................... 259

15 Sales and sale returns day books .............................................................................................................. 277
16 The receivables ledger ............................................................................................................................... 287
17 Purchases and purchase returns day books .............................................................................................. 299
18 The payables ledger................................................................................................................................... 309
19 Control accounts ........................................................................................................................................ 319
20 Recording payroll transactions ................................................................................................................... 335

Checkpoint 3 Additional study guidance 353

21 Answers to lecture examples ..................................................................................................................... 359

22 Appendix A ................................................................................................................................................. 389

Prepare for and book your CBE!

You should plan to sit your CBE within a couple of weeks of the end of the course whilst the knowledge from this course is
still fresh in your mind. In preparation use the Learning Media Practice & Revision Kit to test yourself on as many
questions as you can, revising from the Course Notes and Passcards any areas of the syllabus that cause you problems.

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 INTRODUCTION

Introduction to FA1 Recording Financial Transactions

Overall aim of the syllabus
To develop knowledge and understanding of the main types of business transactions and documentation and
how these are recorded in an accounting system up to the trial balance stage.

The syllabus
The broad syllabus headings are:

A Types of business transactions and documentation

B Duality of transactions and the double entry system
C Banking system and transactions
D Payroll
E Ledger accounts
F Cash and bank
G Sales and credit transactions
H Purchases and credit transactions
I Reconciliation
J Preparing the trial balance

Main capabilities
On successful completion of this paper, candidates should be able to:
 Understand a range of business transactions and documentation
 Record transactions and events
 Prepare a trial balance (including identifying and correcting errors)
 Outline key aspects of the banking system and procedures
 Maintain and reconcile cash and petty cash records
 Prepare the journal
 Prepare relevant control account reconciliations

Links with other papers

Foundations FFA
in
Accountancy
FA2 Introductory
Certificate in
Financial and
Management
FA1 = Accounting
+ MA1 + FiP*

This paper is the first paper in the financial accounting pillar of the Foundations in Accountancy qualification and
one of two papers in the Introductory Certificate in Financial and Management Accounting.
*Foundations in Professionalism

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 INTRODUCTION

Assessment methods and format of the exam

Students have the option to take either a paper-based or a computer-based exam.
Both examinations are two hours and all questions are compulsory. Questions will assess all parts of the syllabus
and will contain both computational and non-computational elements.
The pass mark is 50%.

Format of the exam Marks

50 two-mark questions 100
100

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 INTRODUCTION

Study Programme Aims

Achieving the FA1 Study Guide Outcomes

A Types of business transactions and documentation

A1 Types of business transaction Chapter 1
A2 Types of business documentation Chapter 1
A3 Process of recording business transactions within the accounting system Chapters 3 and 6

B Duality of transactions and the double entry system

B1 Books of prime entry Chapter 3
B2 Double entry system Chapter 4
B3 The journal Chapter 7
B4 Elements of financial statements Chapter 2

C Banking systems and transactions

C1 The banking process Chapters 9 and 11
C2 Documentation Chapters 9 and 11

D Payroll
D1 Processing payroll transactions into the accounting system Chapter 20

E Ledger accounts
E1 Prepare ledger accounts Chapters 4, 5
and 7

F Cash and bank

F1 Maintaining a cash book Chapters 3, 10
and 14
F2 Maintaining a petty cash book Chapter 13

G Sales and credit transactions

G1 Recording sales Chapters 4 and
15
G2 Customer account balances and control accounts Chapters 15, 16
and 19

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H Purchases and credit transactions

H1 Recording purchases Chapters 3, 4
and 17
H2 Supplier balances and reconciliations Chapters 11, 18
and 19

I Reconciliation
I1 Purpose of control accounts and reconciliation Chapter 19
I2 Reconcile the cash book Chapter 14
I3 Reconcile the receivables control account Chapter 19
I4 Reconcile the payables control account Chapter 19

J Preparing the trial balance

J1 Prepare the trial balance Chapter 5
J2 Correcting errors Chapter 7

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 INTRODUCTION

Analysis of the pilot paper

Please note that past exam papers will not be published. The analysis of the Pilot Paper should therefore be
used as a guide to both the areas that will be examined and the mix between narrative and computational
questions.

Computational
Narrative
Types of business transaction and documentation
Types of business transaction 1
Types of business documentation 2
Process of recording business transactions within the accounting system 2

Duality of transactions and the double entry system

Books of prime entry 1
Double entry system 5
The journal 1
Elements of financial statements 1

Banking systems and transactions

The banking process 1
Documentation 2

Payroll
Processing payroll transactions into the accounting system 1 2

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Computational
Narrative
Ledger accounts
Prepare ledger accounts 1

Cash and bank

Maintaining a cash book 1 1
Maintaining a petty cash book 1 1

Sales and credit transactions

Recording sales 4
Customer account balances and control accounts 4 1

Purchases and credit transactions

Recording purchases 2
Supplier balances and reconciliations 3

Reconciliation
Purpose of control accounts and reconciliation
Reconcile the cash book 2
Reconcile the receivables control account 1 1
Reconcile the payables control account 1 1

Preparing the trial balance

Preparing the trial balance 1 1
Correcting errors 4

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 INTRODUCTION

Key to icons

Question practice from the Interactive Text

This is a question we recommend you attempt for home study.

Section reference in the Interactive Text

Further reading is needed on this area to consolidate your knowledge.

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 Skills bank

This section explains and demonstrates the key skills

required to enable you to maximise your chance of
exam success. Knowledge of the syllabus is insufficient
on its own. Through question practice you will develop a
set of skills that will enable you to pass this paper.

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Key skills required to pass

Our analysis of the examining team's comments on past exams, together with our experience of preparing
students for this type of exam, suggests that to pass this exam you will need to develop a number of key skills.

1 Learning and 2 Time

understanding management and
the syllabus approaching
content questions logically

3 Answering
questions
efficiently

Each of these key skills is analysed on the following pages. Examples from exam questions are included to
illustrate the importance of these skills and how these skills should be applied.

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Skill 1 – Learning and understanding the syllabus content

1 What do I need to know to attempt the paper?

This exam has a broad syllabus that can be tested by objective testing including multiple choice questions and
other means such as data entry type questions. This means that you need a broad and yet quite detailed
knowledge of the syllabus as well as an understanding of a variety of calculations to apply the theory.
The type of knowledge that you have to acquire includes the following:
Practical application – eg calculation of numbers to be included in the trial balance; identifying errors and
correcting them.
Theoretical knowledge – eg how accounts fit together and their key components; the flow of information when
posting entries.
In this section we will look at approaches that you can take to help you learn the key elements of the knowledge
in the syllabus.

2 Practical application
Practical application requires you to do two main things:
1 Understand the rationale behind a topic and be able to explain it; and
2 Apply your understanding to generate figures that may be included in a set of accounts.
In this way you should be in a good position to answer most questions. They will either ask you to calculate a
number from some information provided, or to use the numerical information provided to demonstrate your
knowledge of the topic in some way. You should ensure that you read the requirement carefully for these
questions; further tips on question approach will be covered under skill 2.
For example, in the Specimen Exam Q27 asks:

Iwan's payables ledger account showed that $2,300 was owed to

suppliers at the start of the week. During the week Iwan made
purchases of $3,900 although he paid $900 of this in cash. He
also paid suppliers $1,000 by cheque.

What is the closing balance on the payables ledger?

 $4,000
Application

 $4,300
 $5,200
 $6,100 (2 marks)

This question requires you to have a good understanding of how to account for credit purchase transactions and
the way ledger accounts work in order to be able to answer it.

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Another question type is Q31 from the Specimen Exam. It requires you to apply your understanding of a specific
area of the syllabus.

Walter sells goods to Ninevah with a list price (exclusive of

sales tax) of $4,300, offering a 4% trade discount. Sales tax
is 17.5%

What amount should be recorded for this transaction in the

sales account (to the nearest $1)?

 $4,850

 $4,128
Principles

 $5,053

 $3,513 (2 marks)

Note that to find the correct figure you need to understand the effect of both sales tax and discounts on the
amount recorded in the sales account.

Therefore you need to ensure that you understand the context of the principles of what you are learning and are
able to apply them to numerical examples. To do this you should consider:

Detail – For practical application of the topics covered in the syllabus, you must know the rules for each area and
understand where they have been derived from. By reviewing the overview at the beginning and the summary at
the end of the relevant chapter in your course notes before attempting questions, you should be able to pick up
the key points.

Application – This is where question practice is key. The more practice you have in working through the
questions, the more confident you will become on using and applying the theory.

3 Theory
You will also have to answer narrative questions about theory.

You can expect questions about:

1. Fact – What are books of prime entry?

2. Application – How do the books of prime entry fit into the flow of information?

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Here is an example from Question 25 of the Specimen Exam.

The following statements relate to the aged receivables analysis:

i. It provides information about debt collection efficiency to the
management
ii. It identifies when payments are due to be made to suppliers.
Which of the above statements are correct?

 Statement (i) only

 Statement (ii) only

 Both statement (i) and statement (ii)

Fact

 Neither statement (i) nor statement (ii)

This question is testing you on facts regarding the use of the aged receivables analysis. To be able to answer
this question you need to know what the aged receivables analysis is.
Here is a further example from Question 19 of the Specimen Exam:

Which of the following represents the correct imprest amount in an

imprest petty cash system?

 Notes and coins in the cash box – vouchers for payments – IOUs

 Notes and coins in the cash box + vouchers for payments – IOUs
Application

 Notes and coins in the cash box – vouchers for payments + IOUs

 Notes and coins in the cash box + vouchers for payments + IOUs
(2 marks)

This type of question is about applying the theory to a theoretical situation. This can seem tricky if there are no
numbers involved. The key is to start at the beginning of the period when the petty cash box is full:
Imprest amount = notes and coins in the cash box
Then we need to think about what happens when we spend money either for expenses or for IOUs:
Imprest amount – money paid out = notes and coins in the cash box
From our understanding of the imprest system we know that when money is paid out it must be replaced with
vouchers or IOUs and so the equation becomes:
Imprest amount – vouchers for payments - IOUs = notes and coins in the cash box

and rearranging this gives:

Imprest amount = notes and coins + vouchers for payments + IOUs

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There are various ways to build up this level of knowledge. Here are some suggestions:

Read Passcards Get a colleague or

regularly friend to set you
quizzes
Practise as many
MCQs as possible
Write your own Produce a list of your
glossary of definitions common mistakes and
review it before doing
question practice!

Skills practice
Learn the content of the syllabus actively by:
1 Reviewing the key overviews for each chapter
2 Practising as many questions as possible, moving from using your notes to completing them
without any help
3 Using the Interactive Text to help only on areas you're struggling with and to fill in gaps in
your background knowledge

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Skill 2 – Time management and approaching questions

logically
The exam contains objective tests; it is important that you use your time wisely to gain maximum marks. Your
approach will differ depending on whether you are doing a computer-based exam (CBE) or a paper-based exam.
In the paper-based exam you will have mainly multiple choice questions with some yes/no questions. The CBE
may contain a wider range of question styles including selecting a number of possible correct answers from a list
and entering numbers into a blank box.
You need to ensure that you have a logical approach to these questions to maximise your chances of getting the
correct answers.
Below we look at how to approach each style of paper, and within that how to deal with the different types of
questions you may come across.

Time management
 What you SHOULD NOT do
Panic! You have two hours to answer 50 questions. This equates to approximately 2.4 minutes per question. For
many questions you will get the answer straight away and so you are likely to have a bit more time to think about
some of the others. Therefore don't worry about your timing on each individual question, just keep track over a
few (eg 5).

 What you SHOULD do

It is important to start the exam positively.

Firstly:
Work through questions systematically
Start at Question 1 and begin answering from there working through questions in order.
Try not to jump around questions otherwise you may leave some unanswered by the end.

Then:
Check your solutions before the end of the exam
Having answered all of the questions you should look through your answers to make sure:
1 You are happy with the options selected; and
2 You have answered all questions

If you have taken this logical and systematic approach you should have given yourself the best chance of doing
well in the exam.

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There are however some other guidelines to ensure that you make the most of the CBE format of the exam.

STEP Before the exam

1 Make sure that you are registered with the ACCA and that your exam centre has your exam
booking. This is important because you cannot sit the exam if you are not a registered student
and you need photographic identification on the day of your exam.

STEP At the beginning of the exam

2 You want to make the start of the exam as stress free as possible so make sure that you have
the following available:
 Photo identification and your student number
 Paper supplied by your exam centre, pens and a calculator
 Details of which exam you are planning to sit.

STEP Starting the exam

3 To start the exam you will need to do the following:
 Login – Enter your ACCA student number and your date of birth – make sure that you
have both to hand.
 Instructions – The next three screens are instructions – read these carefully so that you
know what you have to do to complete the exam.
 Launch the exam – Please don't click this screen until you have been advised to by your
invigilator AND you are ready because this starts the exam and starts the timer.

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STEP Answering the questions

4 The exam will start at Question 1. You can progress through the questions by clicking <Next>
but you can also go back by clicking <Previous>. When you answer the questions you must
follow the following procedure:
 Enter your answer.
 Click on <Submit> – you must do this otherwise as soon as you click <Next> to move to
the next question your entry will be lost and you will have to re-enter.
 If you click <Next> and have not submitted your answer to a question then you will get a
reminder – clicking <OK> on the reminder does not submit your answer – you must go
back and re-enter your answer and then <Submit>.
 If you are unsure of an answer then just put an answer in for now, make a note of it, and
revisit it later.
You can see that it is very important to submit your answers as you go and to keep track of what you have done.
It is probably a good idea therefore to use your pad of paper to do two things:
1 Make any notes you want to help you answer the questions; and
2 Keep a record of the status of each question.
For example:

Question Status
1 
2 ?
3 
4 X
where:

 means that the question has been answered and I am reasonably confident of the answer

? means that the question has been answered but I want to check the answer

X means that the question has not been answered and I need to go back to it
It would be most efficient to set this up at the beginning of the exam. In this way you will have a tally of which
questions really need to be checked over at the end of the exam and it reduces the chances that you will leave a
question unanswered.

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STEP At the end of the exam

5 At the end of the exam you should check your answers and ensure that you have submitted an
answer for every question as well as double-checking any answers you were not sure of.
You have two ways of navigating the questions:
1 Clicking <Previous> to work back through the questions one by one; or
2 Using the drop-down menu which shows all the questions 1–50 indicating whether an
answer has been submitted or not; clicking on the question number will take you directly to
that question.
Remember that if you choose to change a previously submitted answer you must
<Submit> the new one otherwise your original answer will be retained instead!

STEP Closing your exam session

6 Once you are satisfied that you are happy with your answers, if you have time left in the exam
then you have a couple of options to finish your exam session (subject to any advice you get
from the invigilators in your exam centre).
1 Let the time on the on-screen clock run down to zero and the exam session will end
automatically; or
2 Click <Exit> – you will be asked to <Confirm> this so you can not accidentally end your
session early
In either case the next thing you will see will be the Results Screen that shows your mark and
whether you have passed or not.
It is important that you don't <Exit> at this stage since you have no proof of your result!
Your invigilator will ask you to <Print> two copies and will instruct you to <Exit> once these have
been printed off.
You have now finished your exam.

Some final tips on timings

 Make use of the paper to make notes or to work out the answers to questions.
 If you find a particularly difficult question or a long calculation, move on and come back to it later in the
remaining time – it is important that you do not run out of time leaving easier questions later in the
paper unanswered.
 Keep an eye on the clock so that you can pace yourself.
 Be well prepared for the exam day so that you can concentrate on doing the exam rather than the
administration around it.
 Get to your exam venue in plenty of time so that you are relaxed when you get into the exam room.

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Approaching questions logically – multiple choice questions

1 What to do if you know the answer to the question

If you know the answer to a narrative question you should:
1 Locate the correct answer.
2 Check the other answers.
3 Read the question again to ensure you're answering the correct question.
4 Confirm that you have the correct answer.
This systematic check will ensure that you do not throw away marks when you really do know the answer.

2 What to do if more than one answer appears plausible

Sometimes more than one option can seem to answer the question. In this case you have to firstly ensure
you've read the requirement carefully, as questions may be phrased in ways that are not what you're expecting.
If you still identify more than one likely option, select the 'most correct' answer. The approach adopted above is
useful here too but this time you have to think through the alternatives a bit more.
For example, Q17 on the Specimen Exam states:

Which of the following are valid reasons for keeping a payables ledger
control account?
(1) To obtain a figure for payables to be included in the statement of
financial position.
(2) To assist in the location of errors.
(3) To check the accuracy of entries made in personal accounts.
 1 and 2 only
 2 and 3 only
 1, 2 and 3
 1 and 3 only

This is testing your knowledge of the payables ledger control account. At first sight, it may be tricky to identify
the correct answer as there are so many variations in the options.
Here are some steps to follow:

STEP Initial review

1 Firstly, identify any answers that are immediately wrong. In this question, the key thing to think
about is what is the purpose of the payables ledger control account. Remembering that there are
ledger accounts for each balance in the financial statements and so by definition statement (1)
must be correct. So we can discard option B from the answers.

STEP Assess the remaining answers

2 We now need to consider statement (2) and statement (3) as this will differentiate the first, third
and fourth response options. For statements (2) and (3), a separate control account and
payables ledger (personal accounts) can be maintained and reconciled to identify errors and
check the accuracy of the personal accounts, so both (2) and (3) are correct and we arrive at
answer C.
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STEP Read the question again…

3 Finally, we should re-read the requirement before submitting the question to ensure we are
answering the correct question. The question could easily have asked: 'Which of the following
statements is incorrect' which would have led us to a different answer!

This systematic approach helps you to break a question down and work through to find the correct answer
logically.

3 How to approach numerical questions

In the exam, you will be asked to calculate numbers based on some information provided. If it is a multiple choice
question rather than a data entry question, the temptation may be to look at the options first, and then 'fit' your
calculations to the one you think is most likely. This could lead you to answering the question incorrectly,
especially if you have not read the requirement carefully.
For example, Q34 of Specimen Exam is as follows:

Sally's cash book balance is $160 debit. However, her bank statement
shows a different amount. On investigation, Sally discovers the
following:
(i) A cheque deposit that Sally paid into the bank for $40 is still
outstanding
(ii) A cheque for $60 paid by Sally to Edward has not yet been
presented
(iii)Sally has forgotten to record a cash withdrawal of $30
(iv) The bank has deducted charges of $15 from her account
What is the balance on Sally's bank statement?
 $95
 $135
 $185
 $225

Working through this question, we find that the balance on Sally's bank statement $135. Looking carefully at the
information provided, the scenario states that the cash book balance is $160 debit. Then working through points
(i) to (iv), the cheque deposit of $40 must be deducted from the cash book balance as it has not yet cleared the
bank, the cheque for $60 must be added as it has not yet been presented at the bank, the $30 must be deducted
as this has been withdrawn from the bank and likewise the $15 charges must be deducted as they have been
deducted by the bank.
It is important to understand what the question is asking and how to approach the adjustments.

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STEP Read the requirement carefully

1 With numerical questions it is really important to first understand what the question is asking,
since you can easily either do too much work and waste time working out calculations that aren't
required, or answer the question you want to answer, and not the question that is actually being
asked!

STEP Ignore the options

2 Once you're certain what the question is asking, you should ignore the options given, as you
may arrive at an answer that matches an option but is not what is required by the question.

STEP Match your answer

3 Once you've calculated your answer, match it to the options. If you've worked carefully and
answered the question, the matching option will be available. If no option matches your
calculation, re-read the requirement to ensure you've understood what you have to do. If you
still can't find the answer, you may want to guess the answer, make a note of the question
number and return to it at the end when you can judge how much of the time remaining you can
spend on it.

4 What to do if you still don't know the answer…

If you have been through the above steps and can't identify a preferred answer then you have to guess!

 What you SHOULD NOT do

Two main things to avoid:
1 Waste excessive time – time spent dithering over a single question could leave you with insufficient time
for the rest of the paper.
2 Not answering – this is a common yet serious error – even if you make a wild guess you start with a 25%
chance of success. Your chance of getting the two marks if you don't offer an answer is zero!

 What you SHOULD do

Having used the three-step approach above to narrow down your possible answers, go with the one that feels
right. And move on.

If you have a flash of inspiration later in the exam go back and revisit it – but only if you are sure.

Data entry questions

The above systematic approach to multiple choice questions can be applied to any questions that you come
across in the exam. You may be asked to calculate a numerical figure which you then have to enter into a box in
the exam. For these questions you can use Steps 1 and 2 in Section 3 above.

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Skills practice
1 Practise keeping track of the questions you have answered when doing questions from the
Practice & Revision Kit
2 Always check your answers through (if you would have time in the exam) before looking at
the solutions in the back of the book
3 Practise as many multiple choice questions as possible
4 If you don't know the answer to a question, don't just look at the answers, or just guess –
use the three-step approach described above.

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Skill 3 – Answering questions efficiently

Once you have grasped an area fully, the third key skill in being successful in the exam is to answer questions
efficiently. If you are confident at how to arrive at an answer, you can often avoid doing extra calculations that do
not impact on the final answer by knowing when to stop.

1 Knowing the basics

Before you attempt any shortcuts, it is important to make sure you're happy with the topic itself. You should work
through questions as you have been taught in lecture examples, and make sure you can arrive at the right
answer each time.

2 Identifying when to 'Stop'

Whilst you will have enough time to answer every question fully in the exam, it makes sense to develop your
question technique as you revise to try to recognise at what point you've arrived at the answer and can stop.
This means you avoid wasting time and can use those extra seconds to think about other questions.
As an example, the examining team identified the following question which students struggled with in the June
2012 paper-based exam:

On 1 August Barry made the following transactions:

1. He made a cash sale of $3,680.

2. He received cash of $2,760 in relation to a credit sale in the

previous month.

Both transactions were inclusive of sales tax at 15%

How much sales tax would be recorded in the cash book for the above
transactions?

 $480

 $360

 $840

 $552

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It is tempting, if you know the topic, to calculate absolutely everything here. But if you think about the
requirement, all you need to work out is what the sales tax is on the cash sale only.
Remember, in the cash receipts book, sales tax is only calculated on cash sales and not on cash received from
credit customers. Sales tax relating to credit customers has already been calculated in the sales day book
when the credit sale was first recorded (so transaction 2 is irrelevant to this question!).
Now, we have eliminated a lot of the work, and are left with transaction 1:
The cash sale was for $3,680 inclusive of 15% sales tax. So:
Sales tax = $3,680 x 15 / 115
= $480
No more work is needed on this question – you now have the answer!
Spending time now working out the sales tax on transaction 2 is unnecessary.

3 Building up your technique

There are several places on the syllabus where you may be able to apply this technique. As you practise
questions, compare your workings to the answers and highlight at what point on your workings you arrived at the
answer they wanted.
In this way you can start to pick up where you're doing too much work to answer the question. Your goal should
be to finish your calculations as soon as you've got the correct answer!
You may like to make a list of key common areas where you can answer questions efficiently, and look over
them as part of your revision.

Skills practice
1 Practise questions building up to the exam with efficiency in mind. The more you do, the
more efficient you'll become.
2 Identify from your question practice which areas this is likely to apply to and make a list of
key areas and the relevant shortcuts.

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 Business transactions
and documentation

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Understand a range of business transactions including sales and purchases
 Understand the various types of discount including where applicable the effect that trade discounts have on sales
tax
 Outline the purpose and content of a range of business documents including:
 Invoice
 Credit note
 Remittance advice
 Prepare the financial documents to be sent to credit customers including:
 Sales invoices
 Credit notes
 Consider the risks to data security, data protection procedures and the storage of data
 Explain why it is important for an organisation to have a formal document retention policy
 Identify the different categories of documents that may be stored as part of a document retention policy

Exam context
This chapter is an important introduction to the course and is examinable in its own right as well as providing key
terminology for more complex areas later in the course, such as discounts and sales tax. Questions are likely to be
narrative in nature and will include requirements to identify the purpose of different types of documentation or to identify
the most appropriate document for a given purpose.

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Overview

Business entity and the dual Business transactions

effect

Business

Business and
business transactions

Discounts External Internal

documentation documentation

Invoices and credit

notes

Sales tax Storage of information

Retention periods Data protection

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1 Businesses
1.1 A commercial organisation, large or small, which exists to make money or profit for its
owners.

2 Business transactions
2.1 The main types of business transactions are sales and purchases.
Sales and purchases occur in two different ways, by cash or on credit.

2.2 A cash transaction is one where the buyer pays cash to the seller at the time the goods or
services are transferred.
A credit transaction is a sale or purchase which occurs sometime earlier than cash is
received or paid.

2.3 Other types of business transactions include payment of wages, borrowing money and
offering a discount.

3 The concept of business entity (separate entity) and

the dual effect
Separate entity
3.1 It is a fundamental concept that a business is considered to be a separate entity from its
owner.
Personal transactions of owner should never be mixed with the business transactions.
When considering a limited company this distinction is laid down in law – separate legal
identity.
In preparing accounts, any type of business is treated as a separate entity from its owner(s).

Dual effect
3.2 Every financial transaction has a dual effect; a 'debit' and a 'credit' impact.

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4 External documentation
4.1 Flow of transaction
Letter of enquiry

Quotation

Sales order

Acknowledgement

Delivery note

Invoice received

Cheque payment

5 Internal documentation
5.1 Several internal documents
 Inventory lists
 Purchase order
 Supplier lists
 Staff schedules and time sheets
 Goods received notes
 Invoices
 Cheques
 Expense claims

5.2 The internal documentation includes:

 The accounting system

 Payroll systems
 Receivables ledger and payables ledger
 Cash and bank systems

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6 Invoices and credit notes

6.1 Invoices are created when there is a sale or a purchase. It is a request for payment from a
seller to a purchaser.

6.2 Typically, an invoice will contain the following:

(a) Seller's name, address and telephone number
(b) Purchaser's name, address and telephone number
(c) Invoice number
(d) Date of the transaction
(e) Description of what is being sold
(f) Quantity and unit price of what is being sold
(g) Total amount of the invoice including any details of sales tax and discounts
(h) Date by which payment is due

6.3 Other information:

 FOB
 Ex works
 E & O.E.

6.4 Invoice copies:

1 Sent to purchaser
2 Kept as a file copy
3 Delivery note
4 Advice note

6.5 Sale order sets

Another common approach used so that the seller can keep track of the order:
1 Sent to customer
2 Sent to warehouse
3 Kept in sales department
4 Passed to 'accounts'
5 Sent with goods (advice note)
6 Sent with goods (delivery note)
7 Kept in warehouse

6.6 Purchase order sets

Purchase order sets follow the same pattern so the purchaser can keep track of the order:
1 Sent to supplier
2 Kept in purchasing department or warehouse
3 Accounts department

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6.7 A credit note is used by a seller to cancel part or all of previously issued invoice.
Reasons for issue:
 Invoice error
 Overpayment by purchaser
 Incorrect or inferior quality goods

6.8 Other documents sometimes used in connection with sales and purchases include:
 Debit note – issued by a customer to a supplier requesting a credit note
 Goods received note (GRN) – record details of good received by the warehouse
 Remittance advice – sent with payment to a supplier as a record of invoice/items to
which the payment relates

6.9 E-commerce – internet trading which reduces document flow and saves time.

7 Discounts
7.1 Discounts are a reduction in a selling price as an inducement to buy a product or to settle a
debt early.

7.2 Trade discounts:

(a) Made at the time of the sale, they reduce a selling price as an inducement to
purchase
(b) Usually for regular customers and bulk buyers

7.3 Settlement (cash) discounts:

(a) Offered, but not necessarily taken, as an inducement to settle a debt early
(b) For example, 5% discount if settled within 14 days

Lecture example 1
Robbie trades widely in his area. He has three suppliers:
(a) Gary offers a 6% trade discount.
(b) Howard offers an 8% trade discount on amounts in excess of $200 (the first $200 spent is
not subject to discount).
(c) Jason offers a 9% cash discount for immediate payment or 4% if paid within 30 days.
In February X8, Robbie makes the following purchases of goods before discounts.
(a) $300 from Gary
(b) $800 from Howard
(c) $500 paid in cash & $400 paid on 28 February 20X8
Required
How much did Robbie receive as discount?

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Solution

7.4 Discounts allowed: settlement (cash) discounts given to customers.

7.5 Accounting treatment
Sales are always recorded net of (ie after) trade discounts. Therefore trade discounts never
appear in the financial statements.
If a customer is expected to take up a settlement discount allowed, the discount is
deducted from the invoiced amount when recording the revenue for the sale. If the customer
subsequently does not take up the discount, the discount is then recorded as revenue.
If the customer is not expected to take up the discount, the full invoiced amount is
recognised as revenue when recording the sale. If the customer then does take up the
discount, revenue is reduced by the amount of the discount.

Lecture example 2
Cheap Co purchases goods with a list price of $44,000. The supplier offers a 10% trade discount
and a cash discount of 5% for payment within 15 days.
Required
(a) Calculate the amount payable by Cheap Co if they are not expected to pay within 15 days.
(b) Calculate the amount payable by Cheap Co if they are expected to pay within 15 days.

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Solution

7.6 Discounts received: settlement (cash) discounts received from suppliers.

7.7 Accounting treatment

Purchases are recorded net of trade discounts but inclusive of settlement discounts.
Again trade discounts never appear in the financial statements.
The accounting treatment of settlement discounts received differs from that of settlement discounts
allowed in that the purchaser initially records the transaction at the full purchase price, ignoring the
discount. Therefore, when the initial transaction is recorded they do not consider whether or not
they are going to take the settlement discount.
If the settlement discount is taken up when payment is made, the discount is recorded as
discounts received in the statement of profit or loss.

8 Sales tax
8.1 Output sales tax: charged on sales.

8.2 Input sales tax: incurred on purchases.

8.3 Usually output sales tax (on sales) is greater than input sales tax (on purchases). The
excess is paid to government. If input sales tax is greater than output sales tax the
government will refund the difference to the business.

8.4 Net price is the amount before sales tax has been added (exclusive of sales tax)
Gross price is the net price plus sales tax (inclusive of sales tax).

8.5 Sales tax and discounts – sales tax is calculated on the amount actually paid after any
discounts that have been applied.
The rate of sales tax will always be provided in the exam.

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Lecture example 3
The gross price of a product was $500 and the net price of another product was $115.
The rate of sales tax is 20%.
Required
What was the sales tax changed on each product?

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Solution

9 Storage of information
9.1 Information stored must be:
 Accessible
 Secure

Lecture example 4
Required
(a) What information may be needed in a business?
(b) Who may be entitled to information from a business?

Solution

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10 Retention periods
10.1 Overall principle:
If you think you may need it, keep it for as long as you may need it.
10.2 Retention periods vary. There are legal limits for different records for different purposes, for
example under The Companies Act in the UK:

 Simple legal contracts 6 years

 More important sealed contracts 12 years
 Documents related to legal establishment of the business permanent
 Annual accounts permanent

Tax legislation may stipulate other minimum retention periods for certain documents.

11 Data protection
11.1 To protect individuals (data subjects).
11.2 Data subjects have rights:
 to gain access to personal data held
 to know why data is held and who has access
 to have inaccurate data corrected or deleted
 to seek compensation for losses suffered due to inaccurate data or unauthorised
disclosure

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12 Chapter summary
Section Topic Summary
1 Business A business may be defined in various ways. Its purpose is
to make a profit for its owner(s).
2 Business transactions Business transactions consist of two types: cash and
credit.
3 The concept of business The business entity concept states that a business is
entity and the dual effect always separate from its owners.
The principles of double entry (Chapter 4) work on the
basis that every transaction has a dual effect.
4 External documentation External documentation is used to evidence business
transactions. The volume and complexity depends on the
nature of the transaction.
5 Internal documentation Internal documentation is also used to evidence business
transactions. Internal documentation includes the
accounting system.
6 Invoices and credit notes Invoices and credit notes are important documents which
must contain specific information.
7 Discounts There are two types of discount:
 Trade discount – a reduction in the cost of goods
 Settlement (cash) discount – a reduction in the amount
due from the customer or payable to the supplier
The accounting treatment is reviewed in Chapter 5.
8 Sales tax Sales tax is a complex area but the key points for the FA1
exam relate to terminology and the accounting treatment:
 Output tax is charged on sales
 Input tax is incurred on purchases
The accounting treatment is reviewed in Chapter 5.
9 Storage of information Information must be stored securely but must also be
accessible.
10 Retention periods A company's retention policy sets out the length of time
certain records are to be retained.
Legal limits are in place for some documents.
11 Data protection Information stored about individuals is regulated by Data
Protection legislation.

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Overview summary

Business entity and the dual Business transactions

effect

Two types:
 Cash

Business  Credit

Business and
business transactions

Discounts External Internal

documentation documentation

 Trade discounts
 Settlement (cash) discounts Invoices and credit
notes

Sales tax Storage of information

 Output tax

 Input tax
Retention periods Data protection

For the protection of individuals

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 1: QUESTIONS

1.1 A trade discount is:

A A reduction in the invoiced amount of money demanded from a customer
B An optional reduction in the amount of money payable by a customer
C A reduction by the supplier of the amount payable by a customer in return for prompt payment
D An offer by the supplier to reduce the amount demanded on the invoice if certain conditions are
fulfilled (2 marks)
1.2 A settlement discount is:
A A reduction in the invoice amount of money demanded from a customer
B An optional reduction in the amount of money payable by a customer
C A reduction in the amount of money demanded from a customer as shown on the supplier's
invoice because of the customer's large re-order quantities
D A reduction in the amount demanded from a customer as shown on the invoice as certain
conditions have been fulfilled (2 marks)
1.3 What document is used as a demand for payment?
A Invoice
B Receipt
C Remittance advice
D Credit note
(2 marks)
1.4 Bob buys goods on credit from Sue but finds that some of them are faulty.
What document would Bob return to Sue with the faulty goods?
A Credit note
B Debit note
C Purchase invoice
D Statement
(2 marks)
1.5 Sally buys goods with a list price of $8,720 on which she receives 10% trade discount. Her supplier
offers 5% discount for payment within 10 days.
If Sally pays within 10 days what is the total amount of money she will pay for this order?
A $7,651.80
B $7,455.60
C $8,284.00
D $7,412.00
(2 marks)

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1.6 Which department is most likely to keep records which are regulated under data protection law?
A Sales and marketing
B Personnel
C Management
D Credit control
(2 marks)
1.7 Tom makes sales in the quarter of $15,000 including sales tax at 20%. His total purchases net of sales
tax are $8,750.
How much does he owe the tax authorities in sales tax?
A $1,250
B $6,250
C $750
D $1,041.67
(2 marks)

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 1: ANSWERS

1.1 A

1.2 B

1.3 A

1.4 B – A debit note is a formal request for a credit note.

1.5 B

List price 8,720

Less: trade discount (10%  8,720) (872)

7,848

Less: settlement discount (5%  7,478) (392.40)

7,455.60

1.6 B

1.7 C

Output tax (15,000  20/120) 2,500 (charged on sales and owed to the tax authorities)

Input tax (8,750  20/100) 1,750 (incurred on purchases and reclaimable)

750

END OF CHAPTER
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 Assets, liabilities and the
accounting equation

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Define the accounting equation
 Understand and apply the accounting equation
 Understand how the accounting equation relates to the double entry bookkeeping system
 Define and distinguish between the elements of the financial statements
 Identify the content of a statement of financial position and statement of comprehensive income

Exam context
Chapter 2 introduces some vital concepts that will underpin your FA1 studies and beyond. Although the format of the
financial statements is not examinable, and you will not be required to prepare these in your FA1 exam, they are
included in this chapter to illustrate the end result of the recording of business transactions which will be covered in
detail over the next few chapters. The accounting equation is an alternative way of presenting the statement of financial
position and is a very examinable topic. Identification of different types of transactions and matching these to appropriate
financial statement headings is also examinable.

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Overview

Financial statements

Asset expenditure versus Assets, liabilities and the

expenses charged to accounting equation
profit or loss

Assets and liabilities Accounts payable and

accounts receivable

The accounting equation

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1 Financial statements
1.1 Businesses produce financial statements to demonstrate how well they have performed over
the accounting period and to show their financial position at the end of that period. The
financial statements, in their simplest form, consist of a statement of financial position and
an income statement.
1.2 The statement of financial position provides a summary of everything the business owns
and owes at a particular point in time.
1.3 Proforma statement of financial position – sole trader
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X2

$ $
Assets
Non-current assets
Land and buildings 100,000
Plant and machinery 50,000
Motor vehicles 30,000
Fixtures, fittings, tools and equipment 20,000
200,000
Current assets
Inventory 50,000
Trade receivables 30,000
Less allowances for receivables (2,000)
28,000
Cash at bank and in hand 12,000
90,000
Total assets 290,000

Capital and liabilities

Capital
Capital 170,000
Profit 45,000
Less drawings (25,000)
190,000
Current liabilities
Bank overdraft 16,000
Trade payables 44,000
60,000
Non-current liabilities
Bank loan 40,000
40,000
Total capital and liabilities 290,000

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Note. Total assets equals total capital and liabilities – this is a result of the dual effect and the
process of double entry bookkeeping (to be covered in later chapters).

1.4 The statement of profit or loss shows how the business has performed and shows the
excess of income over expenses (profit) for the period.
1.5 Proforma statement of profit or loss – sole trader

STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X2

$ $
Sales 200,000
Less cost of sales (120,000)
Gross profit 80,000
Sundry income 5,000
Discounts received 3,000
Less:
Rent 16,000
Telephone 2,000
Electricity 3,000
Wages and salaries 17,000
Irrecoverable and doubtful debts 3,000
Motor expenses 2,000
(43,000)
Profit for the year 45,000

2 Assets and liabilities

2.1 A business owns assets and owes liabilities.

2.2 An asset is something valuable which a business owns or has the use of that is used in the
running of the business.
Non current assets are held and used in the business over the long term.
Current assets are held for the short term to be converted into cash (including cash itself).

2.3 A liability is something which is owed to somebody else such as a loan.

3 The accounting equation

3.1 The accounting equation is the statement of financial position expressed as an equation:

Assets = Liabilities + Capital

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3.2 For example, Fred has a statement of financial position at 31 March 20X1:
Assets = Liabilities + Capital
$ $ $
Van 2,500 Trade payables 3,500
Inventories 1,840 Accruals 200
Receivables 4,860 Capital 11,700
Cash 6,200
15,400 = 3,700 + 11,700

3.3 The equation can also be written as:

ASSETS = [CAPITAL + PROFIT – DRAWINGS] + LIABILITIES
or
ASSETS – LIABILITIES = CAPITAL + PROFIT – DRAWINGS

Example
3.4 Fred's statement of financial position as at 31 March 20X1 could be expressed in this form
of the equation:
ASSETS – LIABILITIES = CAPITAL + PROFIT – DRAWINGS
15,400 – 3,700 = 10,000 + 2,000 – 300

Lecture example 1

Emma started a cupcake business on 1 September 20X2. As at 30 September 20X2 the

accounting equation is as follows:

ASSETS – LIABILITIES = CAPITAL + PROFIT – DRAWINGS

20,000 – 5,000 = 10,000 + 7,500 – 2,500

Required
If Emma introduces her car which cost $5,000 into the business, how will the accounting equation
change?

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Solution

Lecture example 2

Luke has his own business but he is not very good at keeping records of his drawings from the
business.
At 31 December 20X2 Luke's business has the following:
Assets $35,000
Liabilities $7,000
Capital $21,000
Profit $10,000
Required
Calculate Luke's drawings from the business.

Solution

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4 The business equation

Definition
4.1 Net assets = Total assets – Total liabilities
4.2 From the accounting equation:
NET ASSETS = CAPITAL + PROFIT – DRAWINGS
it follows that:
Change in net assets = Change in capital + Profit – Drawings

Lecture example 3
In Fred's accounts, net assets increased over the first month:
1 March NA = $ 6,000
31 March NA = $11,700
Increase = $5,700
Required
If he introduced an additional $4,000 of capital and took drawings of $300, how much profit was
made in March?

Solution

5 Accounts payable and accounts receivable

5.1 Accounts payable are amounts owed by the business to suppliers. A payable is a liability of
the business.

5.2 Accounts receivable are amounts owed to the business by customers. A receivable is an
asset of the business (the right to receive payment is owned by the business).

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6 Asset expenditure and expenses charged to profit or

loss
6.1 (a) Asset expenditure results in the acquisition, replacement or improvement of non-
current assets.
(b) Expenses charged to profit or loss is for the trade of the business (eg rent and rates,
electricity) or to repair, maintain and service non-current assets.

6.2 Asset expenditure results in the appearance of a non-current asset in the statement of
financial position.

6.3 Expenses charged to profit or loss results in an expense being deducted from income to
calculate profit in the statement of profit or loss.

6.4 The distinction between asset and revenue expenditure is important due to the impact on
profit.

Lecture example 4
Required
Select the most appropriate classification for each of the following items of expenditure.

Solution

Description Asset Expenses

expenditure charged to
profit or loss
(a) Purchase of new office building
(b) Legal fees in relation to purchase of office building
(c) Legal fees to recover customer debts
(d) Costs of additional shelves in a storage cupboard
(e) Refurbishment costs for an upgrade to a building
(f) Machinery repairs and maintenance costs
(g) Purchase of new machinery
(h) Wages of the machine operators
(i) Customs duties and delivery costs of the machinery
(j) Bonuses for production workers

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7 Chapter summary
Section Topic Summary
1 Financial statements Financial statement provide a summary of the
performance and position of a business for a particular
period.
2 Assets and liabilities A business owns assets and owes liabilities.
Assets are used in the running of the business and may be
non-current (eg land and buildings) or current (eg cash).
Liabilities are amounts owed to third parties (eg bank
loans).
3 The accounting equation Assets = Capital + Liabilities
4 The business equation Change in net assets = Change in capital + Profit –
Drawings
5 Accounts payable and Accounts payable are amounts owed to suppliers of the
accounts receivable business.
Accounts receivable are amounts owed by customers to
the business.
6 Asset expenditure and The distinction between asset expenditure and expenses
expenses charged to charged to profit or loss is important. If classified
profit or loss incorrectly the profit figure will be wrong.

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Overview summary

Financial statements

Asset expenditure versus Assets, liabilities and the

expenses charged to accounting equation
profit or loss

Assets and liabilities Accounts payable and

accounts receivable

 Assets are owned by the business

 Liabilities are owed to third parties

The accounting equation

ASSETS = CAPITAL + LIABILITIES

Expresses the statement of financial position as an equation

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 2: QUESTIONS

2.1 Which of the following correctly sets out the accounting equation:
A Net assets = Capital – Profit – Drawings
B Net assets = Capital – Profit + Drawings
C Net assets = Capital + Profit + Drawings
D Net assets = Capital + Profit – Drawings
(2 marks)
2.2 A business started with capital in cash of $2,000. Inventories costing $1,600 are purchased on credit,
and half are sold for $2,000. Which of the following is correct?
A Assets $4,800 less liabilities $1,600 equals capital $3,200
B Assets $2,000 less liabilities $1,600 equals capital $400
C Assets $4,000 less liabilities $1,600 equals capital $2,400
D Assets $3,600 less liabilities $1,600 equals capital $2,000
(2 marks)
2.3 Which one of the following provides details of the profit or loss of a business during an accounting
period?
A The statement of financial position
B The statement of profit or loss
C The statement of cash flows
D The receivables ledger
(2 marks)
2.4 Which one of the following shows everything a business owns and owes at a point in time?
A The statement of financial position
B The statement of profit or loss
C The payables ledger
D The statement of cash flows
(2 marks)
2.5 Which of the following is an example of a current asset?
A Land and buildings
B Trade payable
C Motor vehicles
D Cash
(2 marks)

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2.6 Sarah has set up her own business working from home. She buys a laptop for $4,000 and puts $2,000
into a business bank account. During the first month she invoices a client for $3,000 and pays $1,200 to
a part time employee. The client has not yet paid the invoice.
What is Sarah's capital balance at the end of the month?
A $3,800
B $4,800
C $7,800
D $9,000
(2 marks)
2.7 Which of the following does not appear in the statement of financial position?
A Capital
B Trade receivables
C Prepayments
D Discounts received
(2 marks)
2.8 Which of the following would not be classified as asset expenditure?
A The purchase of a new machine
B Delivery costs of the new machine
C Annual maintenance contract
D Refurbishment of the factory to make room for the new machine
(2 marks)
2.9 Which of the following would be classified as expenses charged to profit or loss?
A Wages of machine operators
B Enhancement of a machine to enable it to produce twice as many units per hour
C Purchase of a motor vehicle
D Delivery costs of the motor vehicle
(2 marks)
2.10 Which of the following is correct?
Capital Assets Liabilities
A $17,500 $12,000 $5,500
B $10,500 $7,500 $18,000
C $12,500 $16,500 $4,000
D $16,500 $12,500 $4,000
(2 marks)

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2.11 An item of asset expenditure was incorrectly treated as expenses charged to profit or loss. What effect
did this have on the accounts?
A Expenses were understated and non-current assets understated
B Expenses were overstated and non-current assets understated
C Expenses were understated and non-current assets overstated
D Expenses were overstated and non-current assets overstated
(2 marks)

2.12 The purpose of a statement of financial position is to show:

A A clear and definite estimate of what a business is really worth
B The amount the business could be sold for in liquidation
C The amount the business could be sold for as a going concern
D The assets of the business and the claims against those assets
(2 marks)

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2.1 D

2.2 A

Assets (2,000 cash + 1,600 inventory – 800 inventory sold + 2,000 cash) = 4,800

Liabilities = 1,600 (purchases on credit)

Capital (2,000 capital introduced + 1,200 profit on sale) = 3,200

2.3 B

2.4 A

2.5 D

A and C are non-current assets and B is a current liability.

2.6 C

Capital = Assets – Liabilities

= (4,000 + 2,000 + 3,000 – 1,200)

= 7,800

2.7 D

2.8 C – Maintenance costs are always expenses charged to profit or loss as they do not result in the
acquisition or improvement of a non-current asset.

2.9 A – Wages are always expenses charged to profit or loss.

2.10 C

12,500 = 16,500 – 4,000 (Capital = Assets – Liabilities)

2.11 B – Expenses will be overstated as the item was incorrectly treated as an expense and non-current
assets will be understated as the item should have been included as a non-current asset.

2.12 D

END OF CHAPTER
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 Recording, summarising
and posting transactions

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Outline the purpose and content of the books of prime entry including their format
 Explain how transactions are entered in the books of prime entry
 Enter supplier invoices and credit notes into the appropriate book of prime entry
 Record applicable transactions within the cash book
 Prepare the total, balance and cross-cast the cash book

Exam context
This chapter begins the recording and summarising of business transactions which will develop over the next few
chapters. This content might be examined in various ways, including definitions of books of prime entry and
memorandum ledgers, purpose of these records or selecting the appropriate place to record a given transaction. A
good understanding of the flow of information is also fundamental to later chapters where you will be required to identify
and correct errors.

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Overview

Recording, summarising
and posting transactions

Books of prime entry Memorandum ledgers

Cash book Sales day book Purchase day Petty cash book Journal book
book

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1 Introduction
1.1 At the end of an accounting period any business needs to be able to produce a set of
financial statements.
In order to do this, a record of all the day-to-day transactions needs to be kept and analysed
by type. Special books are used for this purpose and are written up from source documents.

2 The flow of information

balances to statement of profit or loss

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3 Books of prime entry

3.1 All transactions are categorised with other similar transactions and initially recorded by the
business in a book of prime entry. These books form part of the accounting records and
are really just lists of transactions.

3.2 The main books are

(a) Cash book (CB) – cash receipts and cash payments in and out of the
bank account. Often these two are separated into
different books, or pages in a book
(b) Sales day book (SDB) – list of credit sales
(c) Purchase day book (PDB) – list of credit purchases
(d) Petty cash book – cash receipts and payments in and out of the petty
cash tin
(e) Journal book – adjustments and correction of errors

4 Proforma books of prime entry

Cash receipts
4.1
Date Narrative Folio Total Sales tax Capital Sales Receivables

$ $ $ $ $

Cash payments
4.2
Date Narrative Folio Total VAT Discount Purchases Van Rent Payables Salary Drawings
Received
$ $ $ $ $ $ $ $ $

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Sales day book

4.3
Date Customer A/C No. Gross Sales tax Net
Folio $ $ $

Purchase day book

4.4
Date Supplier A/C No. Gross Sales tax Purchases Telephone Electricity
Folio Net
$ $ $ $ $

Petty cash book

4.5
Date Receipts Total Sales Net Date Payments Total VAT Petrol Postage Other
$ tax $ $ $ $ $ $
$

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5 Memorandum ledgers
Purpose of memorandum ledgers
5.1 In addition to the books of prime entry, memorandum ledgers are maintained to keep a
record of how much is owed by a particular customer or to a particular supplier at a point in
time.
For example, the sales day book shows the sales made on credit to all customers and the
cash receipts book shows the cash received from all sources.
The amount owed by an individual customer cannot be seen from the books of prime entry
without reviewing all the detailed information.
This information can be found in the receivables ledger which consists of a collection of
personal accounts for each individual customer.
5.2 There are two such ledgers kept by the business:
(a) Receivables (sales) ledger – showing how much is owed by each individual customer
(b) Payables (purchases) ledger – showing how much is owed to each individual supplier

Receivables ledger
5.3 Each receivables ledger account maintains a record of:
(a) Invoices sent to customers, detailing amounts and invoice number
(b) Credit notes (sales returns), detailing amounts and credit note number
(c) Payments from customers
(d) Settlement (cash) discounts (for early payment)
(e) The balance currently owed by the customer
In addition, information such as the name, address and telephone number of the customer,
delivery details, contact names, credit terms and the customer's credit limit will be
maintained.
All entries will be dated and referenced to the appropriate day book and relevant information
such as invoice or credit note numbers will also be recorded.

Payables ledger
5.4 Each payables ledger account maintains a record of:
(a) Invoices received from the supplier
(b) Credit notes (purchases returns) detailing amounts and debit note number
(c) Payments to the supplier
(d) Settlement (cash) discounts (for early payment)
(e) The balance currently owed to the supplier
In addition, information such as the name, address and telephone number of the supplier,
contact names, credit limit and so on will be maintained.
All entries will be dated and referenced to the appropriate day books and relevant
information such as the invoice or credit note number will also be recorded.

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5.5 Credit limit is the term used for indicating how much credit a customer may receive or a
supplier is prepared to grant.
eg credit limit $5,000 – the balance on the individual's memorandum ledger account
must not exceed $5,000.

Writing up memorandum ledgers

5.6 The entries in these ledgers are made by rearranging the information recorded in the day
books into individual customer and supplier accounts.

6 Melvyn Rose example

Lecture example 1
Mel is left $10,000 by his great aunt in his will. He puts $4,000 into his own current account and
with the remaining $6,000 he decides to start up a business selling books.
The following are his transactions in the first month of business.
1 March Mel pays $6,000, in to the business bank account
2 March The business buys 200 books for $1,600 from VRU Co and pays by cheque
5 March The business sells half the books for $1,200 cash to AB Videos
10 March The business buys a van for $2,500 and pays by cheque
11 March The business buys 50 books for $8 each from AA Co on credit
12 March The business buys 100 books for $8 each from AA Co on credit
12 March 75 books are bought on credit from B Co for $600
14 March 50 books are sold on credit for $2,100 to SS Co
14 March 25 books are sold on credit to T Co for $350
17 March 50 books are sold to SS Co for $700 on credit
17 March $300 rent is paid, in respect of March, for the business premises
19 March Paid $900 to AA Co
20 March Received $1,000 from SS Co
21 March Mel pays a cheque into the business bank account from his current account for
$4,000
25 March 200 books are bought from AA Co for $800 credit
25 March 25 books are bought on credit from B Co for $200
25 March 200 books are bought on credit from CC Co for $1,600
26 March Sold 25 books on credit for $1,350 to UEE Co
27 March Sold 100 books for $1,100 to VV Co on credit
27 March Sold 20 books on credit for $260 to WD Co
30 March Mel withdrew $700 from the bank, paying his assistant $400 and keeping the
remaining $300 for himself
31 March Invoices received for $150 for electricity and $50 for the telephone
Required
Complete the attached books of prime entry, memorandum accounts and extract a listing of the
total memorandum balances.

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Solution

SALES DAY BOOK

DATE CUSTOMER TOTAL INVOICE

TOTAL
You should total each column for the month
Double entry:
$ $
Dr

Cr

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PURCHASES DAY BOOK

DATE SUPPLIER TOTAL PURCHASES ELECTRICITY TELEPHONE OTHER

TOTAL
You should total each column and ensure that the analysis cross-casts and agrees with the
'total' column
Double entry:
$ $
Dr

Cr

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CASH BOOK PAYMENTS

DATE DESCRIPTION TOTAL PURCHASES PAYABLES RENT WAGES OTHER
LEDGER RATES

TOTAL
Double entry:
$ $
Dr
Dr
Dr
Dr
Dr
Dr

Cr

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CASH BOOK RECEIPTS

DATE DESCRIPTION TOTAL RECEIVABLES SALES OTHER

LEDGER

TOTAL

$
Opening balance
Add receipts

Less payments ( )
Closing balance
You should total each column and ensure that the analysis cross-casts and agrees with the
'total' column

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Double entry:
$ $
Dr

Cr
Cr
Cr
Cr

M. ROSE (MEMORANDUM) PAYABLES LEDGER

SUPPLIER AA Co. PAYMENT Cash or Cheque

DETAILS
ADDRESS Jewel House TERMS 30 days from invoice date
Guernsey DISCOUNT n/a
DETAILS
TEL 123 4567 ACCOUNT 854
DATE DETAILS INVOICES PAYMENTS BALANCE
$ $ $

SUPPLIER B Co. PAYMENT Cash or Cheque

DETAILS
ADDRESS 47 Gorse Road TERMS 30 days from invoice date
Jersey DISCOUNT n/a
DETAILS
TEL 444 1234 ACCOUNT R123
DATE DETAILS INVOICES PAYMENTS BALANCE
$ $ $

SUPPLIER CC Co. PAYMENT Cash or cheque

DETAILS
ADDRESS 23 Old Kent Road TERMS 14 days from invoice date
London DISCOUNT n/a
DETAILS
TEL 0208 123 6789 ACCOUNT SL600
DATE DETAILS INVOICES PAYMENTS BALANCE
$ $ $

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SUPPLIER Electricity Co. PAYMENT Cash or cheque

DETAILS
ADDRESS St Sampsons TERMS 14 days from invoice date
Guernsey DISCOUNT n/a
DETAILS
TEL 534 5050 ACCOUNT 1
DATE DETAILS INVOICES PAYMENTS BALANCE
$ $ $

SUPPLIER Telephone provider PAYMENT Cash or Cheque

DETAILS
ADDRESS Hillary St TERMS on receipt of bill
Jersey DISCOUNT n/a
DETAILS
TEL 478 4222 ACCOUNT 5
DATE DETAILS INVOICES PAYMENTS BALANCE
$ $ $

M. ROSE (MEMORANDUM) SALES LEDGER

CUSTOMER SS Co. CREDIT LIMIT $3,000

ADDRESS 11 The Drive TERMS 30 days from date of invoice
Alderney DISCOUNT none
DETAILS
TEL 550 6565 ACCOUNT Mrs C Control
DATE DETAILS INVOICES RECEIPTS BALANCE
$ $ $

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CUSTOMER T Co. CREDIT LIMIT $1,000

ADDRESS 1a Dunn St TERMS 30 days from date of invoice
Jersey DISCOUNT none
DETAILS
TEL 554 3323 ACCOUNT Mr Beach
DATE DETAILS INVOICES RECEIPTS BALANCE
$ $ $

CUSTOMER UEE Co. CREDIT LIMIT $2,500

ADDRESS 6 The Strand TERMS 30 days from date of invoice
London W1 DISCOUNT None
DETAILS
TEL 405 9779 ACCOUNT Miss Summer
DATE DETAILS INVOICES RECEIPTS BALANCE
$ $ $

CUSTOMER VV Co. CREDIT LIMIT $2,000

ADDRESS 12 The High Street TERMS 30 days from date of invoice
Guernsey DISCOUNT none
DETAILS
TEL 550 7512 ACCOUNT Mr Bouncit
DATE DETAILS INVOICES RECEIPTS BALANCE
$ $ $

CUSTOMER WD Co. CREDIT LIMIT $500

ADDRESS 16a Mile End Road TERMS 30 days from date of invoice
London E2 DISCOUNT none
DETAILS
TEL 790 9181 ACCOUNT Mr Dodgey
DATE DETAILS INVOICES RECEIPTS BALANCE
$ $ $

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List of receivables ledger balances

Folio Customer Balance

Total:

List of payables ledger balances

Folio Supplier Balance

Total:

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7 Chapter summary

Section Topic Summary

1 Introduction A business will enter into many transactions during an
accounting period. All of these will need to be recorded
and summarised to produce the entity's financial
statements.
2 The flow of information The sequence from source document to financial
statements to assist in the recording and summarising of a
business' transactions.
3-4 Books of prime entry The business' transactions must first be categorised into
the books of prime entry. The cash book records money
paid into and out of the bank account; the sales day book
records credit sales; the purchase day book records credit
purchases; the petty cash book records small incidental
expenses and the journal book is used to correct errors
and make other year-end adjustments.
5 Memorandum ledgers Separate records for individual customers and suppliers to
keep track of amounts owed from customers (receivables
ledger) and owed to suppliers (payables ledger) at any
point in time.

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Overview summary

 Categorise similar  Receivables ledger –

Recording, summarising amounts owed by each
transactions
and posting transactions
together customer

 Payables ledger – amounts

owed to each supplier

Books of prime entry Memorandum ledgers

Cash book Sales day book Purchase day Petty cash book Journal book
book

 Cash receipts  Credit sales  Credit  Small incidental  Correcting

into the bank purchases expenses errors

 Cash payments  Period-end

out of the bank adjustments

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 Chapter 3: Questions

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 3: QUESTIONS

3.1 Which of the following are books of prime entry?

(1) Sales day book
(2) Cash book
(3) Journal
(4) Payables ledger
A 1 and 2 only
B 1, 2 and 3 only
C 1 only
D All of them
(2 marks)
3.2 In which book will a business record credit notes in respect of good returned by customers?
A Sales returns day book
B Cash book
C Sales day book
D Purchase returns day book
(2 marks)
3.3 A company has just sent off the quarterly sales tax cheque. In which book of prime entry will this be
entered?
A Cash book
B Purchase day book
C Journal
D Sales day book
(2 marks)
3.4 Which one of the following transactions would be recorded in the journal?
A One-off purchase of supplies at a discounted price
B Credit notes issued in respect of good returned from customers
C Correction of an error
D Sale to a new customer
(2 marks)
3.5 Toby sends a debit note to one of his suppliers. In which of Jonathan's books of prime entry would this
be recorded?
A Sales day book
B Purchases day book
C Sales returns book
D Purchase returns book
(2 marks)

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3.6 Which of the following is not a book of prime entry?

A Sale returns book
B Cash book
C Journal
D Receivables ledger
(2 marks)
3.7 In which books of prime entry would the following transactions be entered:
a credit purchase for $527 and a cash purchase of $350 less 10% discount for cash payment?
A The cash book and purchase day book
B The petty cash book and purchase day book
C The purchase day book and sales day book
D The journal and cash book
(2 marks)
3.8 XYZ Co made a sale on credit to a customer for $500 in January 20X1 and offered a 15% settlement
discount for payment within 30 days which the customer was expected to take up. If the customer pays
within 30 days and takes advantage of the discount, in which book(s) of prime entry will the payment from
the customer be recorded?
A The sales day book
B The cash book
C The sales day book and the cash book
D The cash book and the journal
(2 marks)

3.9 Which of the following is the best description of the function of books of prime entry in a standard double
entry bookkeeping system?
A Books of prime entry are used to record cash transactions
B Books of prime entry are used to list similar transactions with the totals being posted to the
nominal ledger.
C Books of prime entry record amounts owed to/from individual suppliers and customers
D Books of prime entry are used to summarise credit transactions
(2 marks)
3.10 Which of the following statements best explains the term 'memorandum account'?
A An account used for the correction of errors
B An account used to record transactions between the business and its owners
C An account used to record information, which does not form part of the double entry bookkeeping
D An account used to summarise transactions before being posted to the ledgers
(2 marks)

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3.1 B

3.2 A

3.3 A

3.4 C

3.5 D

3.6 D

3.7 A – The credit purchase will be recorded in the purchase day book and the cash purchase in the cash
book.

3.8 B – The cash received from the customer will be recorded in the cash book. The sales day book is
where the original credit sale was recorded, net of the settlement discount as the customer was expected
to take it up.

3.9 B

3.10 C – For example the receivables and payables ledgers which detail the amounts owed by each customer
and the amounts owed to each supplier.

END OF CHAPTER
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 Ledger accounts and
double entry

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Outline how the books of prime entry integrate with the double entry bookkeeping system
 Enter transactions including the sales tax effect where applicable into the books of prime entry
 Process financial transactions from the books of prime entry into the double entry bookkeeping system
 Enter transactions from the books of prime entry into the ledgers
 Balance and close off ledger accounts
 Record sales transactions taking into account discounts, sales tax and the impact on the sales tax ledger account
where applicable
 Record purchase transactions taking into account discounts, sales tax and the impact on the sales tax ledger
control account where applicable

Exam context
Your understanding of double entry will be crucial to passing the exam and will continue to be fundamental in your future
studies. Questions may include selecting the appropriate double entry for a particular transaction or may require you to
calculate the entry for an account based on a number of transactions which could include sales tax and/or discounts.
You could also be asked to identify the impact of a debit or a credit on different types of account. Double entry
bookkeeping is an area that should be taken slowly and practised often to get to grips with the rules.

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 4: LEDGER ACCOUNTS AND DOUBLE ENTRY

Overview

Ledger accounts and

double entry

Ledger accounts Double entry

Debit Credit

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1 Introduction
1.1 This chapter is designed to enable you to explain the principles of double entry bookkeeping
and apply these principles to the preparation of accounting records within the nominal
ledger.
1.2 In Chapter 3 we saw how transactions were categorised in books of prime entry. The next
step is to summarise the information in a format nearer to that of the financial statements.

The nominal ledger

1.3 (a) Each item in the statement of financial position or income statement will have an
'account' (which might be a page in a book or a record on a computer).
(b) All the accounts are collected together in the nominal ledger.
(c) The books of prime entry are totalled up and two entries will be made in the nominal
ledger accounts with each of these totals – double entry.

The dual effect

1.4 The method used stems from the fact that every transaction affects two things:
eg (a) M. Rose pays $6,000 in the business bank account:
Cash increases by $6,000 and
Capital increases by $6,000
(b) M. Rose purchases tapes on credit for $400:
Purchases increase by $400
Creditors increase by $400

2 The principles of double entry bookkeeping

General rules
2.1

Debit Credit

increase increase

Expense Liabilities

Asset Income

Drawings Capital

(and credits will decrease these) (and debits will decrease these)

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2.2 The cash account can also be used as a good starting point:
(a) Cash in = Debit
(b) Cash out = Credit
This may seem the wrong way round to you. Why is 'cash in' a debit and not a credit as on
your bank statement? The reason is, that the bank will send you a copy of its account with
you. If it says credit on your bank statement this means from their point of view the bank
owes you money. From your point of view your account with the bank will have a debit
balance, indicating that the bank owes you money.

Ledger accounts
2.3
DR CAPITAL CR
$ $
Debits Credits

We make two entries in two ledger accounts from each total extracted from the books of
prime entry – one DEBIT and one CREDIT.
TOTAL DEBITS = TOTAL CREDITS

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Lecture example 1
Required
Explain each entry in terms of the general rules above:
DEBIT CREDIT
(a) Sales for cash

(b) Sales on credit

(c) Purchases for cash

(d) Purchases on credit

(e) Pay electricity bill

(f) Receive cash from a debtor (receivable)

(g) Pay cash to a creditor (payable)

(h) Borrow money from the bank

Remember, for each of these there must be a debit and a credit.

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Lecture example 2
Required
Complete the double entries for each book of prime entry total you prepared in Lecture example 1
(Chapter 3). Using the nominal ledger accounts below write up these postings.
CAPITAL
$ $

CASH
$ $

PAYABLES
$ $

RECEIVABLES
$ $

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DRAWINGS
$ $

ELECTRICITY
$ $

NON-CURRENT ASSET – VAN

$ $

PURCHASES
$ $

RENT
$ $

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WAGES AND SALARY

$ $

SALES
$ $

TELEPHONE
$ $

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3 Chapter summary

Section Topic Summary

1 Introduction In Chapter 3 similar transactions were categorised into the
books of prime entry.
The totals of the books of prime entry are now posted to
the nominal ledger using double entry.
2 The principles of double Each line in the financial statement has a ledger account
entry bookkeeping and every total from a book of prime entry is posted into
two ledger accounts due to the dual effect.
A debit increases expenses, assets and drawings and a
credit entry increases liabilities, income and capital.
This can be remembered as DEAD CLIC.

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Overview summary

Ledger accounts and

double entry

Ledger accounts Double entry

 The books of prime entry are totalled

and posted to the nominal ledger using
double entry

Debit Credit

Increase: Increase:
– Expenses – Liabilities
– Assets – Income
– Drawings – Capital

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4.1 A debit entry into a ledger account represents which of the following?
A Increase in income
B Increase in capital
C Increase in drawings
D Increase in a liability
(2 marks)
4.2 A credit entry into a ledger account represents which of the following?
A Increase in an expense
B Decrease in an asset
C Decrease in capital
D Increase in drawings
(2 marks)
4.3 Which one of the following is the correct posting from the purchase day book?
A Dr Purchases Cr Payables
B Dr Purchases Cr Cash
C Dr Payables Cr Purchases
D Dr Cash Cr Purchases
(2 marks)
4.4 Which of the following statements concerning credit entries is correct?
A They record decreases in capital or liabilities
B They record increases in assets
C They recorded increases in profits
D They record increases in expenses
(2 marks)
4.5 Which of the following is the correct posting from the sales day book to the general ledger?
A Dr Sales Cr Receivables
B Dr Cash Cr Sales
C Dr Receivables Cr Sales
D Dr Receivables Cr Cash
(2 marks)

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4.6 Which of the following items would be a debit in the ledger accounts?
A Capital
B Bank overdraft
C Motor vehicles
D Trade payables
(2 marks)
4.7 Which of the following would be a credit in the ledger accounts?
A Trade receivables
B Bank loan
C Cash at bank
D Drawings
(2 marks)
4.8 Which of the following pairs includes one debit and one credit?
A Inventory and drawings
B Capital and income
C Trade payables and cash
D Trade receivables and rent expense
(2 marks)

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4.1 C

4.2 B

4.3 A

4.4 C

4.5 C

4.6 C

4.7 B

4.8 C

END OF CHAPTER
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 Checkpoint 1 – Progress Review
To reinforce your learning to date you should now follow the study guidance in the
following pages. On completion, your progress towards full exam preparation will be:

Take some time to reflect on the knowledge and skills you covered during Stage 1. If you feel you need further
clarification on any of the key areas listed below you can use the Interactive Text and speak to your tutor.
The Course Notes section for each chapter (starting overleaf) provides helpful guidance (and time commitments)
on how to focus your review on the key learning points in your notes.

Key messages from Stage 1

The first stage of the course introduces you to the concept and rules of double entry bookkeeping. Having good
double entry bookkeeping skills is fundamental to passing the exam, although it can seem like a foreign language
at first. It is, however, a bit like riding a bike – once learned, never forgotten – and question practice is the best
way to master it!

Key knowledge
The specific areas of key knowledge covered in Stage 1 were:
 Chapter 1 gives a general overview of types of business transaction and documents. This is an
introductory chapter that sets the scene for the course.
 Chapter 2 introduces some important definitions and concepts and provides a good foundation for the
coming chapters. It is important to understand how the next few chapters link together and to see the end
result, being a set of financial statements, although you will not be required to prepare these at this stage
of your studies.
 Chapter 3 covers the books of prime entry and posting transactions, being the first stage of the
bookkeeping process. You should be happy with the books of prime entry and the purpose of each one
as well as the memorandum ledgers and how these are used by a business.
 Chapter 4 was concerned with how ledger accounts are put together from the books of prime entry and
the principle of double entry. You need to be able to prepare ledger entries for common business
transactions and understand that these ledger entries originate from the books of prime entry. You also
need to learn the terminology used in this chapter as narrative questions could be asked (for example
what impact a debit entry has on an asset).

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Key skills
The most important technique to take away from Stage 1 is how to record transactions using double entry. You
should learn the mnemonic for recording double entry (DEAD CLIC) and ensure you carry out lots of practice
recording transactions in this way. Your tutor will be able to tell you where to find further questions if you want
them.
You should also start to familiarise yourself with T-accounts which are introduced in Chapter 4, as these are
used throughout the rest of your accounting studies. It is important to be happy with how these are put together
and how they fit into the 'big picture' in preparing a trial balance in Stage 2; remember that these are just a tool to
aid you in putting together your accounts.
Finally, you must ensure you know the accounting equation (Assets – Liabilities = Capital) and can calculate
missing items using it.

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Checkpoint 1 – Study support

Chapter 1 – Business transactions and documentation 30 mins

Key areas
 Business and business transactions
 The concept of business entity and the dual effect
 Internal and external documentation
 Invoices and credit notes
 Discounts
 Sales tax

Course Notes
 Start to familiarise yourself with the different documents used for different transactions 5 mins
and the content of these documents.
 Re-read Section 7 and make sure you are happy with the two different types of 5 mins
discounts, how they relate to each other and how to calculate them.
 Learn the definitions of input and output tax and re-read Lecture example 3 to make sure
10 mins
you are comfortable with how to calculate sales tax when given gross or net amounts.
Question practice
 Required question practice:
From the Course Notes try the following questions:
Questions 1.1, 1.3, 1.5 and 1.7 10 mins

Chapter 2 – Assets, liabilities and the accounting equation 25 mins

Key areas
 Statement of profit or loss and statement of financial position elements
 Assets and liabilities
 The accounting equation
 Accounts payable and accounts receivable
 Asset expenditure and expenses charged to profit or loss

Course Notes
 Review the accounting equation and the business equation and make sure you are 10 mins
happy with calculating and manipulating both for missing figures.
 Re-read Section 6 and Lecture example 4 as you need to be able to identify whether a
5 mins
transaction relates to asset expenditure or expenses charged to profit or loss.

Question practice
 Required question practice:
From the Course Notes try the following questions:
Questions 2.1, 2.2, 2.3 and 2.5 10 mins

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Study support 1 (cont.)

Chapter 3 – Recording, summarising and posting transactions 40 mins

Key areas
 Books of prime entry
 Memorandum ledgers

Course Notes
 Review Sections 3 and 4 and make sure you are happy with the purpose of each of the five books 5 mins
of prime entry.
 Re-read Section 5.1 ensure you can identify the links between the books of prime entry and the 5 mins
memorandum ledgers.

Question practice
 Required question practice:
From the Course Notes try the following questions:
Questions 3.1, 3.5, 3.7 and 3.8 10 mins

Question 5.11 (James) – Practise drawing up books of prime entry and memorandum
ledgers only. 20 mins

Chapter 4 – Ledger accounts and double entry 35 mins

Key areas
 Double entry bookkeeping

Course Notes
 Re-read the general rules of double entry bookkeeping in Section 2.1 to consolidate 5 mins
your understanding of why a particular entry is a debit or a credit. Review Lecture
example 1 to ensure your understanding is correct.
 Rework Lecture example 2 to practise double entry and posting to ledger accounts.
10 mins

Question practice
 Required question practice:
From the Course Notes try the following questions:
Question 4.3, 4.5 and 4.8 10 mins

Question 5.10 Douglas – Practise double entry by preparing double entries and ledger
accounts (part a only). 10 mins

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accounts and financial
statements

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Balance and close off ledger accounts
 Prepare ledger balances, clearly showing the balances carried down and brought down as appropriate
 Extract an initial trial balance
 Record sales transactions taking into account discounts, sales tax and the impact on the sales tax ledger account
where applicable
 Records purchase transactions taking into account discounts, sales tax and the impact on the sales tax ledger
control account where applicable

Exam context
Questions on this chapter may require you to calculate the balance carried down or brought down in a ledger account.
You may also be required to calculate a trial balance total or identify a missing figure based on your understanding of the
trial balance. Sales tax and discounts are revisited in this chapter to highlight the accounting treatment and are very
examinable areas.

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Overview
Accounting for sales tax

Completing ledger
accounts and financial
statements

Accounting for discounts

Balancing off the ledger

accounts

Trial balance

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1 Balancing off the accounts

Example
1.1 The next step towards producing a set of accounts is to balance off every account.
Using a cash account as an example:
CASH
$ $
2/1 Sales 500 1/1 Purchases 300
10/1 Sales 500 25/1 Purchases 50

Steps
1.2 (a) Add the debit and credit sides separately
(b) Fill in the higher of the two totals on both sides
(c) Literally 'balance' the account – what number do we need, on which side to make the
two sides equal? – balance carried down
(d) Complete the 'double entry' – balance brought down on opposite side.
Note. We use the term carried down or carried forward to denote the closing balance, ie c
for closing balance.
We use the term brought down or brought forward to denote the balance at the beginning
(known as the opening balance), ie b for beginning (opening) balance.

Lecture example 1
Required
Balance off the ledger accounts for M. Rose which you have written up in Chapter 4.

Solution

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2 The trial balance

2.1 All the balances brought down on the accounts should be listed, separating debits and
credits as below. This is known as an initial trial balance.

Example
2.2 Miss Smith
Trial balance as at 31 December 20X8
DEBIT CREDIT
$ $

Cash 720
Capital 500
Sales 2,200
Purchases 1,100
Furniture 500
Electricity 120
Telephone 60
Drawings 200
Total 2,700 2,700
This should balance: TOTAL DEBITS = TOTAL CREDITS
If it doesn't balance: something must be wrong!
The initial trial balance is extracted as a control to ensure that all debits and credits have
been posted to the nominal ledger and acts as a control. It will not check whether amounts
have been posted to the correct account – only whether all debits = all credits.

Lecture example 2
M. Rose
Required
Complete the following proforma using the balances calculated for M. Rose as at 31 March 20X8
(Lecture example 1).

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Solution
M. Rose
Trial balance as at 31 March 20X8

Folio Debit Credit

$ $
Capital 1
Cash 2
Payables 3
Receivables 4
Drawings 5
Electricity 6
Non-current assets – Van 7
Purchases 8
Rent 9
Salary 10
Sales 11
Telephone 12

Lecture example 3
A business has the following account balances:
$
Van 1,000
Sales 6,000
Purchases 4,000
Inventory 2,000
Rent 500
Bank 1,500
Capital 3,000
Required
What is the trial balance total?

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Solution

Lecture example 4
The following are the year-end balances in a business' ledger:
$
Plant and machinery 1,500
Sales 3,000
Electricity 700
Overdraft 300
Receivables 800
Factory building 5,000
Capital 4,000
Payables ?
Required
If the trial balance balances what is the missing figure for payables?

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Solution

3 Accounting for sales tax

3.1 As output tax is collected on behalf of the tax authorities, sales should be recorded net of
output tax.
Debit Cash/receivables Gross amount
Credit Sales Net amount
Credit Sales tax account Output tax

3.2 If input tax is recoverable from the tax authorities, purchases should be recorded net of input
tax.
Debit Sales tax account Input tax
Debit Purchases Net amount
Credit Cash/payables Gross amount
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3.3 If input tax is not recoverable, include it in purchases as it is a cost to the business.

3.4 The balance on the sales tax account will reflect an amount payable to or receivable from
the tax authorities.

Lecture example 5
X Co Sold $1,200 worth of goods inclusive of sales tax. X Co also purchased $800 worth of goods
inclusive of sales tax.
X Co can recover sales tax.
The sales tax rate is 17.5%.
Required
What are the accounting entries for the above?

Solution

4 Accounting for discounts

4.1 As was seen in Chapter 1, sales and purchases are both recorded after deducting trade
discounts. Trade discounts therefore do not appear in the financial statements.
If a customer is expected to take advantage of a settlement discount, then the revenue
transaction is recorded net of the discount allowed.
Discounts received are not anticipated when the initial purchase is made, therefore,
transactions are recorded at the full purchase price.

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Lecture example 6
ABC Co made a sale on credit for $15,000. A trade discount of 5% was given as the customer
was a regular. An additional 10% settlement discount was offered for payment within 15 days, but
it was not expected to be awarded.
Required
(a) Record the initial sale.
(b) Record the receipt of cash in the event that the customer paid in seven days, taking full
advantage of the settlement discount.
(c) Record the receipt of cash in the event that the customer did not pay for 25 days.

Solution

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Lecture example 7
Ryan Co purchases goods worth $5,000 from Austin Co. Ryan Co will receive a 5% settlement
discount if the goods are paid for within seven days. Ryan Co has every intention of taking
advantage of the settlement discount.
Required
In the books of Ryan:
(a) Show the initial recording of the purchase.
(b) Record the payment for the goods assuming Ryan pays within seven days.
(c) Record the payment for the goods if payment is made after seven days.

Solution

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5 Chapter summary
Section Topic Summary
1 Balancing off the In Chapter 4 we posted the day book totals to the ledger
accounts accounts. To obtain 'totals' we must balance off each
ledger account to find the balance carried down and the
balance brought down.
2 The trial balance The trial balance consists of a list of the balances brought
down for each ledger account.
3 Accounting for sales tax Sales and purchases are recorded net (exclusive) of sales
tax.
Trade receivables and trade payables (or cash) are
recorded gross (inclusive) of sales tax.
Sales tax is recorded in the sales tax control account and
where output tax (charged on sales) is greater than input
tax (incurred on purchases) the balance is payable to the
tax authorities.
4 Accounting for discounts Trade discounts are always deducted when recording
sales/purchases.
Where settlement (cash) discounts allowed to customers
are expected to be taken, transactions are recorded net of
the settlement discount.
Settlement discounts received are not anticipated and
therefore purchases are recorded inclusive of settlement
discounts.

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Overview summary

Accounting for sales tax

Completing ledger
accounts and financial
statements

Accounting for discounts

Balancing off the ledger

accounts

Trial balance

A list of balances brought down on each ledger account

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5.1 The following are the year end balances in a business's ledgers:

Sales 628,000
Cost of sales 458,000
General overhead 138,000
Trade payables 54,000
Trade receivables ?
Cash at bank 61,000
Capital 86,000
If the trial balance balances, what is the missing figure for trade receivables?
A $61,000
B $111,000
C $233,000
D $387,000
(2 marks)
5.2 What is the double entry required for discounts received from suppliers?
A Dr Payables Cr Discounts received
B Dr Purchases Cr Discounts received
C Dr Discounts received Cr Purchases
D Dr Discounts received Cr Payables
(2 marks)
5.3 What is the double entry for payment to a credit supplier?
A Dr Purchases Cr Cash
B Dr Purchases Cr Payables
C Dr Payables Cr Cash
D Dr Payables Cr Purchases
(2 marks)
5.4 Tilly makes a sale on credit for $1,200 inclusive of sales tax at a rate of 20%. What is the correct double
entry for the transaction?
A Dr Cash 1,200 Cr Sales 1,200
B Dr Receivables 1,200 Cr Sales 1,000 and Cr Sales tax 200
C Dr Receivables 1,200 Cr Sales 960 and Cr Sales tax 240
D Dr Receivables 1,000 Cr Sales 1,000
(2 marks)
5.5 Which of the following is the correct posting of the discounts received column in the cash book?
A Dr Purchases Cr Discounts received
B Dr Cash Cr Purchases
C Dr Payables Cr Discounts received
D Dr Purchases Cr Cash
(2 marks)

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5.6 Which of the following statements is correct?

A The purchases figure in the statement of profit or loss of a sales tax registered business includes
sales tax.
B If the sales tax account has a credit balance at the end of the quarter, the balance is due to the
government.
C A machine is purchased for $500 plus sales tax of $55. The machine account is debited with
$500 and the sales tax account is debited with $55. The sales tax is irrecoverable.
D Input tax incurred on purchases is credited to the sales tax account.
(2 marks)
Note. The following questions have been included specifically to aid your understanding of double entry
bookkeeping as a full technique. They are not in the format of exam questions.
5.7 Doolittle

Doolittle has the following transactions to record for the month of May:
1 May Paid $10,000 capital into his business
2 May Bought a motor car for $2,000 cash
3 May Bought goods to the value of $4,000, and paid for them immediately
4 May Sold goods for $3,000 cash
5 May Paid rent of $500 cash (representing half of the monthly rent)
6 May Bought goods costing $2,000 on credit from Higgins
7 May Bought a computer costing $2,500 on hire purchase from Rothenburg, paying a deposit of
20% cash
8 May Sold goods for $1,600 on credit to Mrs Hopkins
9 May Paid motor running expenses of $50 cash
10 May Paid $1,000 to Higgins
11 May Bought 100 shares in Eliza Co for $600 cash
12 May Mrs Hopkins paid in full the amount owing
13 May Bought stationery for $150 on credit from Mrs Pearce
14 May Paid the balance owing to Higgins
15 May Sold goods to Karpathy for $1,700 on credit
16 May Sold goods to Freddie Eynsford-Hill for $750 on credit
17 May Received a dividend from Eliza Co of $25 cash
19 May Bought a van for $5,000, taking out a two-year term loan to do so
20 May Bought trade goods from Pickering to the value of $6,000 on credit
21 May Sold goods to Mrs Hopkins for $3,200 on credit
22 May Paid insurance of $200 cash
23 May Drew cash for personal expenses of $300
24 May Paid bank charges of $60
25 May Paid Mrs Pearce in full
26 May Received full payment from Karpathy
27 May Paid employee's salary of $400
28 May Sold goods for $5,000 cash
29 May Paid Pickering in full for trade goods
30 May Received $400 from Freddie Eynsford-Hill
31 May Received $1,600 from Mrs Hopkins
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Required
(a) Show how these transactions would be recorded in Doolittle's books of account.
You are required to write out the double entry and then post the transactions into the relevant
T-accounts.
(b) Balance off the accounts.
(c) Produce a TB.

CASH CAR

VAN

COMPUTERS

LOAN INVESTMENTS

CAPITAL DRAWINGS

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RECEIVABLES PAYABLES

SALES DIVIDENDS RECEIVED

RENT

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PURCHASES MOTOR EXPENSES

INSURANCE STATIONERY

WAGES BANK CHARGES

5.8 Joan

Joan, a secondhand bookseller, has been in business for two months. In this time the following
transactions occurred:
(1) Paid in cash $5,000 as capital
(2) Took the lease of a stall and paid two months' rent. The annual rental was $1,200
(3) Purchased, on credit from J Fox, books at cost of $825
(4) Spent $420 cash on the purchase of other books from W Smith
(5) Paid an odd-job man $75 to paint the exterior of the stall and repair a broken lock
(6) Put an advertisement in the local paper at a cost of $10
(7) Sold three volumes containing 'The Complete Works of Shakespeare' to an American for $60
cash
(8) Sold six similar sets on credit to a local school for $300
(9) Paid J Fox $525 on account for the amount due to him
(10) Received $200 from the school
(11) Purchased cleaning materials at a cost of $10 and paid a cleaner $30
(12) Took $100 from the business to pay for her own personal expenses
(13) Made other cash sales during the two months of $1,500
(14) Sold all books by the end of two months
Required
(a) Write up the relevant ledger accounts for these transactions.
(b) Balance off all of the ledger accounts.

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5.9 Douglas

Douglas had the following transactions during January:

(i) Introduced $5,000 cash as capital
(ii) Purchased goods on credit from Richard, worth $2,000
(iii) Paid rent for one month, $500
(iv) Paid electricity for one month, $200
(v) Purchased car for cash, $1,000
(vi) Sold half of the goods on credit to Tish for $1,750
(vii) Drew $300 for his own expenses
(viii) Sold goods for cash, $2,100
Required
(a) Write up the relevant ledger accounts necessary to record the above transactions.
(b) Prepare a trial balance.

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5.1 B
DEBIT CREDIT
Sales 628,000
Cost of sales 458,000
General overheads 138,000
Trade payables 54,000
Trade receivables ?
Cash at bank 61,000
Capital 86,000
768,000 (Bal fig.) 768,000
Trade receivables = 111,000

5.2 A

5.3 C

5.4 B

Dr Receivables (gross) 1,200

Cr Sales (net) 1,200  20/120 = 1,000

Cr Sales tax 200

5.5 C

Dr Payables (to reduce the amount owed to suppliers by the discount amount)

Cr Discounts received (treated like an 'income' as the purchase was recorded before the discount
was deducted)

5.6 B

If the statement of profit or loss is credited (ie sales), the sales tax account is also credited
whereas if the statement of profit or loss is debited (ie purchases) the sales tax account is also
debited.

Credits are liabilities which are amounts owed to third parties – in this case, to the government.

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5.7 Doolittle
(a)
DEBIT $ CREDIT $
1 May Paid $10,000 capital into his business Cash 10,000 Capital 10,000
2 May Bought a motor car for $2,000 cash Motor Car 2,000 Cash 2,000
3 May Bought goods to the value of $4,000, and Purchases 4,000 Cash 4,000
paid for them immediately
4 May Sold goods for $3,000 cash Cash 3,000 Sales 3,000
5 May Paid rent of $500 cash Rent 500 Cash 500
6 May Bought goods costing $2,000 on credit from Purchases 2,000 Payables 2,000
Higgins
7 May Bought a computer costing $2,500 on hire Computer 2,500 Hire 2,000
purchase from Rothenburg, paying a deposit Purchase –
of 20% cash Rothenburg
Cash 500
8 May Sold goods for $1,600 on credit to Mrs Receivables 1,600 Sales 1,600
Hopkins
9 May Paid motor running expenses of $50 cash Motor 50 Cash 50
Running
Expenses
10 May Paid $1,000 to Higgins Payables 1,000 Cash 1,000
11 May Bought 100 shares in Eliza Co. for $600 cash Investments 600 Cash 600
12 May Mrs Hopkins paid in full the amount owing Cash 1,600 Receivables 1,600
13 May Bought stationery for $150 on credit from Mrs Stationery 150 Payables 150
Pearce
14 May Paid the balance owing to Higgins Payables 1,000 Cash 1,000
15 May Sold goods to Karpathy for $1,700 on credit Receivables 1,700 Sales 1,700
16 May Sold goods to Freddie Eynsford-Hill for $750 Receivables 750 Sales 750
on credit
17 May Received a dividend from Eliza Co. of $25 Cash 25 Dividend 25
cash Received
19 May Bought a van for $5,000, taking out a 2 year Cash 5,000 Loan 5,000
term loan to do so Van 5,000 Cash 5,000
20 May Bought trade goods from Pickering to the Purchases 6,000 Payables 6,000
value of $6,000 on credit
21 May Sold goods to Mrs Hopkins for $3,200 on Receivables 3,200 Sales 3,200
credit
22 May Paid insurance of $200 cash Insurance 200 Cash 200
23 May Drew cash for personal expenses of $300 Drawings 300 Cash 300
24 May Paid bank charges of $60 Bank Charges 60 Cash 60

25 May Paid Mrs Pearce in full Payables 150 Cash 150

26 May Received full payment from Karpathy Cash 1,700 Receivables 1,700
27 May Paid employee's salary of $400 Wages 400 Cash 400
28 May Sold goods for $5,000 cash Cash 5,000 Sales 5,000
29 May Paid Pickering in full for trade goods Payables 6,000 Cash 6,000
30 May Received $400 from Freddie Eynsford-Hill Cash 400 Receivables 400
31 May Received $1,600 from Mrs. Hopkins Cash 1,600 Receivables 1,600

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(b)
CASH
$ $
Capital 10,000 Motor car 2,000
Sales 3,000 Purchases 4,000
Receivables 1,600 Rent 500
Dividend received 25 Cash-computer 500
Loan 5,000 Motor exp 50
Receivables 1,700 Payables 1,000
Sales 5,000 Investments 600
Receivables 400 Payables 1,000
Receivables 1,600 Motor van 5,000
Insurance 200
Drawings 300
Bank charges 60
Payables 150
Wages 400
Payables 6,000
c/d 6,565

28,325 28,325
b/d 6,565

RECEIVABLES
$ $
Sales 1,600 Cash 1,700
Sales 1,700 Cash 1,600
Sales 750 Cash 400
Sales 3,200 Cash 1,600

c/d 1,950
7,250
7,250
b/d 1,950

PAYABLES
$ $
Cash 1,000 Purchases 2,000
Cash 1,000 Stationary 150
Cash 150 Purchases 6,000
Cash 6,000

8,150
8,150

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INVESTMENTS
$ $
11 May Cash 600 31 May c/d 600
10/1 Sales 600 600

1 June b/d 600

LOAN
$ $
31 May c/d 5,000 19 May Cash 5,000
5,000 5,000

1 June b/d 5,000

CAPITAL
$ $
1 May Cash 10,000
31 May c/d 10,000
10,000 10,000

1 June b/d 10,000

DRAWINGS
$ $
23 May Cash 300 31 May c/d 300

1 June b/d 300

MOTOR CAR
$ $
Cash 2,000 c/d 2,000

2,000 2,000
b/d 2,000

ROTHENBURG – HP CREDITOR (PAYABLE)

$ $
7 May 7 May Computer 2,000
31 May c/d Sales 2,000
2,000 c/d 2,000

1 June b/d 2,000

COMPUTER
$ $
Hire purchase 2,000
Cash 500

c/d 2,500
2,500 2,500

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SALES
$ $
4 May Cash 3,000
8 May Mrs Hopkins 1,600
15 May Karpathy 1,700
16 May Freddie 750
Eynsford-Hill
21 May Mrs Hopkins 3,200
28 May Cash 5,000
c/d 15,250
15,250 15,250
I/S 15,250 b/d 15,250

DIVIDENDS RECEIVED
$ $
c/d 25 17 May Cash 25
I/S 25 b/d 25

PURCHASES
$ $
3 May Cash 4,000
6 May Higgins 2,000
20 May Pickering 6,000
c/d 12,000
12,000 12,000
b/d 12,000 I/S 12,000

RENT
$ $
5 May Cash 500
c/d 500
500
500
b/d 5500 I/S 500

MOTOR EXPENSES
$ $
9 May Cash 50 c/d 50
b/d 550 I/S 50

INSURANCE
$ $
22 May Cash 200 c/d 200
b/d 200 I/S 200

STATIONERY
$ $
13 May Mrs Pearce 150 c/d 150
b/d 5150 I/S 150

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WAGES
$ $
27 May Cash 400 c/d 400
b/d 400 I/S 400

BANK CHARGES
$ $
24 May Cash 60 c/d 60
b/d 60 I/S 60

VAN
$ $
19 May Loan 5,000 5,000 c/d 5,000
b/d 5,000 I/S 5,000

(c) Doolittle Trial Balance as at 31 May

DEBIT CREDIT
$ $

Cash at bank 6,565

Capital 10,000
Motor car 2,000
Purchases 12,000
Sales 15,250
Rent 500
Computer 2,500
Rothenburg – Hire purchase creditor (Payable) 2,000
Receivables 1,950
Motor running expenses 50
Investment – Eliza plc 600
Stationery 150
Dividends received 25
Van 5,000
Loan 5,000
Insurance 200
Drawings 300
Bank charges 60
Wages 400
32,275 32,275

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5.8 Joan
CASH BOOK

$ $
(1) Capital 5,000 (2) Rent 200
(7) Sales 60 (4) Purchases 420
(10) Receivables 200 (5) Repairs 75
(13) Sales 1,500 (6) Advertising 10
(9) Payables 525
(11) Cleaning materials 10
(11) Cleaning 30
(12) Drawings 100
Balance c/d 5,390
$6,760 $6,760
Balance b/d 5,390

CAPITAL – JOAN
$ $
Balance c/d 5,000 (1) Cash 5,000
5,000 5,000
Balance b/d 5,000

RENT
$ $
(2) Cash 200 Balance c/d 200
200 200
Balance b/d 200

PAYABLES
$ $
(9) Cash 525 (3) Purchases – J Fox 825
Balance c/d 300
825 825
Balance b/d 300

PURCHASES
$ $
(3) Payables 825 Balance c/d 1,245
(4) Cash 420
1,245 1,245
Balance b/d 1,245

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REPAIRS
$ $
(5) Cash 75 Balance c/d 75
75 75
Balance b/d 75

ADVERTISING
$ $
(6) Cash 10 Balance c/d 10
10 10
Balance b/d 10

SALES
$ $
Balance c/d 1,860 (7) Cash 60
(8) Receivables 300
(13) Cash 1,500
1,860 1,860
Balance b/d 1,860

RECEIVABLES
$ $
(8) Sales – school 300 (10) Cash 200
Balance c/d 100
300 300
Balance b/d 100

CLEANING MATERIALS
$ $
(11) Cash 10 Balance c/d 10
10 10
Balance b/d 10

CLEANING
$ $
(11) Cash 30 Balance c/d 30
30 30
Balance b/d 30

DRAWINGS
$ $
(12) Cash 100 Balance c/d 100
100 100
Balance b/d 100

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5.9 Douglas
(a)
CASH BOOK
$ $
Capital 5,000 Rent 500
Sales 2,100 Electricity 200
Car 1,000
Drawings 300
c/d 5,100
7,100 7,100

b/d 5,100

CAPITAL
$ $
Cash 5,000
c/d 5,000
5,000 5,000
b/d 5,000

PAYABLES (RICHARD)
$ $
c/d 2,000 Purchases 2,000
2,000 2,000
b/d 2,000

PURCHASES
$ $
Payables 2,000 c/d 2,000
b/d 2,000 2,000

RENT
$ $
Cash 500 c/d 500
b/d 500

ELECTRICITY
$ $
Cash 200 c/d 200
b/d 200

CAR
$ $
Cash 1,000 c/d 1,000
b/d 1,000

DRAWINGS
$ $
Cash 300 c/d 300
b/d 300

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RECEIVABLES (TISH)
$ $
Sales 1,750 c/d 1,750
1,750 1,750
b/d 1,750

SALES
$ $
c/d 3,850 Receivables 1,750
Cash 2,100
3,850 3,850
b/d 3,850
(b) Trial balance
DEBIT CREDIT
$ $

Cash 5,100
Capital 5,000
Payables 2,000
Purchases 2,000
Rent 500
Electricity 200
Car 1,000
Drawings 300
Receivables 1,750
Sales 3,850
$10,850 $10,850

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END OF CHAPTER
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 Manual and
computerised systems

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Identify the characteristics of accounting data and the sources of accounting data records, showing understanding
of how the accounting data and records meet the business' requirements
 Understand how users locate, display and check accounting data records to meet user requirements and
understand how data entry errors are dealt with
 Outline the tools and techniques used to process accounting transactions and period-end routines and consider
how errors are identified and dealt with
 Consider the risks to data security, data protection procedures and the storage of data
 Understand the principles of coding in entering accounting transactions including the coding of sales invoices,
supplier invoices and credit notes ready for entry into the books of prime entry
 Describe the accounting documents and management reports produced by computerised accounting systems and
understand the link between the accounting system and other systems in the business

Exam context
This chapter outlines the key differences of a computerised accounting system compared to a manual accounting
system although it is important to remember that the underlying principles are the same. Questions will not be set on the
technical aspects of how computers work but you are required to have an understanding of inputs, processing and
outputs within an accounting system. Questions may also ask you to outline the advantages of computer processing
over manual processing.

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Overview

Data entry errors

Manual and computerised

systems

Accounting systems Batch processing and

controls

Accounting modules Coding

Receivables ledger

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1 Introduction
1.1 The books of prime entry and the ledgers may be either handwritten books or computer
records.

1.2 A computer activity can be divided into three processes:

Areas Activity
Input Entering data from original documents
Processing Posting books and ledgers and generally sorting the input information
Output Producing any report desired by the managers of the business, including
financial statements

1.3 Computerised and manual accounting systems perform the same tasks however the main
differences are as follows:
(a) How information is stored
(b) How tasks are performed
(c) How some packages do things 'automatically'

2 Data entry errors

2.1 For data to be processed through a computerised accounting system it must first be entered
into the system. Accuracy of data entry is vital but errors and omissions may arise in a
number of ways:
(a) Source documents may be damaged, destroyed, incorrect or incomplete
(b) Poor handwriting can make paper records difficult to read
(c) Transposition errors, eg entering 75 instead of 57
(d) Poorly skilled staff
(e) Malicious intent

2.2 Once the data have been input there is still a risk that further program problems or corrupted
software could lead to errors in output.

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Lecture example 1
Required
What practical methods could a business use to reduce the incidences of errors at the data input
stage?

Solution

3 Batch processing and control totals

3.1 Batch processing is where similar transactions are gathered into batches and each batch is
sorted and processed by the computer.
3.2 Batch processing is less time consuming than transaction processing where transactions
are processed individually.
3.3 Control totals are used to make sure that there have been no errors when the batch is input.
The total value of transactions input is compared to the total that is manually counted before
input.

4 Accounting systems
4.1 Advantages and disadvantages of accounting packages compared with manual systems:

Advantages Disadvantages
Can be used by non-specialists Initial time and costs (such as training) can be
high
Large amounts of data can be processed Need for security checks to control access to
quickly data
More accurate System of coding is required to be developed
Capable of handling and processing large Lack of 'audit trail'
volumes of data
Can analyse data rapidly to present Possible resistance from staff
useful control information for managers
such as a trial balance or a receivables
schedule

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5 Coding
5.1 Computers can be used more efficiently if information is expressed using codes.
Example

5.2 General ledger accounts may be coded using a two-digit code:

00 Sales
01 Non-current assets
05 Expenses
15 Purchases etc

6 Accounting modules
6.1 A module is a program which deals with one particular part of a business accounting
system. An accounting package will consist of several modules, for example invoicing,
inventory, receivables ledger, payables ledger, general ledger, payroll, cash book, job
costing, non-current asset register and report generator.
Integrated software
6.2 Each module may be integrated with the others so that data entered in one will be passed
automatically to other modules as required.
6.3 For example if there is input into the cash book following the receipt of cash from a
customer, there might be automatic links:
(a) To the receivables ledger to update the customer account
(b) To the general ledger, to post the cash received to the receivables and cash account
(c) To the report generator, to update the age of receivables analysis and cash receipts
reports which are on file awaiting inclusion in management reports.

Lecture example 2
Required
What are the advantages and disadvantages of an integrated accounting system?

Solution

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7 Receivables ledger
7.1 A computerised receivables ledger will keep the receivables ledger up to date and should
produce certain output periodically (such as statements and sales analysis reports).

7.2 The receivables ledger itself is a file and consists of individual records for each customer
account.

7.3 A field of information includes customer name, account number and credit limit.

Inputs
7.4 Typical data input into the receivables ledger includes amendments and transaction data (eg
sales and customer payments).

Processing
7.5 There are two ways to modify the receivables ledger system
(a) The balance forward method
(b) The open item method

Outputs
7.6 Typical outputs include reports (eg age analysis of receivables), invoices, lists and output to
other modules.

7.7 The payables ledger and the general ledger can also be divided into the three processes of
input, processing and output.

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8 Chapter summary

Section Topic Summary

1 Introduction Computer systems can also be used for bookkeeping.
All computer activity can be divided into:
 Input
 Processing
 Output
2 Data entry errors Data must be entered into the system accurately.
However, errors and omissions can be made.
There are practical methods a business can use to reduce
staff errors including staff training and ensure the source
documents and the system are well designed.
3 Batch processing and Batch processing involved collating similar transactions
control totals into batches and processing them together.
It is more efficient than transaction processing but requires
the checking of control totals to check for errors or
omissions.
4 Accounting systems The main advantages are efficiency and the ability to
process large volumes.
The disadvantages include a lack of audit trail.
5 Coding Coding ensures computer systems can be used more
efficiently.
6 Accounting modules An accounting system is often divided into separate
modules.
These systems can be integrated so that data pass from
one module to another as required.
The advantage is that data need to be entered only once
and so can improve efficiency of data entry and reporting.
The disadvantage is that the systems take up more
memory and may have fewer facilities than separate
systems.
7 The receivables ledger A file is made up of records which are made up of fields:
Inputs – amendments and transaction data
Processing – balance forward method or open item
method
Outputs – include reports, invoices and output to other
modules

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Overview summary
Errors: Solutions:
 Source document issues  Training
 Transposition errors Data entry errors  Well-designed systems and
source documents
 Poorly skilled staff
 Drop-down menus
 Malicious intent
 Validity checks

Manual and computerised

systems

Accounting systems Batch processing and

controls

Accounting modules  Integrated system Coding

Receivables ledger

 Inputs – amendments and transaction

data
 Processing – balance forward or open
item method

 Outputs – reports, customer lists,

outputs to other modules
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6.1 Which of the following is not an advantage of accounting packages compared with a manual system?
A A large amount of data can be processed very quickly.
B Computerised systems are free from error.
C The packages can be used by non-specialists.
D Systems can analyse data rapidly to present useful control information to managers.
(2 marks)
6.2 Which of the following is the correct explanation of the open item method of processing data?
A The user identifies specific invoices and credits individual payments against specific invoices so
unpaid items remain open items.
B The ledger system is only open until three days after month end after which time no more entries
can be made.
C The computer system adds or subtracts transactions from the b/f balance to end up with a c/f
balance.
D There are no passwords to restrict access to the ledger system.
(2 marks)

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 6: ANSWERS

6.1 B – Computerised systems are more accurate but they are not error free – there is still a risk of data entry
errors as well as corrupted software that could also lead to errors in the output.

6.2 A

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 Correction of errors

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Understand the use of the journal including the reasons for, content and format of the journal
 Prepare journal entries directly from transactions, books of prime entry as applicable or to correct errors
 Record journal entries in the ledger accounts
 Outline the tools and techniques used to process accounting transactions and period-end routines and consider
how errors are identified and dealt with
 Identify types of error in a bookkeeping system that are disclosed by extracting a trial balance
 Identify types of error in a bookkeeping system that are not disclosed by extracting a trial balance
 Use the journal to correct errors disclosed by the trial balance
 Use the journal to correct errors not disclosed by the trial balance
 Identify when a suspense account is required and clear the suspense account using the journal
 Redraft the trial balance following correction of all errors

Exam context
Exam questions may present transactions in the form of journals where you are required to select the correct entry from
a list of possible entries to test your understanding of double entry. The correction of errors is a tricky area which further
tests your understanding of double entry. Questions may require you to correct an error or to identify the correct
explanation for the cause of a given error.

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Overview

The journal

Correction of errors

Errors Suspense accounts

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1 The journal
1.1 Certain transactions do not 'fit' in the main books of prime entry, eg:
(a) Period-end adjustments, such as depreciation
(b) Correction of errors
These items are initially recorded in another book of prime entry called the journal book.
The journal book details the accounting entry and the reasons for it. It looks like this:

Date Narrative DR CR
XX/XX/XX $ $
Account to be debited X
Account to be credited X
Narrative to explain the transaction.

2 Errors
2.1 If the two columns in the trial balance are not equal there must be an error in recording of
transactions in the accounts. A trial balance, however, will not disclose the following types of
error:
(a) Error of omission
(b) Error of commission
(c) Compensating error
(d) Error of principle

2.2 Once an error has been identified, it must be corrected:

(a) If the error has not caused an imbalance in the trial balance then a double entry to the
ledger accounts will correct the error using a journal entry.
(b) If the error has caused an imbalance in the trial balance then a suspense account is
created to fix the imbalance which must be cleared using journal entries to correct the
error.

3 Suspense accounts
3.1 Suspense accounts are temporary accounts. They never appear in the final accounts

3.2 Uses:
(a) To account for a debit or credit when the accountant is unsure as to where it should
go
(b) To make a preliminary trial balance balance

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Lecture example 1
A bookkeeper is unsure what the double entry should be for a payment which has been made.
Since cash has been paid the cash at bank account must be credited with $400. However, she
has no idea about the related debit entry. If this happens, it is convenient to debit $400 to a
suspense account and then try to determine what the debit should be.
Required
Show the double entry in the ledger accounts below:
SUSPENSE BANK

Suppose the payment turned out to be for rent due for the last month. At the moment there is $400
to the debit of the suspense account that should be debited to the rent expense account.
Required
The double entry to achieve this is:

Please show this in the ledger account:

RENT

Note that after this double entry there will be no balance left on the suspense account, and rent
expense has been correctly debited with $400.

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3.3 Steps to clear a suspense account

(1) Identify the entry that should have been made
(2) Identify the entry that was made
(3) Make the required adjustment

3.4 Illustration
Flowers Co sold goods with a value of $1,000 to Lily, a credit customer. When recording the
sale, Flowers Co posted the transaction to the correct accounts but made two debit entries.
Steps
(1) The entry should have been:
Dr Receivables $1,000
Cr Sales $1,000
(2) The entry was:
Dr Receivables $1,000
Dr Sales $1,000
Cr Suspense account $2,000
A suspense account has been credited to make the trial balance balance.
Note that this has not corrected the error, it has simply highlighted the error so that
we remember to correct it later.
(3) The required adjustment to correct the error (and remove the suspense account) is:
Dr Suspense account $2,000 (always remove the suspense account first as this is the
easiest step!)
Cr Sales $2,000

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Lecture example 2
If a trial balance does not balance, a mistake must have been made somewhere. Inserting a
suspense account into the trial balance to make it balance ensures that the problem is not ignored.
For example, the following balances were extracted from the nominal ledger of a business:
Dr Cr
$ $
Motor van at cost 10,220
Sales ledger control 19,167
Cash at bank 218
Petty cash 50
Purchase ledger control 13,166
Sales 93,870
Purchases 76,182
Rent expense 1,200
Wages and salaries expense 12,500
Electricity expense 516
Telephone expense 230
Accountancy expense 500
Van expenses 1,280
Capital 10,000
122,063 117,036
It does not balance, by $5,027.
A credit balance of $5,027 is inserted to make the trial balance balance.
Dr Cr
$ $
Existing totals 122,063 117,036
Suspense account 5,027
122,063 122,063
This does not solve the problem, it merely highlights it. The errors giving rise to the imbalance now
need to be corrected, which should reduce the suspense account balance to zero.
The following errors are discovered.
(i) A transposition error was made when posting a sales day book total of $8,132. The correct
figure was entered in the sales ledger control account but it was posted to the sales account
as $1,832.
(ii) The balance on the electricity account was incorrectly copied out. It should have read $615.
(iii) A mistake was made when casting the purchases account. It should read $77,356.
All of these errors have caused the trial balance not to balance, and the extent to which it did not
balance has been taken to the suspense account. The double entry for correcting those errors
should therefore be taken to the suspense account.

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Required
(a) The double entry required to correct these errors is

$ $
(i) DEBIT
CREDIT

(ii) DEBIT
CREDIT

(iii) DEBIT
CREDIT

(b) Please complete the suspense account below.

SUSPENSE ACCOUNT
$ $

(c) Please extract a new trial balance.

Dr Cr
$ $
Motor van at cost
Sales ledger control
Cash at bank
Petty cash
Purchase ledger control
Sales
Purchases
Rent expense
Wages and salaries expense
Electricity expense
Telephone expense
Accountancy expense
Van expenses
Capital

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Lecture example 3
The trial balance of Wakefield Modelling Co at 31 March 20X2 included the following balance:
$
Suspense account 710 (Cr)
Subsequent investigations revealed the following errors:
(1) Discounts received of $200 in January 20X2 have been posted to the debit of the sales
returns account.
(2) A payment of $2,500 to a credit supplier in December 20X1 has been debited to purchases.
(3) Sales returns of $450 were posted to the receivables account as $540.
(4) The debit column of the electricity expense account has been overcast by $400 when the
accounts were balanced off and the TB extracted.
Required
Prepare the suspense account showing the entries necessary to correct the accounting errors.
SUSPENSE ACCOUNT
$ $

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4 Chapter summary

Section Topic Summary

1 The journal A journal keeps a record of unusual movements between
accounts and is commonly used for the following:
 The correction of errors
 Period-end adjustments
The journal book is a book of prime entry.
2 Errors Errors can occur for a number of reasons. Accountants
need the ability to understand how errors have been made
and how to correct them using the principles of double
entry bookkeeping.
3 Suspense accounts Suspense accounts are temporary accounts and will never
appear in the financial statements.
There are two uses of suspense accounts:
 To correct an imbalance between debits and credits
in an initial trial balance
 To complete a double entry when unsure what one
side of the posting should be

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Overview summary

The journal
A book of prime entry

Correction of errors

Errors Suspense accounts

 Error of omission: Transaction not recorded 'A temporary account which never
 Error of commission: Debits and credits balance appears in
but the entry is made to the wrong account the financial statements'
For example, an expense is debited to the rent  Used when:
account rather than the electricity account – An accountant is unsure of a
 Error of principle: Debits and credit balance but the double entry
entry is made to the wrong 'type' of account – A preliminary trial balance does
For example, machine repairs debited to the not balance
machine asset account  Must be cleared out
 Compensating error: Two separate errors are  Steps:
made which correct each other (1) What entry was made?
 Transposition error: Here two figures have been (2) What entry should have been
inverted. made?
For example, the posting of a credit sale of $210 as (3) What entry is required to correct
Dr Trade receivables $120 the entries?
Cr Sales $120

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 7: QUESTIONS

7.1 Which of the following errors would be disclosed by drawing up a trial balance?
A Error of principle
B Error of omission
C Compensating error
D Single entry
(2 marks)
7.2 Where one side of a transaction has been recorded in the wrong class of account, such as electricity
expense posted to repairs and maintenance, the error is known as an error of:
A Commission
B Omission
C Transposition
D Principle
(2 marks)
7.3 An error of principle is one where:
A A transaction has not been recorded
B The rules of an accounting principle or concept have been broken
C The digits in a number are recorded the wrong way round
D One side of a transaction has been recorded in the wrong class of account, such as bank interest
income to rental income
(2 marks)
7.4 Discounts received of $200 have been debited to the electricity expense account.
How will this affect the trial balance?
A Debits will be $400 more than credits.
B Credits will be $400 more than debits.
C Debits will be $200 more than credits.
D Credits will be $200 more than debits.
(2 marks)
7.5 Which of the following errors would be found by extracting a trial balance?
A A transaction has been completely missed in the accounts.
B The double entries have been made the wrong way round.
C An expense item has been posted to a non current asset account.
D Different figures have been entered for the debit and credit entries.
(2 marks)

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7.6 Which of the following errors will require an entry to a suspense account to correct it?
A A credit purchase was recorded as a cash purchase.
B A credit sale was completely omitted from the accounting records.
C A cash purchase was recorded correctly in the purchases account and debited to the cash
account.
D The payment of the rent expense was debited to the electricity account instead of the rent
account. (2 marks)
7.7 An invoice from a supplier for raw material has been posted to the plant and machinery account in the
general ledger.
What type of error has occurred?
A Error of principle
B Compensating error
C Error of omission
D Error of transposition
(2 marks)
7.8 Which of the following errors would be a possible reason for a trial balance failing to balance?
A Cash wages being recorded as Dr Cash $250, Cr Wages $250
B Cash wages being recorded as Cr Cash $250, Dr Rent $250
C Cash wages of $250 entered correctly into the cash account but entered as $2,500 into the wages
account
D Cash wages not being recorded at all

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7.1 D

7.2 A

7.3 B

7.4 A

Should have done: Cr Discounts received $200

Did: Dr Electricity expense $200, so debits were $400 higher than credits

7.5 D

7.6 C

7.7 A

7.8 C

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 Receiving and checking
money

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Understand a range of business transactions including receipts
 Describe the processing and security procedures relating to the use of:
(i) Cash
(ii) Cheques
(iii) Credit cards
(iv) Debit cards for receipts
 Outline the purpose and content of a range of business documents including:
(i) Remittance advice
 Prepare the receivables control account or receivables ledgers by accounting for:
(i) Payments from customers including checking the accuracy and validity of receipts against relevant
supporting information

Exam context
Questions on this chapter will be narrative. They are likely to focus on the importance of cash being securely held
accurately recorded and you may be required to select appropriate definitions for different payment methods.

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Overview

Security considerations

Receiving and checking Remittance advices

money

Cheques Card receipts Other payments

EFTPOS

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 8: RECEIVING AND CHECKING MONEY

1 Introduction
1.1 A business can receive payment in respect of its sales in three main ways:
(a) Cash
(b) Cheque
(c) Debit/credit card

2 Security considerations
2.1 Where receipts are in the form of cash, it is important there are controls in place. Controls
over cash receipts will focus on three main areas:
(a) Receipts must be banked promptly.
(b) The record of receipts must be complete.
(c) The loss of receipts through theft or accident must be prevented.

2.2 Some examples of controls to prevent theft or loss include the following:
(a) Cash register security
(b) Safes
(c) Protective glass
(d) Strong box
(e) Security guards and collections
(f) Night safes
(g) Frequent banking
(h) By post

3 Cheques
3.1 Proforma

Northern Bank
12 BROOM STREET CHELSEA W1 2XT 20
20-27-48
NORTHERN BANK Co.
Pay
or order

$
MR P R ONI
Cheque No. Branch No. Account No.

||101109|| 20||||2748 | 30595713

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Definitions
3.2 A cheque is a document ordering payment of a specific amount of money to either the
bearer of the cheque or to a specified person.

Procedures for receiving a cheque

3.3 (a) Examine face of cheque

(b) Check for signature

4 Card payments

Feature Explanation
(a) Card number Each card issued has a unique number allocated to it.
(b) VISA This is the type of credit card.
(c) Qualitycard This is the issuing company. There are many different issuing
companies (mainly banks and building societies).
(d) 02/X7 This is the date from which the card can be used.
(e) 04/X9 This is the date on which the card expires.
(f) A N Other The name of the card holder is also on the front of the card.
(g) Hologram This is a special security device which seeks to prevent forgery of the
card.
(h) Signature strip This holds the specimen signature of the card holder.
(i) Magnetic strip This black strip holds all the information on the card (except the
signature) in code enabling a computer to read it.

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Credit cards
4.1 A credit card payment involves three transactions and three payments:
(a) Card holder purchases good from supplier
(b) Card issuer pays supplier
(c) Card holder pays card issuer

4.2 Card issuers often charge a yearly membership fee as well as charging interest.

4.3 Accepting a credit card:

(a) Fill in credit card voucher/swipe card
(b) Ask customer to sign
(c) Rub thumb over signature panel
(d) Compare signatures (unless CHIP and PIN used)
(e) Check against warning list
(f) Check date of card
(g) Get authorisation if floor limit exceeded.

Debit cards
4.4 Debit cards are used in the same way as credit cards. However the amount is immediately
deducted from the customer's bank account.

5 EFTPOS
5.1 Electronic Funds Transfer at Point of Sale is a system that allows for the customer's bank
account to be automatically charged with a specified sum. There is no period of credit.

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6 Other receipts
These comprise:
6.1 Banker's drafts.

Quality Bank 30-23-56

20
Branch

On demand pay
or order

$
on account of this Office

To: Quality Bank Co. Manager

Head Office
New York NY1102 Countersignature

||101129|| 20||||2748 | 30595713

6.2 A banker's draft is similar to a cheque but it cannot be stopped or cancelled. It is commonly
used when a customer is buying a property and needs a guarantee that the payment will not
be dishonoured to complete the purchase.

6.3 Standing orders and direct debits are discussed in detail in Chapter 10.

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7 Remittance advices
Proforma
7.1

REMITTANCE ADVICE ABC & Co

To: Las Ninjos & Co 4 The Mews

Belton Estate Middlesborough
Peterborough
Account Ref OININ Date 050499 Page 1

DATE DETAILS INVOICES CREDIT PAYMENT

NOTES AMOUNT
12.3.XX Invoice 017780 212.11 212.11
15.3.XX Invoice 017821 106.07 106.07
29.3.XX Invoice 017944 78.90 78.90
30.3.XX Credit note 025327 23.48 – 23.48

397.08 23.48 373.60

Purpose
7.2 A remittance advice shows the invoices which are covered by the payment. The type of
checks to be performed:
(a) Cast-check totals
(b) Compare receipt to remittance advice
(c) Bank cheque and record the receipt
(d) Pass on to sales ledger department

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8 Chapter summary
Section Topic Summary
1 Introduction There are various ways a business can receive money.
The main ways are:
 Cash
 Cheques
 Credit/debit cards
2 Security considerations Holding cash creates problems and careful security
procedures must be followed.
Receipts must be well controlled to ensure good cash flow.
The three key elements include:
 Banking
 Security
 Documentation
3 Cheques Cheques are written by a customer demanding the bank to
make a payment to the bearer (the supplier).
4 Card payments A debit card allows the payment to be deducted
immediately from the customer's bank account.
A credit card provides the customer with credit periods
through the use of a third party.
5 EFTPOS The system which allows payment to be deducted from a
customer's bank account immediately.
6 Other receipts Other receipts include standing orders, direct debits and
bankers' drafts.
7 Remittance advices Trade customers will usually send a remittance advice with
payment.
This is a document which details the invoices covered by
the payment and is useful for recording the receipt.

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Overview summary

Security considerations

Receiving and checking Remittance advices

money

Usually sent by trade

customers listing invoices to
which a payment relates

Cheques Card receipts Other payments

 Banker's draft
 Standing order
EFTPOS  Direct debit

System which allows amount to be

deducted from customer's bank
account immediately

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 Chapter 8: Questions

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 8: QUESTIONS

8.1 Which of the following best describes the EFTPOS system?

A The organisation can invoice its bank, electronically, for the value of goods sold in a trading period
B Funds are transferred automatically from a customer's bank account to the organisation's bank,
when goods are purchased
C EFTPOS acts as a form of line validation of cheques rendered by customers
D Electronic Financial Transaction for Purchases or Sales
(2 marks)
8.2 If you have sold goods to a customer which have a high value, which of the following methods of payment
would be most appropriate?
A Banker's draft
B Credit card
C Cheque
D Credit sale
(2 marks)
8.3 What is a remittance advice?
A A document which is sent to a supplier containing detailed delivery instructions
B A document prepared by a supplier on a regular basis listing the outstanding amounts and
payments received in the most recent trading period
C A document used to confirm a telephone order
D A document sent with a payment explaining what the payment represents
(2 marks)
8.4 Which of the following is not a characteristic of a banker's draft
A It cannot be stopped after issue
B It provides a cheap source of finance for high-value purchases
C It is a secure form of payment for a recipient
D It is commonly used for payments of high value
(2 marks)
8.5 What document can be given to a customer who pays for goods at the time of a transaction?
A Purchase order
B Statement
C Credit note
D Receipt
(2 marks)

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8.1 B

8.2 A – A banker's draft is similar to a cheque but cannot be dishonoured by a bank and so for high value
payments this would be the most secure method.

8.3 D

8.4 B

8.5 D

END OF CHAPTER
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 Banking monies
received

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Describe the processing and security procedures relating to the use of:
(i) Debit cards for receipts
 Explain the differences between the services offered by banks and banking institutions
 Describe how the banking clearing system works
 Outline the processing and security procedures relating to the use of cash, cheques, credit cards, debit cards for
receipts and payments

Exam context
Banking procedures for various kinds of receipts should be fully understood and you should observe real transactions
where possible. Questions on this chapter will be based on definitions and explanations of these procedures..

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Overview
Banking monies received

Banking systems Banker/customer Banking receipts

relationship

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1 Introduction
1.1 If a business is to run efficiently it must:
(a) Know how much money it has received
(b) Ensure that its receipts are safeguarded
Business need to have procedures in place to ensure that monies received are banked
intact.

2 Banking systems
The clearing system
2.1 Banks settle cheques through the clearing system.
The cheque clearing system follows the principles outlined below.

Step 1 The receiving bank branches stamp their names and addresses in addition to
the crossings on the cheques, and sort the cheques paid in by its customers into
bundles of cheques drawn on each of the other banks which participate in the
cheque clearing system. (The 'non-clearing' banks and building societies
participate by using one of the clearing banks as their agent.)

Step 2 The bundles of cheques from each receiving bank branch are sent in, by special
overnight delivery, to the head office of the bank to which the branch belongs.

Step 3 The head office delivers to the Bankers' Clearing House the bundles of cheques
(with covering lists) drawn on each of the other banks, or on non-clearing banks
which they represent.

Step 4 The Bankers' Clearing House distributes these cheques to the head offices of the
relevant paying banks.

Step 5 The paying banks' head offices process the cheques using computers and
distribute the cheques to the various branches of the banks on which the cheques
are drawn.

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3 The banker/customer relationship

What is a banker?
3.1 A banker is some one who will do the following:
(a) Put money and cheques received on a customer's behalf into their account
(b) Take out all cheques and orders paid from the account by the customer
(c) Keep accounts, such as current accounts, which can be used for paying in and taking
out on the customer's behalf

3.2 Contractual relationships

Contractual relationships Transaction Banker Customer
Receivable/payable Customer deposits cash at Receivable Payable
bank.
Bank gives customer money Payable Receivable
on overdraft
Bailor/bailee Customer stores property in Bailee Bailor
bank's safety deposit facilities
Principal/agent Bank arranges insurance for Agent Principal
customer
Mortgagor/Mortgagee Bank lends money to Mortgagee Mortgagor
customer with a mortgage on (Payable) (Receivable)
customers property as its
security

3.3 Rights of bankers

(a) Making charges or commissions
(b) Using customers money
(c) Demanding repayment of overdrawn balances
(d) Possessing a lien over securities

3.4 Duties of customers

(a) Ensuring that fraud is not facilitated when drawing cheques
(b) Indemnifying the bank when it acts on the customer's behalf

3.5 Duties of bankers

(a) Honour a customer's cheque
(b) Credit receipts to a customer's account
(c) Comply with customer's instructions
(d) Repayment on demand
(e) Provide a statement
(f) Maintain confidentiality
(g) Advise of forgery
(h) Care and skill
(i) Provide reasonable notice of closure of accounts

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4 Banking cash
4.1 When banking cash receipts, cash must be properly counted and sorted.
Documentation
4.2 Paying-in slip

Date Date bank giro credit Notes $50

Paid in by/Customer's Reference $20
A/c Cashier's stamp and initials $10
$5
Notes $50 Coins
$20 6 83048231 92057419
$10
$5 Savemore Bank
Coins
CLAPHAM COMMON BRANCH
Cash $
Fee Cheques
$
No. of Cheques BOTTICELLIS
Cash $
Cheques $
Please do not write or mark below this line

101131 ||101131| 20 || 2748| 305957||13

Example
4.3 It is 14 July 20X9 and you are preparing the day's takings for banking.
You have counted and sorted the total contents of the till as follows:
(1) 2  $50 notes
(2) 15  $20 notes
(3) 100  $10 notes
(4) 80  $5 notes
(5) Six bags each containing 20 $1 coins
(6) Four bags each containing 10 50 cent coins
(7) Eight bags each containing 50 20 cent coins
(8) Other silver worth $45.50
(9) Bronze worth 82 cents
The float at the beginning of the day was $75.50 and required to be $120.20 at the end of
today. The till shows receipts of $1,990.82.

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Lecture example 1
Required
Complete the following till summary:

Solution
$
Opening float
Total takings
Banked
Closing float

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Lecture example 2
Required
Prepare the bank paying-in slip after the float of $120.20 has been taken out in the following
denominations:
(1) 4 $10 notes
(2) 4 $5 notes
(3) 2 bags of $1 coins
(4) 1 bag 50c coins
(5) 1 bag 20c coins
(6) Other silver worth $5
(7) 1 bag small coins worth 20c

Solution

Date Date bank giro credit Notes $50

Paid in by/Customer's Reference $20
A/c Cashier's stamp and initials $10
$5
Notes $50 Coins
$20 6 83048231 92057419
$10
$5 Savemore Bank
Coins
CLAPHAM COMMON BRANCH
Cash $
Fee Cheques $

No. of Cheques BOTTICELLIS

Cash $
Cheques $
Please do not write or mark below this line

101131 ||101131| 20 || 2748| 305957||13

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5 Banking cheques
Documentation
5.1 The same document is used for this. The back of the paying-in slip records the names of
customers whose cheques are being paid in, the value of these cheques and the number of
cheques.

Lecture example 3
It is 14 July 20X9 and you receive the following cheques and have been asked to prepare the
paying-in slip:
Name $
I M Clooless 50.50
P B Romilly 25.80
J N Openn 18.50
R S Stuart 28.90
J K Co 45.50
Required
Prepare the paying-in slip for the above cheques.

Solution

Date Date bank giro credit Notes $50

Paid in by/Customer's Reference $20
A/c Cashier's stamp and initials $10
$5
Notes $50 Coins
$20 6 83048231 92057419
$10
$5 Savemore Bank
Coins
CLAPHAM COMMON BRANCH
Cash $
Fee Cheques
$
No. of Cheques BOTTICELLIS
Cash $
Cheques
$ Please do not write or mark below this line

101131 ||101131| 20 || 2748| 305957||13

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Details of cheques, etc. Sub-total brought forward

Carried Total
forward $ Carried over $

In view of the risk of loss in course of clearing, customers are advised to keep an independent record of the drawers of cheques
Please do not write or mark below this line

6 Banking credit and debit card transactions

6.1 The standard paying-in slip is used. Credit card vouchers are processed throughout the
banking system.
Retailer
1 4

Bank

2 3

Credit card company

Documentation
6.2 Before the paying-in slip can be written up, a credit card summary must be prepared. The
summary voucher consists of an original or 'top copy' and two copies with carbon paper in
between. The bottom copy is the processing copy, on the back of it is a place to list the
vouchers. This process is far less common with the use of EFTPOS as covered in Section 5
of Chapter 8.

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7 Banking other receipts

7.1 Banker's draft are treated in the same manner as cheques.

7.2 Giro credits are paid directly into the account by the customer. No further documentation is
required. The transactions appear directly on the bank statement.

8 Chapter summary

Section Topic Summary

1 Introduction Banking procedures for various kinds of receipts should be
fully understood and you should observe real transactions
where possible.
2 Banking systems The cheque clearing system is the system whereby banks
settle cheques.
3 The banker/customer The main relationships between banker and customer are
relationship as follows:
 Receivable/payable
 Bailor/bailee
 Agent/principal
 Mortgagor/mortgagee
4 Banking cash When banking cash receipts, cash must be properly
counted and sorted and detailed on a paying-in slip.
5 Banking cheques When cheques are banked, details of the name of the
drawer, the value of cheques and the number of cheques
must be included on the paying-in slip.
6 Banking credit and debit Card transactions that are manually processed are listed
card transactions on a summary voucher for banking purposes.
Those processed via EFTPOS are transferred directly from
the customer's bank account to the business's bank
account (within two or three days).
7 Banking other receipts Other receipts include banker's drafts which are treated
like a cheque and giro credits which are paid into the
business's account directly by a customer.

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Overview summary

Banking monies received

Banking systems Banker/customer Banking receipts

relationship

Cheque clearing system is  Receivable/payable

the system whereby banks
 Bailor/bailee
settle cheques
 Agent/principal
 Mortgagor/mortgagee

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 Chapter 9: Questions

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 9: QUESTIONS

9.1 When a business pays cheques into its bank, they go through which of the following banking processes?
A The automated payments system
B EFTPOS
C The clearing system
D The credit card system
(2 marks)
9.2 Which of the following does not need to be included on a paying-in slip when banking cheques?
A Customer name
B Value of cheque
C Total value of all cheques
D Customer address
(2 marks)
9.3 Where debit cards are processed using the EFTPOS system what action does the business need to take
for the receipts to be credited to the bank account?
A A summary voucher must be completed and one copy sent to the bank.
B Nothing – the receipts will be credited within 2 or 3 days directly from the customer's bank
account.
C A paying-in slip must be completed at the end of the day detailing the total debit card receipts.
D The business must phone the bank at the time of the transaction to let them know the customer
details so the receipt can be credited.
(2 marks)

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 9: ANSWERS

9.1 C

9.2 D

9.3 B

END OF CHAPTER
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 Recording monies
received

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Process financial transactions from the books of prime entry to the double entry bookkeeping system
 Prepare the receivables control account or receivables ledgers by accounting for payments from customers
including checking the accuracy and validity of receipts agains relevant supporting information

Exam context
Recording transactions was covered in Chapters 3 and 4 with specific detail of cash transactions covered in this chapter.
Cash is often involved in a transaction and so it is vital to understand how to record the receipt appropriately. Questions
on the books of prime entry or the required postings from books of prime entry to ledgers are very likely.

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Overview

Controls over recording Cash registers

receipts

Recording monies
received

Posting cash receipts to

the general ledger

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1 Controls over recording receipts

1.1 Recording receipts on cash received sheets or on cash registers is a method of
summarising cash transactions which are then recorded in summary form in the cash book.

1.2 Segregation of duties is the main control where receiving and recording functions are kept
separate.

1.3 Bank reconciliations also act as a control over cash receipts (see Chapter 14).

2 Cash registers
2.1 The total of daily sales recorded will be used in the following ways:
(a) To check the amount of money in the register to the summary at the end of each day
(b) To record receipts in the cash book

2.2 Security and controls:

(a) Access keys
(b) Training
(c) Programme with pre-set information
(d) Analysis of periodic information

3 Posting cash receipts to the general ledger

Lecture example 1

Date Narrative Total Output tax Sales Receivables

1 Oct Cash sale 100.00 17.00 83.00
Customer 280.00 280.00
Mr Smith
Customer 150.00 150.00
Miss Jones
Customer 190.00 190.00
Mrs Roberts
720.00 17.00 83.00 620.00
Required
What are the postings to the general ledger?

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Solution

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4 Chapter summary
Section Topic Summary
1 Controls over recording Controls over the recording of cash receipts include the
receipts following:
 Segregation of duties
 Bank reconciliations
2 Cash registers Cash registers can be very useful in the control of cash
receipts. They are accurate and can be used to provide
different kinds of sales information.
They are also a place to initially record sales before being
entered into the books of prime entry.
3 Posting cash receipts to The cash book is totalled and two postings are made to
the general ledger the general ledger – one debit and one credit.

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Overview summary

 Segregation of duties Controls over recording Cash registers

receipts
 Bank reconciliations (Chapter 14)

Recording monies
received

Posting cash receipts to DR Cash

the general ledger CR Income analysis

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 Chapter 10: Questions

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 10: QUESTIONS

10.1 Cash received sheets (remittance lists) are:

A Documents used to record money received from sales made
B Documents used to record customer discounts
C Documents used to reconcile the bank balance with the cash book
D Documents used to record refunds from suppliers
(2 marks)
10.2 Which of the following is an effective control in the recording of monies received?
A Allowing only the person who received the cash to record the cash receipt
B Segregation of duties
C Allowing only the Managing Director of the business to record cash receipts
D Posting cash receipts straight to the general ledger immediately after cash has been received
(2 marks)

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 Chapter 10: Answers

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 10: ANSWERS

10.1 A

10.2 B

END OF CHAPTER
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 Authorisation and
making payments

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Understand a range of business transactions including payments
 Describe the processing and security procedures relating to the use of:
(i) Cash
(ii) Cheques
(iii) Credit cards
(iv) Debit cards for receipts and payments
 Outline the purpose and content of a range of business documents including remittance advices
 Prepare remittance advices to accompany payments to suppliers
 Identify and compare different forms of payment

Exam context
You may be required to select the most appropriate method of payment for a given payment transaction. Other
questions may involve identifying the content of documentation involved in making payments.

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Overview

Controls over recording

receipts

Authorisation and making

payments

Making payments Documentation

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 11: AUTHORISATION AND MAKING PAYMENTS

1 Introduction
1.1 Expenditure is a key area of any business. Management is concerned that the expenditure
and payment, whether large or small, should be appropriate. Authorisation is therefore a
very important stage in the payment process.

2 Controls over payments

2.1 There are three main steps in applying controls over payments:
(a) Documentary evidence for the reason for the payment (eg a supplier's invoice)
(b) Authorisation for the payment
(c) Restriction of authority to make payments to certain individuals with specified limits

3 Documentation
3.1 The most common type of documentation that provides evidence of the reason for payment
is the invoice.

3.2 If no such invoice is available, other documentation may be required to ensure authorisation
and recording of payments.
Some businesses use:
(a) Cheque requisition forms

247324

Cheque Requisition

Date

Payable To

Details Chq No.

Date Sent

General ledger
Code

Signed

The requisition may be used for all payments, but is commonly used for transactions where
an invoice would not exist, ie refunds to customers.
Supporting documentation should be attached and an invoice or receipt may follow.

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(b) Expense claim forms

ABC Co.

Expenses claim form

Name C. Purvis Month October X8

Department Marketing

Nominal NET Sales tax TOTAL

Ledger $ $ $
Code

MOTOR CAR EXPENSES

Petrol M1 49.20 8.61 57.81
Repairs and service M2 100.00 17.50 117.50
Parking M3 5.00 0.87 5.87
Car tax M4
154.20 26.98 181.18

OTHER TRAVEL COSTS

(Specify) M5 12.00 2.10 14.10
Taxi 12.00 2.10 14.10

TELEPHONE EXPENSES T2 24.00 4.20 28.20

(Attach telephone bill)

NEWSPAPERS AND JOURNALS N1 12.50 – 12.50

12.50 12.50

OTHER (Specify)

Stationery 5.80 1.01 6.81

5.80 1.01 6.81

TOTAL CLAIMED 242.79

Signature of Claimant: Claire Purvis Date 3 Nov X8

Authorised By: Date

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4 Making payments
Cash
4.1 Cash is used for small payments (petty cash) and this should be on an exceptional basis as
it would otherwise require large amounts of cash to be kept on the premises.
Cash may be used for wages, although this is increasingly unlikely.

Cheque
4.2 This is the most common method of payment.
(a) Preparing cheques:
(i) Name of payee
(ii) Amount
(iii) Date
(iv) Signed by authorised person.

Example

Northern Bank
12 BROOM STREET CHELSEA W1 2XT 20
20-27-48
NORTHERN BANK
Pay
or order

$
MR P R ONI
Cheque No. Branch No. Account No.

||101109|| 20||||2748 | 30595713

(b) Lost cheques

Action to be taken:
(i) Check the bank statement to ensure it has not been presented.
(ii) Check the details of the person to whom the cheque was sent.
(iii) Inform the bank and ask for the cheque to be stopped. This requires
confirmation in writing.

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Bank giro credits

4.3 These documents are prepared and handed in with the payment over the counter of the
bank to be credited directly to the recipient's bank account.
Main uses:
– British Telecom
– British Gas
– Credit card companies
– Electricity companies

Banker's draft
4.4 A banker's draft is like a cheque but cannot be stopped or cancelled.

4.5 It is used for large payments, especially where payment is overseas or in a foreign currency.

Lecture example 1
Required
It is 19 July 20X8. Prepare a banker's draft request using the following details for authorisation by
the Financial Controller:
(a) Payee: HATRO Co
(b) Sum: $41,500.50
(c) Your account: 271 589 81, Edgbaston branch of Savemore Bank

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Solution

APPLICATION FOR BANKER'S DRAFT

To:

Date:

Kindly supply a crossed draft marked Account Payee

Payable to:

amount in words

Please debit my/our account:

Signature:

Name:

Address:

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Standing order/direct debit

4.6 (a) Standing orders
These enable a business to make regular payments of a fixed amount: for example
rental payments.
A standing order mandate must include the fixed amount, frequency of the payment
and banking details of the supplier.
(b) Direct debit
These differ from standing orders in the following ways:
– Recipient initiates payment and chooses the amount of each payment
– Payments can vary in amount
They can be used for bills such as a mobile telephone bill.

5 Accompanying documentation
5.1 Types of documentation:
(a) Remittance advice
(b) Order form
(c) Proforma invoice
(d) Bank giro credit
(e) Covering letter

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6 Chapter summary

Section Topic Summary

1 Introduction Expenditure is a key area for any business and so
management will want to ensure expenditure is
appropriate using procedures including authorisation.
2 Controls over payments Controls over payments include:
 Documentary evidence
 Authorisation of payment
 Restriction of authority to specified people with limits
3 Documentation Invoices are often used to provide documentary evidence
of payments.
Cheque requisition forms can be used to record payments
and ensure authorisation where invoices are not present.
Expense claim forms provide details of payment and
authorisation for reimbursement of expenses borne by
employees.
4 Making payments Cheques are the most common method of payment.
Other methods of payment include:
 Cash
 Bank giro credits
 Banker's draft
 Standing order/direct debit
5 Accompanying A business should send proper explanatory documentation
documentation with all payments to avoid confusion.

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Overview summary

 Documentary evidence

 Authorisation Controls over recording

receipts
 Restriction of authority

Authorisation and making

payments

Making payments Documentation

 Cash  Cheque requisitions

 Cheque  Expense claim forms

 Giro credits

 Standing order

 Direct debit

 Banker's draft

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11.1 A cheque requisition form is:

A A request for cheque payment authorisation when the supporting documentary evidence is
missing
B A request for cheque payment authorisation when amounts payable are over a certain limit
C A list of cheques issued on a particular day
D A form requesting that a cheque should be drawn to make payment
(2 marks)
11.2 Which of the following is not a characteristic of a standing order?
A The amount of payments vary.
B The payments are of a fixed amount.
C The frequency of the payments must be specified.
D They are commonly used for regular payments such as rent.
(2 marks)
11.3 ABC Co has a large contract with a supplier in the US and payment is due on the first order. Which of the
following would be the most appropriate method of payement?
A Cash
B Cheque
C Direct debit
D Banker's draft
(2 marks)

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 11: ANSWERS

11.1 D

11.2 A

11.3 D

END OF CHAPTER
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 Recording payments

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Process financial transactions from the books of prime entry into the double entry bookkeeping system
 Prepare the payables control account or payables ledger by accounting for payments to suppliers including
checking the accuracy and validity of the payment against relevant supporting documentation

Exam context
Recording transactions was covered in Chapters 3 and 4 with specific detail of cash transactions covered in this chapter.
Cash is often involved in a transaction and so it is vital to understand how to record the payment appropriately.
Questions on the books of prime entry or the required postings from books of prime entry to ledgers are very likely. You
may also be required to select the most appropriate method of payment for a transaction where automated credit is an
option.

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Overview

Controls over recording

payments

Recording payments Computerisation of

payments recording

Automated credits

Posting to the general

ledger

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1 Controls over recording payments

1.1 Controls are important to avoid fraud and to ensure completeness. The bank reconciliation
is the most important control (see Chapter 13).

1.2 To avoid fraudulent payments being made, the following procedures should be in place:
(a) All payments are authorised correctly.
(b) Proper checks are made against supporting documentation.
(c) Segregation of duties between the person writing the cheque and recording it in the
cash book.
(d) Payments are reviewed each day to identify anything unusual.
(e) A minimum number of cheque books is in use at any time.

1.3 The following controls will help to ensure completeness:

(a) Regular bank reconciliations
(b) Use cheques in sequence and check as entered in cashbook
(c) Check bank statements to ensure other payments recorded

2 The cash book posting to the general ledger

Lecture example 1

Date Narrative Discount Total Input tax Purchases Payables Expenses

received
1 Oct Supplier 10.00 100.00 100.00
Paid:
Mr Taylos
Telephone 300.00 300.00
expense
Electric 400.00 400.00
expense
Cash 120.00 20.00 100.00
purchase
10.00 920.00 20.00 100.00 100.00 700.00
Required
What are the postings to the general ledger?

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Solution

3 Computerisation of payments recording

3.1 In a computer system, updating the payables ledger for payments will usually cause the
cash book to be automatically updated.

4 Automated credit systems

4.1 Automated credit systems assist in making and recording payments more efficiently and are
used for processing any of the following:
 Standing orders
 Direct debits
 Salaries (monthly)
 Wages (weekly)
 Some one-off payments

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5 Chapter summary

Section Topic Summary

1 Controls over recording Controls over payments are important to avoid fraud and
payments ensure completeness.
The bank reconciliation is the most important control.
2 The cash book postings Posting the payments of the cash book follows the same
to the general ledger procedures as the receipts.
3 Computerisation of In a computer system the cash book may be updated
payments recording automatically through updating the payables ledger.
4 Automated credits Useful methods of making payments which will save a
business time. It is an electronic transfer of funds.

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Overview summary

 Bank reconciliation Controls over recording

payments

Recording payments Computerisation of

payments recording

Automated credits

For example, payroll

Posting to the general

ledger

DR Expense analysis
CR Cash
CR Discounts received

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 12: QUESTIONS

12.1 Which of the following are effective controls in helping to prevent fraud involving payments?
(1) A bank reconciliation independently prepared and authorised
(2) Using BACS to effect payments
(3) Authorisaton of payments
(4) Segregation of duties
A (2) only
B (1) and (2)
C (1), (3) and (4)
D (2) and (4)
(2 marks)
12.2 Ross pays his mortgage by instructing his bank to make monthly payments of a fixed amount from his
current account. When the mortgage rate changes he issues revised instructions to the bank.
Which method of payment is Ross using?
A Payable order
B Standing order
C Direct debit
D Crossed cheque
(2 marks)
12.3 What is the purpose of an analysed cash book?
A To record sales and purchases
B To ensure petty cash payments are recorded correctly
C To record entries from the bank statements received by the organisation from its bank
D To ensure that receipts and payments are summarised under suitable headings for posting
purposes
(2 marks)
12.4 The cash payments book has the following totals:
Total $1,500
Payables $1,500
Discounts received $250
Which of the following is the correct posting to the general ledger?
A Dr Payables 1,500 Cr Cash 1,500
B Dr Cash 1,500 Cr Payables 1,500
C Dr Purchases 1,750 Cr Cash 1,500, Cr Discounts received 250
D Dr Payables 1,750 Cr Cash 1,500, Cr Discounts received 250

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 12: ANSWERS

12.1 C – Fraudulent payments can be made using BACS.

12.2 B

12.3 D

12.4 D

END OF CHAPTER
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 Maintaining petty cash
records

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Prepare a petty cash voucher including the sales tax element of an expense when presented with an inclusive
amount
 Enter and analyse petty cash book with cash in hand
 Balance off the petty cash book using imprest and non-imprest systems
 Reconcile the petty cash book with cash in hand
 Prepare and account for petty cash reimbursement

Exam context
You are required to have an understanding of the types of payments that would be made out of petty cash as well as an
understanding of the controls and procedures surrounding the maintenance of the petty cash system. Questions could
be narrative or numerical.

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Overview

Security of petty cash

Maintaining petty cash Postings to the general

records ledger

The imprest system

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1 Introduction
1.1 Petty cash is cash held in the form of coins and notes. It is used to pay the small incidental
expenses incurred by a business.

2 Who is paid money out of petty cash?

2.1 Employees – usually as reimbursement of expenses incurred on behalf of the business, eg
travel, groceries, postage.

2.2 Suppliers – where cash on delivery is required, eg cleaners.

3 Security of petty cash

3.1 Staff responsibility – Normally allocated to one member of staff, ie cashier, accountant.
They will issue the cash on production of an authorised petty cash voucher.

3.2 Authority – Authority is normally given to certain senior staff to authorise petty cash
expenditure, by signing the voucher after agreeing supporting documentation (see
Section 3.5).

3.3 Container – Petty cash is usually kept in a lockable tin. This can be stored in the safe
overnight or locked up elsewhere if no safe exists.

3.4 Limits – Normally a limit is placed on any expense that may be reimbursed/spent out of petty
cash, eg $100. Above this limit a cheque would be drawn and processed through the cash
book.
Limits may also be placed on authorising staff:
eg under $20 Petty cash clerk
under $50 Financial controller
over $50 Two authorising signatures or the Finance Director

3.5 Supporting documentation – Where possible, vouchers should be supported by

documentation verifying the amount of the expenditure, eg till receipt, invoice, sales tax
receipt, where applicable, or even a price tag.

4 Controlling petty cash – the imprest system

4.1 Where physical cash is concerned it is vital that good controls exist. In practice, this is
frequently exercised by the use of an imprest system which is based on a pre-set float
being maintained – the imprest amount.
(a) Pre-set limit, say $50
(b) As cash is withdrawn, it is replaced by a voucher of the equivalent amount
(c) At any point in time
cash + vouchers = imprest amount
(d) At the end of the week/month, the petty cash book is filled in from the vouchers
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(e) In order to replenish the cash to the imprest amount, vouchers are withdrawn and
replaced by cash of an equivalent amount:

Top up = vouchers = money spent

5 Vouchers
5.1 Below is a typical petty cash voucher. Care must be taken to show any sales tax incurred
on the expense:

No.
Petty Cash Voucher
Date:

AMOUNT
$ c

Signature:

Authorised by:

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6 Petty cash book

Purpose
6.1 This is the book of prime entry used to record the daily transactions concerning petty cash.

6.2 It is used to post petty cash expenses to the general ledger.

6.3 Format (see Chapter 3, Section 4.5).

6.4 As with all books of prime entry, the book is totalled up and the totals posted to the nominal
ledger using double entry:
DR Expense
DR Sales tax
CR Petty cash

7 Recording petty cash expenses and sales tax

7.1 This will be done by using the vouchers and any supporting receipts.
The cashier will analyse the type of expenditure incurred.

Lecture example 1
An imprest system is maintained using a float of $100.
XYZ Co ABC Co
3 High Street, Kingston 14 Low Street, Richmond
VAT Reg No. 228 4135 62 VAT Reg No. 221 4685 27
Date 15/4/X7 Date 15/4/X7

$ Paid $42.30 for stationery,

Electric plugs and fuses 22.00 inclusive of Sales tax @ 17.5%
Sales tax @ 17.5% 3.85
Total 25.85

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No. 371 No. 372

Petty Cash Voucher Petty Cash Voucher
Date: 20/4/X7 Date: 22/4/X7

AMOUNT AMOUNT
$ c $ c

Plugs and fuses 22 00 Stationery 36 00

Sales tax 3 85 Sales tax 6 30

25 85 42 30

Signature: J Smith Signature: R Greene

Authorised by: V Brown (Petty Cashier) Authorised by: D Nuttal (Supervisor)

Required
(a) Enter the above transactions in the petty cash book opposite.
(b) Reimburse the petty cash as required and make the necessary entry in the petty cash book.
(c) Rule off the petty cash book and bring forward the balance.
(d) Show the double entry for posting these transactions.

Solution

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Sales tax
$$
$
Sales tax
$$

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8 Chapter summary
Section Topic Summary
1 Introduction Petty cash is used to make small payments with notes and
coins.
2 Who is paid money out  Employees may be reimbursed for small expenses
of petty cash?
 Suppliers requiring cash on delivery, eg cleaners
3 Security of petty cash All payments out of petty cash must be properly authorised
and evidence by a voucher.
The petty cash tin must be stored securely to prevent theft.
4 Controlling petty cash – There is a pre-set amount in the petty cash tin and when
the imprest system the cash runs low the tin is topped up to the imprest
amount and the expenses recorded in the petty cash book.
5 Vouchers Vouchers are used to record and evidence authorisation of
all payments.
They also assist with recording of expenses in the petty
cash book.
6 Petty cash book A book of prime entry to record the payments from petty
cash which will have separate columns for receipts and
payments.
7 Recording petty cash As with other books of prime entry the petty cash book is
expenses and sales tax totalled and postings are made to the general ledger using
double entry:
DR Expense
DR Sales tax
CR Petty cash

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Overview summary

 Authorisation of payments

 Secure storage Security of petty cash

 Vouchers for accurate record

keeping

Maintaining petty cash Postings to the general

records ledger

DR Expense analysis
CR Petty cash

The imprest system

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 13: QUESTIONS

13.1 A business operates an imprest system for petty cash with an imprest amount of $500. During
September, the total column of the petty cash book was $420 and so the petty cash tin was topped up by
that amount. The analysis columns, which had been posted to the nominal ledger, totalled only $400.
This error would result in:
A No imbalance to the trial balance
B The trial balance being $20 higher on the debit side
C The trial balance being $20 higher on the credit side
D The petty cash balance being $20 lower than it should be
(2 marks)
13.2 A business uses an imprest system for its petty cash. The following transactions took place during May:

Income $ Expenditure $
Opening balance 300 Staff travel 125
Sale of stamps 25 Office refreshments 15
Use of telephone 10

What sum should be reclaimed by the cashier at the end of the month?
A $300
B $195
C $105
D $140
(2 marks)
13.3 Which of the following expenses would not be paid out of petty cash?
A Stamps
B Milk
C Taxi
D Maintenance contract for the photocopier
(2 marks)

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Note. The following question has been included specifically to aid your understanding of petty cash. It is not in
the format of exam questions
13.4 Cash/petty cash

The following transactions were carried out by a business:

20X6
June 2 Received from CMN Co, a receivable, $400 in settlement of their account
June 3 Made purchases for cash $140
June 4 Took $50 out of the bank for petty cash, there being no cash in the petty cash tin
June 11 Paid RST Co, a trade payable, a cheque for $200 in settlement of the amount outstanding
June 13 Paid out of petty cash the following amounts:
$
Postage 5
Coffee and biscuits 10
Petrol for the business van 20
June 14 The petty cash was replenished. It is kept on an Imprest System with a limit of $50
June 16 Received $40 from a cash sale and banked it
June 18 Paid EFG Co, a trade payable $1,220 in settlement of a debt due to them
June 21 Paid salaries of $500 to Joe the bookkeeper and $350 to Sally the receptionist/ secretary by
cheque
June 26 Banked cash takings of $600
June 30 Bought a second hand office desk for $100 from Steptoe
Paid a gas bill of $150
Required
Write up an analysed cash book and petty cash book.

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 13: ANSWERS

13.1 C – The petty cash account was credited $420 but the expense was debited only $400.

13.2 C – 125 + 15 – (25 + 10)

13.3 D

13.4 Cash/petty cash

CASH BOOK – RECEIPTS

Date Narrative Folio Total Sales Cash Sundries

ledger sales
(receivables)

$ $ $ $
June 2 CMN Ltd SL6 400 400
June 16 Cash sale 40 40
June 26 Cash sale 600 600

$1,040 $400 $640

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CASH BOOK – PAYMENTS

Date Narrative Cheque Folio Total Purchase Cash Petty Salaries Sundries Parti–
no. ledger purchases cash culars
(payables)

$ $ $ $ $ $
June 3 Cash
purchases 15 140 140
June 4 Petty cash 16 50 50
June 11 RST Co 17 PL10 200 200
June 14 Petty cash 18 35 35
June 18 EFG Co 19 PL11 1,220 1,220
June 21 Salaries
– Joe 20 500 500
Salaries
– Sally 21 350 350
June 30 Steptoe 22 NL18 100 100 Office
furniture
British
Gas 23 NL31 150 150 Gas

$2,745 $1,420 $140 $85 $850 $250

PETTY CASH BOOK

Date Narrative Fo Total Date Narrative Voucher Total Office Stationery Motor
no. subsistence and running
Postage expenses

$ $ $ $ $
June 4 Bank 50
June 13 Postage 240 5 5
June 13 Coffee and biscuits 241 10 10
June 13 Garages Co 242 20 20
35 10 5 20
Balance c/d 15
$50 $50

Balance b/d 15
June 14 Bank 35

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END OF CHAPTER
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 Checkpoint 2 – Progress review
To reinforce your learning to date you should now follow the study guidance in the
following pages. On completion, your progress towards full exam preparation will be:

Take some time to reflect on the knowledge and skills you covered during Stage 2. If you feel you need further
clarification on any of the key areas listed below you can use the Interactive Text and speak to your tutor.
The Course Notes section for each chapter (starting overleaf) provides helpful guidance (and time commitments)
on how to focus your review on the key learning points in your notes.

Key messages from Stage 2

The second stage of the course introduces you to correction of errors and the banking system. Having good
double entry bookkeeping skills covered in Stage 1 is fundamental to approaching errors questions whilst a good
understanding of the banking process will assist with a variety of other chapters throughout the course.

Key knowledge
The specific areas of key knowledge covered in Stage 2 were:
 Chapter 5 continues on from Chapter 4 in the flow of information throughout the bookkeeping system
with the focus on how a trial balance is put together from the books of prime entry. You need to be able to
balance off ledger accounts and understand how these flow into the trial balance. You also need to learn
the terminology used in this chapter as narrative questions could be asked (for example what the trial
balance is). You should note that with a trial balance, total debits should always equal total credits;
this will be returned to later on in the course when looking at correcting errors in Chapter 7.
 Chapter 6 will be covered as part of your homestudy for Stage 1. This chapter highlights the similarities
and differences in a manual accounting system and a computerised accounting system. You should be
have a good understanding of data entry errors and how these can be prevented and you should also
learn the advantages and disadvantages of using computerised systems.
 Chapter 7 introduces the journal book as an additional book of prime entry for period end adjustments
and the correction of errors. Errors and the use of suspense accounts are also covered which requires a
good understanding of double entry.
 Chapters 8, 9 and 10 covered the receiving, checking, banking and recording money received which
focused on the security aspects of holding and receiving cash and the documentation to assist with
keeping accurate records of the cash within a business.
 Chapters 11 and 12 were concerned with payments from the authorisation of payments to the methods
of payment. This chapter again lends itself to being tested via narrative questions in the exam – you must
make sure you have learnt the types of payment and be able to apply this knowledge to different
scenarios to select the most appropriate method.
 Chapter 13 focused on the petty cash book. You should understand the format of the petty cash book,
what type of payment/receipt is recorded in the petty cash book and how this is post to the general
ledger. You also need an understanding of how the imprest system works for both narrative and
numerical questions.

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 CHECKPOINT 2

Key Skills
You should also understand how to 'balance off' a T-account, to find the closing balance that will feed into your
accounts at the period end. This is important in questions requiring you to find the closing balance on ledger
accounts so it's important to know the procedure for balancing off and why you are doing it.
The most important technique to take away from Stage 2 is how to identify and correct errors which requires a
good understanding of double entry. You should always approach questions using 'Should', 'Did', 'Correction'.
You should also learn the definitions of each type of error as this could be examined in narrative questions also.
You should familiarise yourself with the key methods of payment, the documentation required and the most
appropriate situations for such method.
Finally, you must ensure you know how the imprest system works both in words and numerically as well as how
to post the petty cash entries into the ledger system.

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 CHECKPOINT 2

Checkpoint 2 – Study support

Chapter 5 – Completing ledger accounts and financial statements 55 mins

Key areas
 Balancing off ledger accounts
 Trial balance
 Accounting for sales tax
 Accounting for discounts

Course Notes
 Review Lecture example 1 to make sure you are happy with balancing off ledger 5 mins
accounts and rework the trial balance to check your understanding.
 Rework Lecture examples 5, 6 and 7 as discounts and sales tax are tricky but very 10 mins
examinable areas.

Question practice
 Required question practice:
From the Course Notes try the following questions:
10 mins
Questions 5.1, 5.2 and 5.4
30 mins
Question 5.9 (Joan)

Chapter 6 – Manual and computerised systems 25 mins

Key areas
 Data entry errors
 Batch processing and controls
 Accounting systems
 Accounting modules

Course Notes
 The exam will focus on your understanding of the benefits of a computerised system 20 mins
versus a manual one and will require you to understand batch processing and accounting
modules, however you are not required to understand technical aspects of how computers
work.
 Attempt Lecture examples 1 and 2.

Question practice
 Required question practice:
From the Course Notes try the following questions:
Questions 6.1 and 6.2 5 mins

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 CHECKPOINT 2

Study support 2 (cont.)

Chapter 7 – Correction of errors 30 mins

Key areas
 The journal
 Errors
 Suspense accounts

Course Notes
 Familiarise yourself with the format and purpose of the journal as a book of prime entry 5 mins
and make sure you are comfortable with the use of journal entries to post individual
transactions (both with and without the books of prime entry).
 Re-read Section 2.1 and make sure you are happy with the definitions and examples of
5 mins
the different types of error.
 Rework Lecture examples 2 and 3 and make sure you are comfortable with each error and
the appropriate correction for the different types of question. If necessary, revisit common 10 mins
double entries from Chapter 4 or make your own list of common double entries as the
'should' column is a vital starting point.
Question practice
 Required question practice:
From the Course Notes try the following questions:
Questions 7.4, 7.5 and 7.8 10 mins

Chapter 8 – Receiving and checking money 20 mins

Key areas
 Security considerations
 Types of receipt
 Remittance advices

Course Notes
 Review security considerations and make sure you have understood how important these 5 mins
are for businesses holding and receiving cash.
 Ensure you can identify and explain each of the types of receipt and the procedures
around them and the documentation that is involved. 5 mins

Question practice
 Required question practice:
From the Course Notes try the following questions:
Questions 8.1–8.5 10 mins

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 CHECKPOINT 2

Study support 2 (cont.)

Chapter 9 – Banking monies received 30 mins

Key areas
 Banking systems
 The banker/customer relationship
 Banking receipts

Course Notes
 Re-read Section 2.1 and make sure that you are confident about the key areas and the 10 mins
purpose of the clearing system.
 Learn the different banker/customer relationships in Section 3. 5 mins
 Review the procedures and understand the differences for different types of receipt. 10 mins

Question practice
 Required question practice:
From the Course Notes try the following questions:
Questions 9.1–9.3 5 mins

Chapter 10 – Recording monies received 20 mins

Key areas
 Controls over recording receipts
 Posting receipts

Course Notes
 Review Sections 1 and 2 and make sure you are happy with the controls that a business 5 mins
may put in place over recording receipts.
 Rework Lecture example 1 as you should be confident with posting transactions which 10 mins
include sales tax and discounts from the cash book to the general ledger.

Question practice
 Required question practice:
From the Course Notes try the following questions:
Questions 10.1–10.2 5 mins

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Study support 2 (cont.)

Chapter 11 – Authorisation and making payments 20 mins

Key areas
 Controls over payments
 Posting payments
 Automated credit systems

Course Notes
 Review Section 2 as you should be comfortable with the controls a business may put in 5 mins
place over payments.
 Re-read Sections 3 and 4 paying particular attention to the required information to be
recorded in the documentation for different types of payment. Consider situations in
10 mins
which certain payment methods would be more appropriate than others.

Question practice
 Required question practice:
From the Course Notes try the following questions:
Questions 11.1–11.3 5 mins

Chapter 12 – Recording payments 30 mins

Key areas
 Controls over payments
 Automated credit systems

Course Notes
 Review Section 1 and make sure you are happy with the controls that a business may put 5 mins
in place over recording payments.
 Rework Lecture example 1 as you should be confident with posting transactions which 10 mins
include sales tax and discounts from the cash book to the general ledger.
 Make sure you are comfortable with the types of payments that may involve automated 5 mins
credit systems and the benefits of using such systems.

Question practice
 Required question practice: 10 mins
From the Course Notes try the following questions:
Questions 12.1–12.4

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Study support 2 (cont.)

Chapter 13 – Maintaining petty cash records 40 mins

Key areas
 Security of petty cash
 Types of payments/receipts
 The imprest system
 Recording petty cash expenses

Course Notes
 Review Section 3 and make sure you are happy with the controls that a business may put 5 mins
in place over the petty cash system.
 Re-read Section 4 on the imprest system. You should be comfortable with how the 5 mins
system works as this could be examined numerically as well as through narrative
questions.
 Rework Lecture example 1 making sure you are happy with the double entry posting of the 10 mins
petty cash expenses to the general ledger.

Question practice
 Required question practice: 20 mins
From the Course Notes try the following questions:
Questions 13.1, 13.2 and 13.4

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 Bank reconciliations

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Identify and deal with cash book discrepancies
 Reconcile a bank statement with the cash book

Exam context
Exam questions are likely to ask you to perform calculations to prepare a bank reconciliation. Other questions may
require you to identify reasons for differences between the cash book and bank statement.

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Overview

Bank reconciliations

Cash book balance Bank statement balance

Differences

Timing differences Errors by the business Errors by the bank

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1 Introduction
1.1 The cash book is used to record the detailed transactions of receipts and payments affecting
the bank account. Those are then posted to the nominal ledger periodically. At the end of
each accounting period, the balance on the cash book should equal the balance in the
nominal ledger cash/bank account.
1.2 As an extra control over the cash figure it should be possible to agree it to an independent
figure provided by the bank statement. This is not always a straightforward agreement as
there are many reasons why the two figures may not be exactly the same. Therefore, we
need to produce a reconciliation.

Aims of reconciliation
1.3 The aim of the reconciliation is to prove the:
 Completeness
 Accuracy
 Validity
of cash receipts and payments.

2 How the reconciliation works

2.1 Most businesses will perform bank reconciliations on a regular basis – weekly, monthly –
depending on the number of transactions affecting the bank account.

2.2 The balance on the cash account (which should be the same as the balance in the cash
book) is compared to the balance on the bank statements at a given date.

2.3 Why are there differences between the cash book balance and the bank statement?
(a) Time lag between writing a cheque and the payment appearing on the bank
statement (unpresented cheques)
(b) Time lag between paying amounts into the bank account and these appearing on the
bank statement (unrecorded lodgements)
(c) Direct debits and standing orders are not yet recorded in the cash account (or cash
book)
(d) Bank charges not recorded in the cash account (or cash book)
(e) Errors, such as transposition errors, or miscastings in the cash account (or cash
book)
(f) Errors made by the bank on the bank statement (rare)

2.4 The cashier will tick off all the items that appear in both the cash book and the bank
statement.

2.5 Unticked items means either of two things:

(a) The cash account (and cash book) balances need to be amended.
(b) The bank statement balances need to be amended.
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Recommended approach
2.6 (a) It is very important to follow a set approach.
(b) Overdrafts, withdrawals and payments are put in brackets.
(c) Think of cash from the point of view of the business (not the bank).
(d) Remember a positive balance is a debit in the business's books but a credit in the
bank's records. Conversely, an overdraft is a credit in the business's accounts, but a
debit from the bank's point of view.

Proforma bank reconciliation

2.7
CASH ACCOUNT (CASH BOOK)

Balance b/d X Dishonoured cheque X

Bank charges X
Standing orders X
Direct debits X
Under cast error in balance b/d X Balance c/d X
X X

$
Balance per bank statement X

Less unpresented cheques (X)

RECONCILE
Plus unrecorded lodgements X

Plus/less bank errors X/(X)

Balance per adjusted cash account X

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2.8
CASH BOOK
Date Details Folio Total Date Cheque No. Folio Total
$ $
1.3.X0 Balance b/d 10,469 2.3.X0 11477 54
4.3.X0 Cash sales 5,114 3.3.X0 11478 119
11.3.X0 Cash sales 4,937 5.3.X0 11479 1,333
18.3.X0 Cash sales 6,065 5.3.X0 11480 640
25.3.X0 Cash sales 5,839 8.3.X0 Salaries direct debit 1,704
8.3.X0 11481 70
8.3.X0 11482 6,184
15.3.X0 11483 307
15.3.X0 Salaries direct debit 1,819
18.3.X0 11484 2,017
21.3.X0 11485 538
22.3.X0 11486 400
22.3.X0 Salaries direct debit 1,799
25.3.X0 11487 35
26.3.X0 11488 620
28.3.X0 11489 1,148
30.3.X0 11490 223
31.3.X0 Balance c/d 13,414
32,424 32,424
BANK STATEMENT: A/C 199204379
Debit Credit Total
$

1.3.X0 Balance b/d 10,469 Cr

4.3.X0 Chq 11478 119 10,350 Cr
5.3.X0 Chq 11477 54 10,296 Cr
7.3.X0 Sundries 5,114
Chq 11479 1,333
Chq 11480 640 13,437 Cr
8.3.X0 Salaries (DD) 1,704 11,733 Cr
12.3.X0 Chq 11482 6,184 5,549 Cr
14.3.X0 Sundries 4,937 10,486 Cr
15.3.X0 Salaries (DD) 1,819 8,667 Cr
18.3.X0 Chq 11483 370 8,297 Cr
19.3.X0 Charges 27 8,270 Cr
21.3.X0 Sundries 6,065 14,335 Cr
22.3.X0 Salaries (DD) 1,799
Chq 11484 2,017 10,519 Cr
27.3.X0 Chq 11487 35 10,484 Cr
29.3.X0 Salaries (DD) 1,808 8676 Cr
30.3.X0 Chq 11486 400
Chq 11488 620 7,656 Cr
31.3.X0 Balance c/d 7,656 Cr

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The opening balances agree. Go through and tick off the items one against another. You
should be left with unticked items which explain the $5,758 difference between the closing
balances, ie the reconciling items.

Lecture example 1
Required
Using the bank statement and cash book prepare a bank reconciliation as at 31 March 20X0.
CASH ACCOUNT
$ $
Balance b/d 13,414

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RECONCILIATION AS AT 31.3.X0
$ $
Balance per bank statement

less unpresented cheques

plus unrecorded lodgements

plus/less bank errors

Balance per adjusted cash account

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3 Chapter summary
Section Topic Summary
1 Introduction A bank reconciliation is a comparison between the bank
balance per the books of the business and the balance
appearing on the bank statement.
The bank reconciliation will identify errors or omissions
and is a useful control over cash receipts and payments.
2 How the reconciliation The bank reconciliation is produced by checking all of the
works items on the bank statement to the cash book to ensure
that they have all been recorded.
Any items not in the cash book will then need to be
recorded and the cash book updated.
The balance per the bank statement must then be
adjusted for any timing differences (unrecorded
lodgements and outstanding cheques) or errors by the
bank.

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Overview summary

Bank reconciliations

Cash book balance Bank statement balance

 Business' records of the cash held by  Bank's records of the cash held by the
the business at any point in time business at any point in time

Differences

Timing differences Errors by the business Errors by the bank

 Items in the cash book not currently on  Items on the bank statement  Rare, for example charges
the bank statement, for example but omitted by the business, incorrectly debited
unpresented cheques and unrecorded for example bank charges and  Adjust bank statement balance
lodgements direct debits
 Adjust bank statement balance  Adjust cash book balance

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14.1 Your cash book at 31 December 20X2 shows a bank balance of $25. On comparing this with your bank
statement at the same date, you discover the following:
A cheque for $575 drawn by you on 29 December 20X2 has not yet been presented for payment.
A cheque for $192 from a customer that has cleared during December was recorded as $291 in the cash
book.
The correct bank balance to be shown in the statement of financial position at 31 December 20X2 is:
A $74
B $74 overdrawn
C $649 overdrawn
D $550 overdrawn
(2 marks)
14.2 A business's cash book shows a credit balance of $5,275 at 30 September 20X6. Upon comparison with
the bank statement, you determine that there are unpresented cheques totalling $420, and a receipt of
$130 which has not yet cleared the bank account. The bank statement shows charges of $65 which have
not yet been entered into the cash book.
The balance on the bank statement is:
A $5,630
B $5,050 overdrawn
C $5,630 overdrawn
D $5,050
(2 marks)
14.3 Which of the following is not a valid reason for the cash book and bank statement failing to agree?
A Timing differences
B Bank error
C Bank interest
D Cash payments posted to receivables
(2 marks)
14.4 Bhavinder's bank statement showed a debit balance of $5,600. When Bhavinder was preparing his bank
reconciliation he found the following:
– Outstanding lodgements $8,200
– Unpresented cheques $9,700
What is the cash balance that should be recorded in Bhavinder's financial statements?
A $4,100 credit
B $4,100 debit
C $7,100 credit
D $7,100 debit
(2 marks – December 2011 exam question)

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14.5 The balance on Max's bank statement was $5,460 credit. Max had unpresented cheques of $1,230 and
outstanding lodgements of $870.
What should be the balance on the bank account in Max's general ledger?
A $5,100 debit
B $5,100 credit
C $5,820 debit
D $5,820 credit
(2 marks – June 2012 exam question)
14.6 A company's bank statement shows an overdraft of $3,204 at 31 March 20X7. The statement includes
bank charges of $46 which have not yet been recorded in the company's cash book. The statement does
not include cheques for $780 paid to suppliers, nor an amount of $370 received from a receivable; both of
these amounts appear in the bank statement for April 20X7.
The figure for the bank overdraft at 31 March 20X7 should be:
A $2,748
B $2,794
C $3,614
D $3,660

(2 marks)

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Note. The following question has been included specifically to aid your understanding of bank reconciliations. It
is not in the format of an exam question.
14.7 Rectify
A summary of the cash book of Rectify Co for the year to 31 May 20X5 is as follows:
CASH BOOK
$ $
Opening balance b/f 805 Payments 146,203
Receipts 145,720 Closing balance c/f 322
146,525 146,525
After some investigation of the cash book and vouchers you discover the following:
(1) Bank charges of $143 shown on the bank statement have not yet been entered in the cash book.
(2) A cheque drawn for $98 has been entered in the cash book as $89, and another drawn at $230
has been entered as a receipt.
(3) A cheque received from a customer for $180 has been returned by the bank marked 'refer to
drawer', but it has not yet been written back in the cash book.
(4) An error of transposition has occurred in that the opening balance of the cash book should have
been brought down at $850.
(5) Cheques paid to suppliers totalling $630 have not yet been presented at the bank, whilst
payments in to the bank of $580 on 31 May 20X5 have not yet been credited to the company's
account.
(6) A cheque for $82 has been debited to the company's account in error by the bank.
(7) The company owes $430 to the electricity board.
(8) Standing orders appearing on the bank statement have not yet been entered in the cash book:
(i) Interest for the half year to 31 March on a loan of $20,000 at 11% pa
(ii) Hire purchase repayments on the managing director's car: 12 months at $55 per month
(iii) Dividend received on a trade investment: $1,147
(9) A page of the receipts side of the cash book has been undercast by $200.
(10) The bank statement shows a balance overdrawn of $870.
Required
(a) Adjust the cash book in the light of the above discoveries.
(b) Reconcile the bank statement balance to the cash book balance.

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14.1 B
CASH BOOK

Balance b/d 25 Error (291 – 192) 99

Balance c/d 74
99 99
Balance b/d 74

14.2 B
CASH BOOK

Balance c/d 5,340 Balance b/d 5,275

Bank charges 65
5,340 5,340
Balance b/d 5,340

Balance per bank statement (Bal fig.) (5,050)

Less unpresented cheques (420)
Add unrecorded lodgements 130
(5,340)

14.3 D

14.4 C
Balance per bank statement (5,600)
Outstanding lodgements 8,200
Unpresented cheques (9,700)
(7,100) overdrawn balance (credit)
Remember – When the bank statement shows a debit balance this means you are overdrawn and you
owe the bank money.

14.5 A
$
Balance per bank statement 5,460
Outstanding lodgements 870
Unpresented cheques (1,230)
5,100 debit

14.6 C
$
Bank balance per bank statement (3,204) OD
Unpresented cheques (780)
Outstanding lodgements 370
 per balance sheet (3,614)

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14.7 Rectify

(a)
CASH BOOK
$ $
Balance b/d 322 Bank charges (1) 143
Cheque drawn entered
as $89 (2) 9
Cheque drawn entered
as receipt (2) 460
Error in opening balance (4) 45 Cheque returned
written back (3) 180
Dividend received (8iii) 1,147 Loan interest (8i) 1,100
Undercast (9) 200 HP repayments (8ii) 660
Balance c/f 838
$2,552 $2,552

(b) Bank reconciliation statement as at 31 May 20X5

$ $
Balance per bank statement (10) (870) O/D
Less cheques not yet presented (5) (630)
(1,500) O/D
Add receipts not yet credited (5) 580
cheque wrongly debited by bank (6) 82
662
Balance per cash book (838) O/D

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END OF CHAPTER
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 Sales and sales returns
day books

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Record sales transactions and account for the various types of discount including the sales tax effect where
applicable
 Prepare the financial documents to be sent to credit customers

Exam context
A good understanding of the flow of information from source document to general ledger accounts is fundamental to this
exam. Exam questions could be narrative or numerical to test you on the posting from books of prime entry to ledger
accounts.

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Overview

Sales and sale returns day

books

Sales day book Sale returns day book

Coding

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1 What is the sales day book?

1.1 The sales day book lists the invoices raised by a business when it supplies goods or
services on credit. It is a book of prime entry.

2 What is the sales returns day book?

2.1 The sales returns day book lists the credit notes raised when goods are returned. It is also
a book of prime entry.

3 Coding data
3.1 Various coding systems can be used to classify, sort and analyse financial transactions.

Lecture example 1
Required
Explain the key characteristics of the following types of codes that may be used in a ledger system.

Solution

(a) Sequence codes

(b) Block codes

(c) Significant digit codes

(d) Hierarchical codes

(e) Faceted codes

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4 Posting the daybook totals

4.1 It is important that in addition to entering items in the books of prime entry every transaction
with customers sold to on credit needs to be posted to the receivables ledger.
This is outside the double entry system.

4.2 Sales day book

DR Receivables
CR Sales
CR Sales tax account

4.3 Sales returns day book

DR Sales tax account
DR Returns account/sales account
CR Receivables

5 Chapter summary
Section Topic Summary
1 What is the sales day A book of prime entry which lists invoices raised by the
book? business when it supplies goods or services on credit
2 What is the sale returns A book of prime entry which lists credit notes raised when
day book? goods are returned.
3 Coding data Accounting systems rely on coding systems to classify,
sort and analyse financial transactions.
4 Posting the daybook Transactions are initially recorded in the books of prime
totals entry.
In addition the receivables ledger must also be updated.
The totals of the sales day book and sale returns day book
are posted to the general ledger accounts using double
entry.

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Overview summary

Sales and sale returns day

books

Sales day book Sale returns day book

DR Receivables Dr Sales
CR Sales Dr Sales tax
CR Sales tax Cr Receivables
Coding

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 15: QUESTIONS

15.1 Toby sells televisions. He uses the following coding system for his financial transactions:
1st number 2nd number
100 Purchases 300 Cash
200 Sales 400 Payables
500 Receivables
Toby sells a television worth $1,000 for cash to Bobby.
Which of the following would be the code recorded in Toby's accounting system?
A 100300
B 100400
C 200300
D 200500
(2 marks)
15.2 Sarah is sales tax registered trader. Her sales day book shows sales of $4,000, net of sales tax at
17.5%.

What double entry will Sarah post at the end of her day's trading?

A Dr Receivables $4,000 Cr Sales $4,000

B Dr Receivables $4,700 Cr Sales $4,700
C Dr Receivables $4,700 Cr Sales $4,000, Cr Sales tax $700
D Dr Sales $4,700 Cr Receivables $4,000, Cr Sales tax $700
(2 marks)

15.3 A debit entry to the sales account could represent:

A Cash sales
B Credit sales or the correction of an error
C Irrecoverable debts written off
D The correction of an error or goods returned
(2 marks)

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 15: ANSWERS

15.1 C

15.2 C

15.3 D

END OF CHAPTER
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 The receivables ledger

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Prepare financial documents to be sent to credit customers including statements of account
 Understand the purpose of an aged receivables analysis
 Produce statements of account to be sent to credit customers
 Explain the need to deal with discrepancies quickly and professionally
 Prepare the receivables control account or receivables ledgers by accounting for irrecoverable debts and
allowances for irrecoverable debts including any effect of sales tax where applicable

Exam context
You should have a good understanding of the aged receivables analysis as this is a popular exam topic and an area that
has been performed poorly in recent exam sittings. Questions could be narrative, based on the understanding of the
purpose of such reports, or numerical.

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Overview

Receivables ledger

Offering credit Irrecoverable debts

Age analysis of Allowances for receivables

receivables

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1 Receivables ledger
1.1 The receivables ledger keeps a record of how much money each individual credit customer
owes.
1.2 Entries in the receivables ledger:
(a) Invoices
(b) Returns
(c) Payments from customers
1.3 The receivables ledger accounts are written up as follows:
(a) When invoices are entered into the sales day book they are also entered as a DEBIT
to the receivables ledger.
(b) When entries are made in the cash book for payments from customers or in the sale
returns day book for goods returned, they are also entered as a CREDIT to the
receivables ledger.

2 Offering credit to customers

2.1 Most business buy and sell to one another on credit terms. Ideally a business wants to
collect cash in from customers as quickly as possible but delay paying suppliers for as long
as possible.
2.2 When a business offers credit to its customers it needs to ensure as far as possible that it
will receive payment. Authorisation procedures and limits are put in place to assist.
2.3 The costs involved in offering credit include interest costs of an overdraft if customers pay
late, costs of chasing payment and possibly court costs.
2.4 A credit control function helps to ensure that receivables pay on a timely basis and that any
late payers are followed up promptly.

3 Age analysis of receivables

3.1 The age analysis of receivables is a useful tool for the credit controller to establish which
receivables require following up.

3.2 A list of balances extracted from the receivables ledger will tell us how much each
customer owes but not how long it has been outstanding.

Example
3.3
$
A Co 20,000
B Co 7,000
C Co 11,000
38,000

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3.4 The action taken by the credit control function – ie a polite letter or the commencement of
legal action – will depend on how overdue a debt has become. From the example above we
do not know if A Co always pays up and has only owed $20,000 for the past few days or if
C Co has owed $11,000 for the past year.

3.5 In order to get sufficient information for credit control an age analysis of receivables must be
prepared.

Age analysis of receivables – proforma

3.6
Account Customer Credit Balance Up to 30 Up to 60 Up to Over 90
No Name limit days days 90 days
days
B189 Bertrams 1,000 787.90 401.60 297.63 88.67 –
Bassets
F604 Florence & 1,500 1,280.70 690.48 – – 590.22
Sons
L079 Lavache 1,000 538.00 69.48 240.00 179.60 48.92
Q904 Quince & 2,500 2,408.79 1,907.60 501.19 – –
Sons
T201 Titania 500 490.68 96.80 – – 393.88

Totals 5,506.07 3,165.96 1,038.82 268.27 1,033.02

Percentage 100% 57.5% 18.9% 4.8% 18.8%

3.7 The report analyses the total balances of each customer across different columns according
to the dates of the transactions to make up the total balance. Computerised systems will be
able automatically to produce such a report from the sales ledger.
Many aged debt reports will also include a column showing the credit limit.

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Lecture example 1
Customer Ledger: RST Co: Credit limit $2,000
Date Invoice Total Date Invoice/Credit Total
28.2.X9 Inv 086 240 10.4.X9 CN 005 (Inv 111) 50
1.3.X9 Inv 111 300 15.4.X9 Cheque (Inv 111) 250
5.4.X9 Inv 119 160 31.6.X9 Balance b/d 1,690
15.4.X9 Inv 123 450
20.4.X9 Inv 146 220
2.5.X9 Inv 229 180
10.6.X9 Inv 312 440
1,990 1,990
Required
Prepare an aged receivables report extract as at 30.6.X9 for RST Co, using the following proforma:

Solution
Customer Credit Balance Current Up to 60 Up to 90 Over 90
Name Limit up to 30 days days days
days

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4 Irrecoverable debts
4.1 Some debts may need to be written off as 'irrecoverable debts' as there is no real prospect
of them being paid, often due to the bankruptcy.

4.2 The general ledger entry to write off the debt is:
DR Irrecoverable debts account (expense)
CR Receivables

4.3 The memorandum account must also be updated.

4.4 Sales tax may be able to be claimed back on irrecoverable debts.

5 Allowances for receivables

5.1 When a business expects irrecoverable debts amongst its current receivables but does not
yet know which specific receivables will be irrecoverable it can make an allowance for
receivables. Allowances may be calculated as a percentage of receivables which are not
expected to be recovered after irrecoverable debts have been written off based on past
experience.
Balance c/d X
Irrecoverable debts (X)
Total receivables outstanding X
X% = allowance for receivables

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6 Chapter summary

Section Topic Summary

1 Receivables ledger The receivables ledger contains personal accounts for
each individual credit customer detailing amounts owed to
the business at any point in time.
2 Offering credit to Business often buy and sell on credit and must manage
customers the credit offered to customers to keeps the associated
risks and costs to a minimum.
The credit control function reviews receivables and takes
appropriate action to ensure prompt payment.
3 Age analysis of A useful tool for a credit controller when deciding upon the
receivables appropriate action to take for a particular receivable.
It also provides a general guide as to whether the debts of
a business are being collected quickly enough.
4 Irrecoverable debts Some debts may need to be written off as they are
considered to be irrecoverable usually due to bankruptcy.
5 Allowances for Allowances can be made where a business cannot yet
receivables identify which receivables will be irrecoverable.

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Overview summary

 Personal accounts
Receivables ledger  Credit customers
 Memorandum ledgers – not part of
the double entry process

Offering credit Irrecoverable debts

Age analysis of Allowances for receivables

receivables

 Listing of receivables balances

 Categorised by age
 Used to decide action to take
regarding collection of receivables

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 16: QUESTIONS

16.1 The following statements relate to the age analysis of receivables:

(1) The age analysis of receivables is used by organisations to tell them the date when they need to
pay suppliers.
(2) The age analysis of receivables is used by organisations when a customer has breached their
credit limit.
Statement 1 Statement 2
A Correct Correct
B Correct Incorrect
C Incorrect Correct
D Incorrect Incorrect
(2 marks – December 2011 exam question)
16.2 Which of the following in relation to the age analysis of receivables is/are correct?
(1) It is an analysis of the credit periods allowed to each individual customer.
(2) It shows how old the supplier balances are.
Statement 1 Statement 2
A Correct Correct
B Correct Incorrect
C Incorrect Correct
D Incorrect Incorrect
(2 marks – June 2012 exam question)

16.3 A debit balance of $3,000 brought down on A Co's account in B Co's books means that:
A A Co is owed $3,000 by B Co.
B B Co is owed $3,000 by A Co.
C B Co has sold $3,000 of goods to A Co.
D A Co has sold $3,000 of goods to B Co.
(2 marks)

16.4 Which one of the following occurrences might explain the existence of a credit balance on an individual
receivable's account?
A The bookkeeper failed to make a posting from the returns inwards book to the receivables ledger.
B The receivable took advantage of a settlement discount, as expected, and paid less than the full
amount invoiced.
C The bookkeeper failed to post an invoice from the sales day book to the receivables ledger.
D The bookkeeper posted a total from the returns inwards book to the receivables control account
twice by mistake.
(2 marks)

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 16: ANSWERS

16.1 D – The age analysis of receivables is used to show the date when receivables are due to be paid by
customers, giving information about which receivable balances are overdue.

16.2 D

16.3 B

16.4 D

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 Purchase and purchase
returns day book

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Record purchase transactions taking into account the impact on the sales tax ledger account where applicable
 Enter supplier invoices and credit notes into the appropriate books of prime entry

Exam context
A good understanding of the flow of information from source document to general ledger accounts is fundamental to this
exam. Exam questions could be narrative or numerical to test you on the posting from books of prime entry to ledger
accounts.

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Overview

Purchases and purchase

returns day books

Purchases day book Purchase returns day

book

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1 What is the purchase day book?

1.1 The purchase day book lists the invoices received by a business from its credit suppliers. It
is a book of prime entry.

2 What is the purchase returns day book?

2.1 The purchase returns day book lists the credit notes received when goods are returned to
suppliers. It is also a book of prime entry.

3 Posting the day book totals

3.1 In addition to entering each item in the day books every transaction with suppliers
purchased on credit needs to be posted to the payables ledger.
This is outside the double entry system.

3.2 Purchase day book

DR Purchases
DR Sales tax account (if recoverable)
CR Payables

3.3 Purchase returns day book

DR Payables
CR Sales tax account
CR Returns / purchases

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4 Chapter summary

Section Topic Summary

1 What is the purchase A book of prime entry which lists invoices received from
day book? credit suppliers when it purchases goods or services on
credit.
2 What is the purchase A book of prime entry which lists credit notes received
returns day book? when goods are returned to suppliers.
3 Posting the day book Transactions are initially recorded in the books of prime
totals entry.
In addition the payables ledger must also be updated.
The totals of the purchase day book and purchase returns
day book are posted to the general ledger accounts using
double entry.

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Overview summary

Purchases and purchase

returns day books

Purchases day book Purchase returns day

book

Dr Purchases Dr Payables
Dr Sales tax Cr Purchases
Cr Payables Cr Sales tax

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 Chapter 17: Questions

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 17: QUESTIONS

17.1 Which one of the following would you expect to see in a purchase day book?
A Cash payments
B Invoices received from suppliers
C Cash purchases
D Personal accounts
(2 marks)
17.2 A business received a credit note for goods returned that had originally cost $120 inclusive of sales tax at
a rate of 20%. Which of the following is the correct double entry?
A Dr Purchases 100, Dr Sales tax 20 Cr Payables 120
B Dr Payables 120 Cr Purchases 100, Cr Sales tax 20
C Dr Purchases 96, Dr Sales tax 24 Cr Payables 120
D Dr Payables 120 Cr Purchases 96, Cr Sales tax 24
(2 marks)

17.3 If a purchase return of $150 has been wrongly entered on the debit side of the sales returns account, but
correctly entered in the supplier's account, the totals on the trial balance would show:
A The debit side to be $150 more than the credit side
B The debit side to be $300 more than the credit side
C The debit side to be $150 less than the credit side
D The debit and credit sides to be equal in value
(2 marks)

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 Chapter 17: Answers

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 17: ANSWERS

17.1 B

17.2 B

17.3 B

END OF CHAPTER
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 The payables ledger

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Prepare remittance advices to accompany payments to suppliers
 Produce statements of account to be sent to credit customers
 Explain the need to deal with discrepancies quickly and professionally
 Prepare the payables control account or payables ledgers by accounting for payments to suppliers including
checking the accuracy and validity of the payment against relevant supporting information

Exam context
Narrative questions are likely to require an understanding of the purpose of different documents used in credit purchases
whilst numerical questions could involve calculation of supplier statement reconciliations or demonstration of the
understanding of the causes for numerical differences.

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 18: THE PAYABLES LEDGER

Overview

Payables ledger

Payment of suppliers Contra

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 18: THE PAYABLES LEDGER

1 Payables ledger
1.1 The payables ledger keeps a record of how much money is owed to each credit supplier.

1.2 Entries in the payables ledger:

(a) Invoices received
(b) Returns
(c) Payments to suppliers
(d) Discounts received

1.3 Debit balances are unusual but may arise in the payables ledger. This could be due to an
overpayment of the supplier balance or receipt of a credit note after full payment has been
made.

2 Payments to suppliers
Statement of account
2.1 A supplier will usually send a monthly statement showing invoices issued, credit notes,
payments received and discounts given.
It is important they are reconciled with the business' own records so that discrepancies can
be identified and errors corrected
2.2 Procedure:
(1) Tick off items which appear on statement and purchase ledger.
(2) Deal with reconciling items:
(i) Payment in transit (payments sent by you but not yet received by supplier)
(ii) Omitted invoices and credit notes
(iii) Other errors – casting

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Management of creditors
Objectives
2.3 To maximise credit periods but not:
(1) Jeopardise relationships with suppliers
(2) Optimise inventory levels – ie business keeps minimum levels of inventory to run
business efficiently

Practical steps
2.4 (i) Negotiate credit terms with suppliers.
(ii) Have regular meetings with suppliers.
(iii) Share information on suppliers with others.
(iv) If cash flow tight – pay smaller balances first.
(v) Choose payment method carefully. Interbank transfer is easier but cheque payments
have cash flow advantages.

3 Contra entries with the receivables ledger

3.1 Sometimes a business might both purchase goods from and sell goods to the same person
on credit.

3.2 Separate accounts will exist in receivables and payables ledgers.

3.3 If they decide to settle net this will be a contra the amount is always the smaller amount
DR Payables 
 in the general ledger
CR Receivables 
In the receivables and payables ledgers a contra entry must also be made.

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4 Chapter summary

Section Topic Summary

1 Payables ledger The payables ledger contains personal accounts for each
individual credit supplier detailing amounts owed at any
point in time.
2 Payments to suppliers Suppliers usually send a monthly statement of account
which needs to be compared to the records of the
business.
Credit periods should be maximised without impacting on
the relationship with the suppliers.
3 Contra entries with the Contra entries 'net off' amounts due to and from the same
receivables ledger supplier.

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Overview summary

 Personal accounts
Payables ledger  Credit suppliers
 Memorandum ledgers – not part of
double entry process

Payment of suppliers Contra

 Maximise credit periods  Settlement of payables and

 Maintain relationship with suppliers receivables on a net basis where
 Optimise inventory levels supplier is a customer also
 DR Payables
CR Receivables

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 18: QUESTIONS

18.1 A supplier sends you a statement showing a balance outstanding of $14,350. Your own records show a
balance outstanding of $14,500.
The reason for this difference could be that:
A The supplier sent an invoice for $150 which you have not yet received
B The supplier has allowed you $150 trade discount on a credit purchase which you had omitted to
deduct when entering the transaction in your ledger
C You have paid the supplier $150 which he has not yet accounted for
D You have returned goods worth $150 which the supplier has not yet accounted for
(2 marks)
18.2 A owes B $500 and B owes A $350. If A and B decide to settle the debts net which of the following is the
correct contra entry in A's books:
A Dr Payables 350 Cr Receivables 350
B Dr Payables 150 Cr Receivables 150
C Dr Receivables 350 Cr Payables 350
D Dr Receivables 150 Cr Payables 150
(2 marks)

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 18: ANSWERS

18.1 B

18.2 A

END OF CHAPTER
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 Control accounts

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Outline the tools and techniques used to process accounting transactions and period end routines and consider
how errors are identified and accounted for
 Prepare the receivables control account or receivables ledgers by accounting for:
(i) Sales
(ii) Sales returns
(iii) Payments from customers
 Prepare the payables control account or payables ledgers by accounting for:
(i) Purchases
(ii) Purchase returns
(iii) Payments to suppliers
(iv) Settlement discounts
 Describe the purpose of control accounts as a checking devise to aid management and help identify
bookkeeping errors
 Explain why it is important to reconcile control accounts regularly and deal with discrepancies quickly and
professionally
 Reconcile the balance on the receivables control account with the list of balances
 Reconcile the balance on the payables control account with the list of balances

Exam context
Questions on this chapter are likely to require you to calculate a reconciliation or to identify the reason for reconciling
items from a list provided.

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Overview

Control accounts

Receivables ledger control account Receivables ledger

Payables ledger control account Payables ledger

Reconciliations

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 19: CONTROL ACCOUNTS

1 Introduction
1.1 This chapter is designed to enable you to:
 Identify errors including the preparation of control accounts reconciliations

1.2 Receivables and payables are both recorded in two places:

(a) The memorandum receivables ledger and payables ledger where balances are
maintained for individual customers and suppliers (not part of the double entry
system)
(b) The general ledger:
(i) Receivables account
(ii) Payables account

1.3 Both these records are posted from the same source documents and contain the same
information.

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2 Main entries in control accounts

2.1 The following diagrams use the credit sales (and related cash receipts) cycle to illustrate the
main flow of entries.

CREDIT SALES CYCLE

BOOKS OF PRIME MEMORANDUM
RECEIVABLES
INVOICE INVOICE INVOICE
LEDGER $
$ $ $
Receivable A
A B C SDB 5

5 15 10
Receivable B
SDB 15

SALES DAY BOOK

Receivable C
INVOICE A
5 SDB 10
INVOICE B 15
INVOICE C 10

TOTAL 30 TOTAL 30 Dr

RECONCILE
GENERAL LEDGER $

SALES ACCOUNT
DOUBLE
ENTRY
SDB 30

DR RECEIVABLES SLCA
CR SALES

SDB 30

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CASH BOOK RECEIPTS

RECEIVABLES
LEDGER
Receivable A
CASH BOOK SDB 5 CB 5

NARRATIVE TOTAL SALES CASH

CAPITAL
LEDGER SALES
Receivable B

PAYMENT A 5 5 SDB 15

PAYMENT C 10 10

Receivable C
CASH SALE 10 10
SDB 10 CB 10
25 15 10

DR CR CR
CASH SLCA SALES
TOTAL 15

(and credit individual accounts in the sales ledger)

GENERAL
LEDGER
CASH ACCOUNT SALES ACCOUNT

SDB 30
CB 25
SLCA CB 10

SDB 30 CB 15
bal cd 15
30 30
bal bd 15

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3 Control account reconciliations

3.1 If we add up the balances in the receivables/payables ledgers, they should agree with the
receivables/payables balances in the general ledger.
If not, an error must have occurred at the same point in the system. Refer back to the
diagrams in Paragraph 2.1 to understand the effect of different types of error.

Types of error
3.2 Receivables/payables (general ledger):
(a) Over/undercast SDB, PDB, CB
(b) Transposition error in posting total from SDB/PDB/CB to general ledger
(c) Entry omitted from SDB/PDB/CB

3.3 List of balances (receivables/payables ledger):

(a) Omit balance from the list
(b) List a debit balance as a credit (and vice versa)
(c) Transposition error in filling ledger from books of prime entry

3.4 Both the lists of balances and receivables/payables:

(a) Details being incorrectly recorded on the original source documentation, ie
sales/purchase invoice
(b) Loss of original source documentation so it is not recognised anywhere in the system

3.5 Proforma receivables account reconciliation:

RECEIVABLES
$ $
Balance b/d X Transposition error in X
posting
Sales day book undercast X
Sales omitted from SDB X Balance c/d X
X X

Balance b/d X

Reconciliation statement
$ $ $
+ –
Total per listing of receivables ledger balances X
Adjustments:
Balance omitted X
Credit balance listed as debit (2X)
X X X
Balance as per adjusted control account
X

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3.6 Proforma payables account reconciliation:

PAYABLES
$ $
Transposition error in posting X Balance b/d X
Purchase day book undercast X
Balance c/d X Purchases omitted from PDB X
X X

Balance b/d X

Reconciliation statement
$ $ $
+ –
Total per listing of payables ledger balances X
Adjustments
Balance omitted X
Debit balance listed as credit (2X)
X X X
Balance as per adjusted control account
X

Lecture example 1
Balances and transactions affecting a company's control accounts for the month of July 20X0 are
listed below.
Balances at 1 July 20X0 $
Receivables ledger 8,912 (debit)
Payables ledger 4,402 (credit)

Transactions during July 20X0:

Purchases on credit 18,135
Returns to suppliers 629
Receipts from customers by cheque 27,370
Sales on credit 36,755
Discounts received 1,105
Payments to creditors by cheque 15,413
Contra settlements 3,046
Returns from customers 2,452
Customers' cheques dishonoured 489
Cash receipts from credit customers 10,707
Refunds to customers for overpayment of accounts 53

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Required
Post the receivables and payables accounts for the month of July 20X0 and derive the respective
debit and credit closing balances on 31 July 20X0.

Solution
RECEIVABLES

PAYABLES

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4 Chapter summary
Section Topic Summary
1 Introduction Control accounts are maintained to assist in the
identification and subsequent correction of errors in the
bookkeeping of receivables and payables.
2 Main entries in control Receivables and payables are both recorded in two places
accounts from the same source documents:
 Memorandum ledgers
 General ledger accounts
All transactions relating to credit customers or suppliers
must be updated in both the memorandum ledgers and the
general ledger accounts including discounts and contras.
3 Control account If the balance on the control account does not agree to the
reconciliations total of all the list of balances then an error must have
occurred and a reconciliation will need to be carried out to
identify the differences.

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Overview summary

Control accounts

Receivables ledger control account Receivables ledger

Payables ledger control account Payables ledger

 RLCA: Total
RLCA: Total owed
owed by
by all
all customers
customers at
at aa  RL: List
RL: List of
of amounts
amounts owed
owed byby individual
individual
point in time
point in time customers at a point in time
customers at a point in time
 PLCA: Total owed to all suppliers at a  PL: List of amounts owed to individual
 PLCA: Total owed to all suppliers at a Reconciliations  PL: List of amounts owed to individual
point in time suppliers at a point in time
point in time suppliers at a point in time

The RLCA and RL and the PLCA and PL

show the same information from the
same source documents so the balances
should reconcile

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 19: QUESTIONS

19.1 Which of the following is not a use for control accounts?

A To check the accuracy of the entries made to the personal accounts
B To assist in the location of errors
C To provide an internal check where there is separation of bookkeeping duties
D To prevent errors occurring in the receivables/payables cycles
(2 marks)
19.2 The receivables ledger control account at 1 September had a balance of $15,250. During September,
sales of $525,000 were made on credit. Receipts from trade receivables amounted to $505,000 and
returns from customers were $2,500. The closing balance at 30 September is:
A $35,250
B $2,250
C $7,250
D $32,750
(2 marks)
19.3 In reconciling the payables control account to the payables ledger, the following discrepancies are
noticed: a credit note for $105 has been posted to the wrong side of the control account; the payables
ledger has not been adjusted for a receivables ledger offset of $2,055; an account with a credit balance of
$348 has been omitted from the list of payables ledger balances. The balance on the payables control
account is $3,627. The balance on the payables ledger is $5,124.
What is the reconciled balance?
A $3,627
B $3,069
C $3,417
D $3,765
(2 marks)

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 19: QUESTIONS

Note. The following questions have been included specifically to aid your understanding of the controls accounts.
They are not in the format of exam questions.

19.4 Duff

On 31.12.X0 the balance on Duff's Receivables account was $1,070, but the list of individual sales
ledger balances totalled only $890.
You ascertain the following:
(1) The sales day book was overcast by $100 on 1.12.X0.
(2) Sales ledger balances totalling $70 had been omitted from the list.
(3) A contra entry of $20 had been made between purchase ledger and sales ledger accounts of
Jones & Co, but this had not been reflected in the control accounts.
(4) The only posting made in respect of sales on 15.12.X0, $50 in total, had been to individual ledger
cards.
(5) $60 worth of goods had been returned by Smith Co in November; this had been recorded only in
the control account.
(6) The ledger account balance of Davis & Co had been listed as $90, but was in fact $190.
Required
(a) Show the adjustments needed to the sales ledger control account and the amended balance
when these have been made.
(b) Show the adjustments needed to the list of sales ledger balances, and the amended total.

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 19: ANSWERS

19.1 D

19.2 D
RECEIVABLES
Balance b/d 15,250 Cash received 505,000
Sales on credit 525,000 Returns from customers 2,500
Balance c/d (β) 32,750
540,250 540,250
Balance b/d 32,750

19.3 C
PAYABLES
Credit note error 210 Balance b/d 3,627
Balance c/d (Bal fig.) 3,417
3,627 3,627
Balance b/d 3,417

Balance per list of balances 5,124

Contra (2,055)
Omitted credit 348
3,417

19.4 Duff
(a)
RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
Balance b/d 1,070 Overcast (1) 100
Sales 15.12.X0 (4) 50 Purchase ledger contra (3) 20
Amended balance c/d 1,000
1,120 1,120
Balance b/d 1,000
(b) Receivables ledger reconciliation statement
$ $ $
Total balances in the receivables ledger per
listing 890

Adjustments: + –
Balances omitted (2) 70
Goods returned (5) 60
Balance understated (6) 100
170 60
110
1,000

END OF CHAPTER
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 Recording payroll
transactions

Syllabus guide detailed outcomes

Having studied this chapter you will be able to:
 Prepare and enter the journal entries in the general ledger to process payroll transactions including:
(i) Calculation of gross wages for employees paid by the hour, paid by output and salaried workers
(ii) Accounting for payroll costs and deductions
(iii) The employers responsibilities for taxes, state benefit contributions and other deductions
 Identify the different payment methods in a payroll system, eg cash, cheques, automated payment
 Explain why authorisation of payroll transactions and security of payroll information is important in an
organisation

Exam context
Numerical questions on this chapter may require you to calculate the appropriate journal entries in relation to gross
wages including deductions. Narrative questions may require you to demonstrate your understanding of the importance
of security and authorisation in relation to payroll transactions, the composition of net or gross pay or the advantages
and disadvantages of different remuneration schemes.

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 20: RECORDING PAYROLL TRANSACTIONS

Overview

Recording payroll
transactions

Accounting for payroll Deductions Payroll systems

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 20: RECORDING PAYROLL TRANSACTIONS

1 Accounting for payroll

1.1 An important role for payroll officer is the processing of payroll transactions through the
accounting system.

1.2 It is important for a number of reasons:

(a) In order to help control costs
(b) To establish how long it takes to make particular products
(c) To establish the payroll cost of different departments
(d) To establish profits
(e) Employees have a legal obligation to pay the correct amounts to their local tax
authorities

2 Deductions
2.1 Employees of a business are paid weekly or monthly either in cash or by automated
payment.

2.2 The following deductions are typically made from gross wages or salaries:
(a) Income tax
(b) Other deductions, eg benefit contributions
pension contributions

GROSS WAGE

Net wage Pension Income tax Employee's

benefit
contributions

paid to employee paid to paid to the state

pension fund

Total cost to employer is full gross wage plus employers' tax:

GROSS WAGE

Net wage Pension Income tax Employee's Employers'

benefit benefit
contributions contributions
TOTAL EXPENSE

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2.3 Employers are responsible for accounting to the tax authority for income tax deducted from
employees' salaries. Detailed analysis is important. Employers also have an expense of
employer's tax which is calculated and paid in a similar manner.

Lecture example 1
For the month of September the following figures have been extracted from a business' records
concerning wages:
Employer's benefit contributions $526
Income tax $3,465
Gross basic wages $10,500
Employee's benefit contributions $1,250
Required
What will be the total charge for wages and salaries in the accounts? How much will the
employees actually receive?

Solution

3 Payroll bookkeeping
3.1 Payroll is recorded using double entry. The best way to demonstrate this is to look at an
example.

3.2 Common entries are collected into a wages control account.

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Lecture example 2
Ripoff Co pays its employees monthly. It has two departments A and B. Department A has 60% of
wages costs. Month 1 payroll details are as follows:
(a) Net wages paid $50,000
(b) Deductions for income tax $10,000
(c) Employee's benefit deductions $1,500
(d) Employer's benefit deductions $4,000
(e) Employees' contributions to the pension fund were $2,400
(f) Employer's contributions were $3,000
Assume there was $100,000 in the bank.
Required
(a) Write up double entry required to post the above entries in journal form.
(b) Complete the T-accounts provided.

Solution
(a)

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(b)
WAGES CONTROL ACCOUNT

INCOME TAX AND BENEFIT PAYABLE

DEPARTMENT A WAGES

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DEPARTMENT B WAGES

CASH ACCOUNT

PENSION FUND PAYABLE

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4 Payroll systems
 Basic hourly rate
 Piecework schemes:
Wages = units produced  rate of pay per unit
 Overtime
 Bonus schemes
 Commission

Lecture example 3
An employee is paid according to the following piecework scheme:
Weekly output units Rate of pay
per unit
$
1–30 2.15
31–50 2.25
51 and above 2.40
with only the additional units qualifying for the higher rates. In addition he receives a guaranteed
weekly wage of $220.
Required
In a week when he produces 56 units how much will his gross wage be?

Solution

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5 Chapter summary

Section Topic Summary

1 Accounting for payroll Payroll transactions must be processed accurately and
efficiently for a number of reasons including the obligation
to pay employees and to pay the tax authorities.
2 Deductions A person's net pay is calculated as gross pay less income
tax and employee benefit contributions.
Other contributions are borne by the business as an
expense in addition to the gross pay.
3 Payroll bookkeeping A wages control account is used to collect common payroll
entries as part of the double entry system.
4 Payroll systems Gross pay is based on the remuneration system in place
for an employee such as:
 Piecework scheme
 Hourly rates
 Overtime
 Commissions

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Overview summary

Recording payroll
transactions

Accounting for payroll Deductions Payroll systems

Total expense  Piecework system

Wages control account collects
Less employer deductions  Overtime
all transactions as part of double
Gross pay (per contract  Bonus
entry bookkeeping process
Less employee deductions  Hourly rate
Less income tax  Commission
Net pay ($ paid)

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 Chapter 20: Questions

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20.1 Which of the following is an advantage of a piecework system?

A Output will increase and quality will be maintained
B Inspection costs will decrease
C Employee motivation will improve
D There is an incentive to work harder
(2 marks)
20.2 A company has the following year-end payroll information:
Gross salaries and wages $285,350
Income tax deducted $61,063
Employer's pension contributions $26,786
Employee's pension contributions $23,034
What is the company's total payroll cost for the year?
A $312,136
B $274,107
C $396,233
D $308,384
(2 marks)
20.3 Emma works on a chocolate factory line and is paid a rate of $5.50 per hour for a 40 hour week.
All overtime is paid at time and a half. In addition, a piecework rate of $0.10 per box of chocolates
assembled each week is paid.
Last week Emma worked 45 hours and completed the assembly of 500 boxes of chocolate.
What is Emma's gross pay for the week?
A $311.25
B $297.50
C $220
D $330
(2 marks)

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Note. The following question has been included specifically to aid your understanding of payroll. It is not in the
format of exam questions.

20.4 Payroll Co

As at 1 November 20X3, the following balances existed in the ledger of Payroll Co:
$'000
Receivables 2,000
Payables 800
Wages control 38
Employee's tax control 79

During the year ended 31 October 20X4 the following transactions occurred:
$'000
Gross wages earned 2,000
Cash paid to suppliers 5,400
Discounts received 100
Receivables and payables accounts set off against each other and settled by contra 700
Sales on credit 12,000
Purchases on credit 6,000
Cash received from customers 12,100
Net wages paid in cash 1,330
Employee's tax and benefit contributions deducted from employees' wages 667
Employer's benefit contribution 290
Cash paid to state for:
Tax and benefit deductions 946
Required
Write up the following accounts in the company's ledger for the year ended 31 October 20X4:
(a) Payables
(b) Receivables
(c) Wages control
(d) Wages expense
(e) Tax and benefit payable

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20.1 D

20.2 A

Gross salaries and wages 285,350

Employer's pension contributions 26,786

312,136

20.3 A

Basic 40  5.50 = 220

Overtime 5  5.50  1.5 = 41.25

Piecework 500  0.10 = 50

Total 311.25

20.4
(a)
PAYABLES
$ $
Cash 5,400 Balance b/f 800
Discounts received 100 Purchases 6,000
Receivables – contra 700
Balance c/d 600
6,800 6,800
Balance b/d 600

(b)
RECEIVABLES
$ $
Balance b/d 2,000 Payables – contra 700
Sales 12,000 Cash 12,100
Balance c/d 1,200
14,000 14,000
Balance b/d 1,200

(c)
WAGES CONTROL
$ $
Bank 1,330 Balance b/f 38
Employee tax 667 Wages expenses a/c – gross wages 2,000
Employer benefit contributions 290 Wages expense – e'er contributions 290
Balance c/d 41
2,328 2,328
Balance b/d 41

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(d)
WAGES EXPENSE
$ $
Wages control – gross wages 2,000
– e'er cont. 290 Balance c/d 2,290

2,290 2,290
Balance b/d 2,290
(e)
TAX AND BENEFIT PAYABLE
$ $
Cash 946 Balance b/f 79
Wages control – e'ee 667
Wages control – e'er 290

Balance c/d 90
1,036 1,036
Balance b/d 90

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END OF CHAPTER
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 Checkpoint 3 – Progress review
To reinforce your learning to date you should now follow the study guidance in the
following pages. On completion, your progress towards full exam preparation will be:

Take some time to reflect on the knowledge and skills you covered during Stage 3. If you feel you need further
clarification on any of the key areas listed below you can use the Interactive Text and speak to your tutor.
The Course Notes section for each chapter (starting overleaf) provides helpful guidance (and time commitments)
on how to focus your review on the key learning points in your notes.

Key messages from Stage 3

The final stage of the course focuses on receivables and payables and the reconciliation of controls accounts
and bank reconciliations as tools to identify and correct errors.

Key knowledge
The specific areas of key knowledge covered in Stage 3 were:
 Chapter 14 looked at the differences between a bank statement and the cash book at the end of a period
and the reasons for these differences. You should know what the main examples of timing differences,
errors and possible omissions are, which affect the cash book and which the bank statement. You will
not need to draw up a bank reconciliation in your exam but it is important to use the format when
practising questions as this will help you to learn which adjustments go where.
 Chapters 15 and 16 revisited the books of prime entry and memorandum ledger for sales and
receivables. The key thing you must know from this chapter is the posting of the books of prime entry to
the general ledger. You must have a good understanding of the purpose of the memorandum ledger and
the importance of keeping this up to date as this is developed further in Chapter 19. Coding was also
covered and lends itself to questions where you are required to apply your knowledge to a given situation.
 Chapters 17 and 18 revisited the books of prime entry and memorandum ledger for purchases and
payables. Again it is important to understand how information flows from the books of prime entry into the
memorandum ledgers and the control accounts to assist with later identifying and correcting errors.
 Chapter 19 covered control accounts which build on the previous four chapters and looks at comparing
control accounts to memorandum ledgers to identify and correct discrepancies. This is a similar process
to that of bank reconciliations and again the proformas will assist with learning how to deal with different
questions. It is important to remember that memorandum ledgers are not a part of the double entry
system. Discounts are a popular feature in errors and reconciliation questions and so you should be
comfortable with the correct treatment of these.
 Chapter 20 looked at how payroll transactions are accounted for as well as the treatment of various
deductions. You should be comfortable with the journal entries as well as the authorisation processes
that may be involved over payroll systems.

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 CHECKPOINT 3

Key skills
With reconciliations, question practice is very important as there are a number of types of questions you may be
asked. For example in a bank reconciliation question you may be asked to find the bank statement balance, the
opening cash book figure or the adjusted cash book figure. You may be asked narrative questions which require
you to understand how a difference should be dealt with in a reconciliation.
Terminology is key when dealing with the memorandum ledgers and the control accounts and you must ensure
that you can identify where adjustments are required in the event of discrepancies.
You should also familiarise yourself with the terminology in the payroll chapter and how the balances relate to
each other in relation to deductions as you may be required to calculate the net or gross wages or the total
expense to the business.

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 CHECKPOINT 3

Checkpoint 3 – Study support

Chapter 14 – Bank reconciliations 30 mins

Key areas
 Timing differences
 Omissions
 Errors

Course Notes
 Rework Lecture example 1 and ensure that you are happy with each type of 10 mins
discrepancy and how it is resolved to find the corrected cash book balance. Learn the
format for use in all bank reconciliation questions.
Question practice
 Required question practice 20 mins
From the Course Notes try the following questions:
Questions 14.1, 14.2, 14.4, 14.5 and 14.7 (Rectify)

Chapter 15 – Sales and sale returns day books 15 mins

Key areas
 Sales day book
 Sale returns day books
 Coding
 Posting to the general ledger

Course Notes
 You should be comfortable with the purpose of the day books and the double entries for 5 mins
posting these in Section 3.
 Review Lecture example 1 to make sure you are happy with the different types of codes. 5 mins

Question practice
 Required question practice: 5 mins
From the Course Notes try the following questions:
Questions 15.1 and 15.2

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 CHECKPOINT 3

Study support 3 (cont.)

Chapter 16 – The receivables ledger 30 mins

Key areas
 The receivables ledger
 Offering credit
 Age analysis of receivables
 Irrecoverable debts and allowances

Course Notes
 You should have a good understanding of how to adjust the receivables ledger for 5 mins
transactions with credit customers as detailed in Section 1.
 Reread Section 3 on the age analysis of receivables as this is an area typically 10 mins
examined through narrative questions and an area highlighted by the examining team
that students often misunderstand.
 You should understand the implications and how to account for receivables that should 5 mins
be written off and so learn the double entry for the writing off of irrecoverable
receivables in Section 4.2 and the calculations for allowances in Section 5.1.

Question practice
 Required question practice: 10 mins
From the Course Notes try the following questions:
Questions 16.1–16.4

Chapter 17 – Purchases and purchase returns day books 15 mins

Key areas
 Purchase day book
 Purchase returns day book
 Posting to the general ledger

Course Notes
 You should be comfortable with the purpose of the day books and the double entries 5 mins
for posting these in Section 3.

Question Practice
 Required question practice: 10 mins
From the Course Notes try the following questions:
Questions 17.1–17.3

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Study support 3 (cont.)

Chapter 18 – The payables ledger 20 mins

Key areas
 Payables ledger
 Payments to suppliers
 Contra entries

Course Notes
 You should have a good understanding of how to adjust the payables ledger for 5 mins
transactions with credit suppliers as detailed in Section 1.
 Re-read Section 2 to ensure you understand the practical ways a business can 5 mins
manage its payables.
 You should learn the journal entry for a contra and remember that this should be 5 mins
updated in the memorandum ledgers as well as the control accounts.

Question practice
 Required question practice: 5 mins
From the Course Notes try the following questions:
Questions 18.1 and 18.2

Chapter 19 – Control accounts 25 mins

Key areas
 Control account reconciliations

Course Notes
 Rework Question 19.4, completed in class, to make sure you are comfortable with how 10 mins
to use the proforma and how to approach a variety of differences between the control
account and the memorandum ledger.

Question practice
 Required question practice: 15 mins
From the Course Notes try the following questions:
Questions 19.1 and 19.2

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 CHECKPOINT 3

Study support 3 (cont.)

Chapter 20 – Recording payroll transactions 35 mins

Key areas
 Control account reconciliations

Course Notes
 Test yourself to write out the reasons that it is important to account for payroll correctly 5 mins
and compare to Section 1.
 Carefully review Section 2.2 to ensure you are comfortable with the deductions and the 5 mins
relationship between different payroll balances.
 Rework Lecture example 2 to help to learn the appropriate journal entries for payroll. 10 mins

Question Practice
 Required question practice: 15 mins
From the Course Notes try the following questions:
Questions 20.2, 20.3 and 20.4
 Final question practice before sitting your exam
1. The Practice & Revision Kit contains three mixed bank questions (Questions 5–7).
These mixed bank questions examine questions from across the entire syllabus
and so are an excellent way to test your understanding and also to judge
whether you are ready to sit the exam.
2. Mock exam 1 and mock exam 2 in the Practice & Revision Kit. Mock exam 1
is the Sample Paper for this exam and so it is imperative that you attempt it
before sitting the real exam. You should allow yourself two hours to complete it
and sit it under exam conditions. Once you have marked the exam, make a
note of any questions you got wrong and take another look at them. You need
to decide why you got the question wrong – was it because of a lack of technical
knowledge, did you read the question properly, was it a definition you didn't
know or a calculation in which you made a mistake? Mock exam 2 is the
second opportunity to put these lessons into practice.

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 Answers to
Lecture examples

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Chapter 1
Answer to Lecture example 1
$
Trade: 300  6% = 18
(800 − 200)  8 = 48
66
Cash: 500  9% = 45
400  4% = 16
61
Total 127

Answer to Lecture example 2

$
(a) Payment expected after 15 days:
List price 44,000
Less trade discount (10%) (4,000)
39,600
(b) Payment expected before 15 days:
List price 44,000
Less trade discount (10%) (4,000)
39,600 (as before)
Less cash discount (5% of 39,600) 1,980
37,620

Answer to Lecture example 3

$500  20 120 = $83

$115  20/100 = $23

Answer to Lecture example 4

(a) Details of past and current transactions
Past trends and current operations to assist with planning and decision making
Details of routine transactions
Information about performance
(b) Other parties involved in transactions – customers, suppliers, contractors etc
Owners, investors and creditors
External agencies requiring information for surveys or their own activities (eg tax authorities)

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Chapter 2
Answer to Lecture example 1
ASSETS – LIABILITIES = CAPITAL + PROFIT – DRAWINGS
20,000 – 5,000 = 10,000 + 7,500 – 2,500
+ 5,000 + 5,000

25,000 – 5,000 = 15,000 + 7,500 – 2,500

Answer to Lecture example 2

Assets – Liabilities = Capital + Profit – Drawings
35,000 – 7,000 = 21,000 + 10,000 – Drawings
Drawings = $3,000

Answer to Lecture example 3

Change in net assets = Change in capital + Profit – Drawings
5,700 = 4,000 + Profit – 300
Profit = 5,700 – 4,000 + 300
= 2,000

Answer to Lecture example 4

Description Asset Expenses charged

expenditure to profit or loss
(a) Purchase of new office building X
(b) Legal fees in relation to purchase of office building X
(c) Legal fees to recover customer debts X
(d) Costs of additional shelves in a storage cupboard X
(e) Refurbishment costs for an upgrade to a building X
(f) Machinery repairs and maintenance costs X
(g) Purchase of new machinery X
(h) Wages of the machine operators X
(i) Customs duties and delivery costs of the machinery X
(j) Bonuses for production workers X

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Chapter 3
Answer to Lecture example 1
SALES DAY BOOK

DATE CUSTOMER TOTAL INVOICE

14.3.X8 SS Co. 2,100.00
14.3.X8 T Co. 350.00
17.3.X8 SS Co. 700.00
26.3.X8 UEE Co. 1,350.00
27.3.X8 VV Co. 1,100.00
27.3.X8 WD Co. 260.00

TOTAL 5,860.00
Note: It is good practice to rule off any blank lines to show that there are no more entries for the month.
This is to avoid additional entries being added above the total lines.
Double entry:
$ $
Dr Receivables 5,860
Cr Sales 5,860
PURCHASES DAY BOOK
DATE SUPPLIER TOTAL PURCHASES ELECTRICITY TELEPHONE OTHER
11.3.X8 AA Co. 400.00 400.00
12.3.X8 AA Co. 800.00 800.00
12.3.X8 B Co. 600.00 600.00
25.3.X8 AA Co. 800.00 800.00
25.3.X8 B Co. 200.00 200.00
25.3.X8 CC Co. 1,600.00 1,600.00
31.3.X8 Electricity Board 150.00 150.00
31.2.X8 Telephone 50.00 50.00

TOTAL 4,600.00 4,400.00 150.00 50.00

Note: It is good practice to rule off any blank lines to show that there are no more entries for the month.
This is to avoid additional entries being added above the total lines.

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Double entry:
$ $
Dr Purchases 4,400
Dr Electricity 150
Dr Telephone 50
Cr Payables 4,600
CASH BOOK PAYMENTS
DATE DESCRIPTION TOTAL PURCHASES PURCHASE RENT WAGES OTHER
LEDGER RATES
2.3.X8 VRU Co. 1,600.00 1,600.00
10.3.X8 Van purchase 2,500.00 2,500.00
17.3.X8 Rent 300.00 300.00
19.3.X8 AA Co. 900.00 900.00
30.3.X8 Cash 700.00 400.00 300.00

TOTAL $6,000.00 $1,600.00 $900.00 $300.00 $400.00 $2,800.00

Note: It is good practice to rule off any blank lines to show that there are no more entries for the month.
This is to avoid additional entries being added above the total lines.
Double entry:
$ $
Dr Purchases 1,600
Dr Payables 900
Dr Rent 300
Dr Wages 400
Dr Van 2,500
Dr Drawing 300
Cr Cash 6,000
CASH BOOK RECEIPTS
DATE DESCRIPTION TOTAL SALES LEDGER SALES OTHER
1.3.X8 Private a/c 6,000.00 6,000.00
5.3.X8 AB Videos 1,200.00 1,200.00
20.3.X8 SS Co. 1,000.00 1,000.00
21.3.X8 Private a/c 4,000.00 4,000.00

TOTAL $12,200.00 $1,000.00 $1,200.00 $10,000.00

Note: It is good practice to rule off any blank lines to show that there are no more entries for the month.
This is to avoid additional entries being added above the total lines.
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$
Opening balance –
Add receipts 12,200
12,200
Less payments (6,000)
Closing balance 6,200

Double entry:
$ $
Dr Cash 12,200
Cr Receivables 1,000
Cr Sales 1,200
Cr Capital 10,000

M. ROSE (MEMORANDUM) PURCHASE LEDGER

SUPPLIER AA Co. PAYMENT Cash or Cheque

DETAILS
ADDRESS Jewel House TERMS 30 days from invoice date
Guernsey DISCOUNT n/a
DETAILS
TEL 123 4567 ACCOUNT 854
DATE DETAILS INVOICES PAYMENTS BALANCE
$ $ $
11.3.X8 50 books 400 400
12.3.X8 100 books 800 1,200
19.3.X8 Payment on account 900 300
25.3.X8 200 books 800 1,100
2,000 900 1,100

SUPPLIER B Co. PAYMENT Cash or Cheque

DETAILS
ADDRESS 47 Gorse Road TERMS 30 days from invoice date
Jersey DISCOUNT n/a
DETAILS
TEL 444 1234 ACCOUNT R123
DATE DETAILS INVOICES PAYMENTS BALANCE
$ $ $
12.3.X8 75 books 600 600
25.3.X8 25 books 200 200
800 – 800

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SUPPLIER CC Co. PAYMENT Cash or cheque

DETAILS
ADDRESS 23 Old Kent Road TERMS 14 days from invoice date
London DISCOUNT n/a
DETAILS
TEL 0208 123 6789 ACCOUNT SL600
DATE DETAILS INVOICES PAYMENTS BALANCE
$ $ $
25.3.X8 200 books 1,600 1,600
1,600 – 1,600

SUPPLIER Electricity Board PAYMENT Cash or cheque

DETAILS
ADDRESS St Sampsons TERMS 14 days from invoice date
Guernsey DISCOUNT n/a
DETAILS
TEL 534 5050 ACCOUNT 1
DATE DETAILS INVOICES PAYMENTS BALANCE
$ $ $
29.3.X8 March bill 150 150
150 – 150

SUPPLIER Telephone provider PAYMENT Cash or Cheque

DETAILS
ADDRESS Hillary St TERMS on receipt of bill
Jersey DISCOUNT n/a
DETAILS
TEL 478 4222 ACCOUNT 5
DATE DETAILS INVOICES PAYMENTS BALANCE
$ $ $
29.3.X8 March bill 50 50
50 – 50

M. ROSE (MEMORANDUM) SALES LEDGER

CUSTOMER SS Co. CREDIT LIMIT $3,000

ADDRESS 11 The Drive TERMS 30 days from date of invoice
Alderney DISCOUNT none
DETAILS
TEL 550 6565 ACCOUNT Mrs C Control
DATE DETAILS INVOICES RECEIPTS BALANCE
$ $ $
14.3.X8 50 books
2,100 2,100
17.3.X8 50 books 700 2,800
20.3.X8 Payment on account 1,000 1,800
2,800 1,000 1,800

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CUSTOMER T Co. CREDIT LIMIT $1,000

ADDRESS 1a Dunn St TERMS 30 days from date of invoice
Jersey DISCOUNT none
DETAILS
TEL 554 3323 ACCOUNT Mr Beach
DATE DETAILS INVOICES RECEIPTS BALANCE
$ $ $
14.3.X8 25 books 350 350
350 – 350

CUSTOMER UEE plc CREDIT LIMIT $2,500

ADDRESS 6 The Strand TERMS 30 days from date of invoice
London W1 DISCOUNT none
DETAILS
TEL 405 9779 ACCOUNT Miss Summer
DATE DETAILS INVOICES RECEIPTS BALANCE
$ $ $
26.3.X8 25 books 1,350 1,350
1,350 – 1,350

CUSTOMER VV Co. CREDIT LIMIT $2,000

ADDRESS 12 The High Street TERMS 30 days from date of invoice
Guernsey DISCOUNT none
DETAILS
TEL 550 7512 ACCOUNT Mr Bouncit
DATE DETAILS INVOICES RECEIPTS BALANCE
$ $ $
27.3.X8 100 books 1,100 1,100
1,100 – 1,100

CUSTOMER WD Co. CREDIT LIMIT $500

ADDRESS 16a Mile End Road TERMS 30 days from date of invoice
London E2 DISCOUNT none
DETAILS
TEL 790 9181 ACCOUNT Mr Dodgey
DATE DETAILS INVOICES RECEIPTS BALANCE
$ $ $
27.3.X8 20 books 260 260
260 – 260

List of sales ledger balances

Folio Customer Balance
SS1 SS Ltd 1,800.00
ST1 T Ltd 350.00
SU1 UEE plc 1,350.00
SV1 VV Ltd 1,100.00
SW1 WD plc 260.00
Total: 4,860.00

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List of purchase ledger balances

Folio Supplier Balance
PA1 AA Co. 1,100.00
PB1 B Co. 800.00
PC1 CC Co. 1,600.00
PL1 Electricity board 150.00
PB2 Telephone provider 50.00
Total: 3,700.00

Chapter 4
Answer to Lecture example 1
Double entry
(a) DEBIT bank account (increase in asset)
CREDIT sales account (an item of income)
(b) DEBIT receivables account (increase in asset)
CREDIT sales account (an item of income)
(c) DEBIT purchases account (an item of expense)
CREDIT bank account (decrease in asset)
(d) DEBIT purchases account (an item of expense)
CREDIT payables account (increase in liability)
(e) DEBIT electricity account (an item of expense)
CREDIT bank account (decrease in asset)
(f) DEBIT bank account (increase in asset)
CREDIT receivables account (decrease in asset)
(g) DEBIT payables account (decrease in liability)
CREDIT bank account (decrease in asset)
(h) DEBIT bank account (increase in asset)
CREDIT loan account (increase in liability)

Answer to Lecture example 2

M. Rose – Nominal ledger account entries

CAPITAL ACCOUNT

DEBIT CREDIT
DATE DATE
March March Cash book 10,000 00

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CASH ACCOUNT

DEBIT CREDIT
DATE DATE
March Cash 12,200 00 March Cash book 6,000 00
book

PAYABLES ACCOUNT

DEBIT CREDIT
DATE DATE
March Cash 900 00 March Purchases 4,400 00
book
Electricity 150 00
Telephone 50 00

RECEIVABLES ACCOUNT

DEBIT CREDIT
DATE DATE
March Sales day 5,860 00 March Cash book 1,000 00
book

DRAWINGS ACCOUNT

DEBIT CREDIT
DATE DATE
March Cash 300 00
book

ELECTRICITY ACCOUNT

DEBIT CREDIT
DATE DATE
March Creditors 150 00

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NON-CURRENT ASSETS – VAN ACCOUNT

DEBIT CREDIT
DATE DATE
March Cash 2,500 00
book

PURCHASES ACCOUNT

DEBIT CREDIT
DATE DATE
March Cash 1,600 00
book
March Payables 4,400 00

RENT ACCOUNT

DEBIT CREDIT
DATE DATE
March Cash 300 00
book

SALARY ACCOUNT

DEBIT CREDIT
DATE DATE
March Cash 400 00
book

SALES ACCOUNT

DEBIT CREDIT
DATE DATE
March Cash book 1,200 00
March Receivables 5,860 00

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TELEPHONE ACCOUNT

DEBIT CREDIT
DATE DATE
March Payables 50 00

Chapter 5
Answers to Lecture example 1
M. Rose – Balancing off M. Rose ledger accounts

CAPITAL ACCOUNT

DEBIT CREDIT
DATE DATE
Balance c/d 10,000 00 March Cash book 10,000 00
10,000 00 10,000 00
Balance b/d 10,000 00

CASH ACCOUNT

DEBIT CREDIT
DATE DATE
March Cash 12,200 00 March Cash book 6,000 00
book
Balance c/d 6,200 00
12,200 00 12,200 00
Balance b/d 6,200 00

PAYABLES ACCOUNT

DEBIT CREDIT
DATE DATE
March Cash 900 00 March Purchases 4,400 00
book
Balance c/d 3,700 00 Electricity 150 00
Telephone 50 00
4,600 00 4,600 00
Balance b/d 3,700 00

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RECEIVABLES ACCOUNT

DEBIT CREDIT
DATE DATE
March Sales day 5,860 00 March Cash book 1,000 0
book 0
Balance c/d 4,860 0
0

5,860 00 5,860 0
0
Balance b/d 4,860 00

DRAWINGS ACCOUNT

DEBIT CREDIT
DATE DATE
March Cash 300 00 Balance c/d 300 0
book 0
Balance b/d 300 00
To Transfer to
capital a/c

ELECTRICITY ACCOUNT

DEBIT CREDIT
DATE DATE
March Payables 150 00 Balance c/d 150 00
Balance b/d 150 00

NON-CURRENT ASSETS – VAN ACCOUNT

DEBIT CREDIT
DATE DATE
March Cash 2,500 00 March Balance c/d 2,500 00
book
2,500 00 2,500 00
Balance b/d 2,500 00

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PURCHASES ACCOUNT

DEBIT CREDIT
DATE DATE
March Cash 1,600 00 Balance c/d 6,000 00
book
March Payables 4,400 00
6,000 00 6,000 00
Balance b/d 6,000 00

RENT ACCOUNT

DEBIT CREDIT
DATE DATE
March Cash 300 00 Balance c/d 300 00
book
Balance b/d 300 00

SALARY ACCOUNT

DEBIT CREDIT
DATE DATE
March Cash 400 00 Balance c/d 400 00
book
Balance b/d 400 00

SALES ACCOUNT

DEBIT CREDIT
DATE DATE
Balance c/d 7,060 00 March Cash book 1,200 00
March Receivables 5,860 00
7,060 00 7,060 00
Balance b/d 7,060 00

TELEPHONE ACCOUNT

DEBIT CREDIT
DATE DATE
March Payables 50 00 Balance c/d 50 00
Balance b/d 50 00

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Answer to Lecture example 2

M. Rose – Preliminary trial balance
M. ROSE
TRIAL BALANCE AS AT 31 MARCH 20X8
Folio DR CR
$ $ $
Capital 1 10,000
Cash 2 6,200
Payables 3 3,700
Receivables 4 4,860
Drawings 5 300
Electricity 6 150
Non-current assets – Van 7 2,500
Purchases 8 6,000
Rent 9 300
Salary 10 400
Sales 11 7,060
Telephone 12 50
20,760 20,760

Answer to Lecture example 3

DR CR
$ $
Van 1,000
Sales 6,000
Purchases 4,000
Inventory 2,000
Rent 500
Bank 1,500
Capital 3,000
9,000 9,000

Answer to Lecture example 4

DR CR
$ $
Plant and machinery 1,500
Sales 3,000
Electricity 700
Overdraft 300
Receivables 800
Factory building 5,000
Capital 4,000
Payables (balancing figure) 700
8,000 8,000

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Answer to Lecture example 5

DR Cash $1,200
CR Sales $1,021
CR Sales tax account $179
DR Purchases $681
DR Sales tax account $119
CR Cash $800

Answer to Lecture example 6

(a) Dr Receivables $14,250
Cr Sales $14,250

Note. Only the trade discount is deducted at this point as the customer is not expected to take up the
settlement discount.
(b) Step 1 – Record cash Step 2 – Record settlement discount
Dr Cash $12,825 Dr Sales $1,425
Cr Receivables $12,825 Cr Receivables $1,425

Note. Settlement discount is based on 10% of the sale after the trade discount has been deducted
($15,000  95%  10%). The settlement discount reduces sales in the statement of profit or loss.

(c) Dr Cash 14,250

Cr Receivables 14,250

Answer to Lecture example 7

(a) Dr Purchases $5,000
Cr Payables $5,000

Note. The settlement discount is not anticipated.

(b) Dr Payables $5,000
Cr Cash $4,750
Cr Discounts received $250

Note. Discount is based on 5% of the purchase price ($5,000 x 5%)

(c) Dr Payables $5,000

Cr Cash $5,000

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Chapter 6
Answer to Lecture example 1
 Staff training
 Automatic data entry such as scanning avoids transposition errors
 Well designed forms that are easy to read
 Well designed data entry screens that mirror the source document for ease of entry
 Using tick boxes or drop-down lists
 Avoiding long sequences of numerical characters
 Verification by entering the data twice and checking for inconsistencies
 Validation techniques to ensure that data are reasonable and possible (not necessarily correct), eg ensuring
that monetary amounts have only two decimal places and rejecting invalid data.

Answer to Lecture example 2

Advantages:
 It is possible to make just one entry in one ledger which automatically updates the others
 Users can specify reports and the software will automatically extracts required data from all relevant files
 Can reduce/simplify workload of the user
Disadvantages:
 Requires more computer memory leaving less space to store actual data
 As one program is expected to do everything, an integrated package may have fewer features than a set
of specialised modules.

Chapter 7
Answer to Lecture example 1
The double entry would be:
Dr Suspense account 400
Cr Cash at bank 400
then
Dr Rent expense 400
Cr Suspense account 400

SUSPENSE BANK
$ $ $ $
Bank 400 Rent 400 Suspense 400

400 400

RENT
$ $
Suspense 400

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Answer to Lecture example 2

Double entry:
$ $
(a) DR Suspense 6,300
CR Sales 6,300

(b) DR Electricity expense 99

CR Suspense 99

(c) DR Purchases 1,174

CR Suspense 1,174
SUSPENSE ACCOUNT
$ $
(a) Sales 6,300 Balance b/d 5,027
(b) Electricity 99
(c) Purchases 1,174

6,300 6,300

Dr Cr
$ $
Motor van at cost 10,220
Sales ledger control 19,167
Cash at bank 218
Petty cash 50
Purchase ledger control 13,166
Sales 100,170
Purchases 77,356
Rent expense 1,200
Wages and salaries expense 12,500
Electricity expense 615
Telephone expense 230
Accountancy expense 500
Van expenses 1,280
Capital 10,000
123,336 123,336

Answer to Lecture example 3

SUSPENSE ACCOUNT
$ $
Balance b/d 710
(1) Discounts received 200 (3) Receivables – Transposition
Sales returns 200 error 90

(4) Electricity overcast 400

800 800

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Chapter 8
No lecture examples

Chapter 9
Answer to Lecture example 1
$
Opening float 75.50
Total takings 1,990.82
2,066.32
Banked (1,946.12)
Closing float 120.20

Answer to Lecture example 2

Date 14.7.X9 Date 14.7.X9 bank giro credit Notes $50 100 00
Paid in by/Customer's Reference $20 300 00
A/c current Cashier's stamp and initials $10 960 00
$ 5 380 00
Notes $50 100 Coins 80 00
$20 300 6 83048231 92057419 15 00
$10 960 70 00
$5 380 Savemore Bank 40 50
Coins 80 0 62
15 CLAPHAM COMMON BRANCH
70 Cash $ 1946 12
40 50 Fee Cheques $
0 62 $ 1946 12
No. of Cheques BOTTICELLIS
Cash $ 1946 12
Cheques $
$ 1946 12
Please do not write or mark below this line

101131 ||101131| 20 || 2748| 305957||13

Workings
1 $10 notes = (100 – 4) = 96  $10 = $960
2 $5 notes = (80 – 4) = 76  $5 = $380
3 $1 coins = (6 – 2) = 4  $20 = $80
4 50c coins = (4 – 1) = 3  $5 = $15
5 20c coins = (8 – 1) = 7  $10 = $70

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Answer to Lecture example 3

Date 14.7.X9 Date 14.7.X9 bank giro credit Notes $50

Paid in by/Customer's Reference $20
A/c Current Cashier's stamp and initials $10
$5
Notes $50 Coins
$20 6 83048231 92057419
$10
$5 Savemore Bank
Coins
CLAPHAM COMMON BRANCH
Cash $
Fee Cheques $ 169 20
$ 169 20
No. of Cheques BOTTICELLIS
Cash $ 5
Cheques $ 169 20
$ 169 20 Please do not write or mark below this line

101131 ||101131| 20 || 2748| 305957||13

Details of Cheques, etc. Sub-Total brought forward 169 20

I M Clooless 50 50
P B Romilly 25 80
J N Openn 18 50
R S Stuart 28 90
JK Co. 45 50

Carried Total
forward $ 169 20 Carried over $ 169 20

In view of the risk of loss in course of clearing, customers are advised to keep an
independent record of the drawers of cheques
Please do not write or mark below this line

169 20

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Chapter 10
Answer to Lecture example 1
DR Cash 720.00
CR Sales tax 17.00
CR Sales 83.00
CR Receivables 620.00

Chapter 11
Answer to Lecture example 1

APPLICATION FOR TAX DRAFT

To: Savemore Bank

Date: 19 July 20X8

Kindly supply a crossed draft marked Account Payee

Payable to: Hatro Co.

$41,500.50 amount in words Forty One Thousand,

Five Hundred dollars and Fifty cents

Please debit my/our account:

27158981

Signature:

Name:

Address:

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Chapter 12
Answer to Lecture example 1
DR Sales tax 20.00
DR Purchases 100.00
DR Payables 100.00
DR Telephone exp 300.00
DR Electric exp 400.00
DR Payables 10.00
CR Cash 920.00
CR Discount received 10.00

Chapter 13
Answer to Lecture example 1
Sales tax
$
$
$
Sales tax
$
$

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 21: ANSWERS TO LECTURE EXAMPLES

Double entry

1 Dr Sundry 22.00

Dr Sales tax 10.15

Dr Stationery 36.00

Cr Petty cash 68.15

2 Dr Petty cash 68.15

Cr Bank 68.15

Chapter 14
Answer to Lecture example 1
Cash account
$ $
Balance b/d 13,414 Salaries direct debit 1,808
Bank charges 27
Transposition error (370 – 307) 63
 balance c/d 11,516
13,414 13,414
Balance b/d 11,516

$ $
Balance per bank statement 7,656

Less unpresented cheques 11481 70

11485 538
11489 1,148
11490 223
(1,979)
Plus unrecorded lodgements 5,839

Balance per adjusted cash account 11,516

Chapter 15
Answer to Lecture example 1
(a) Sequence codes make no attempt to classify the items being coded.
New items are inserted at the end of the list – codes for similar items may vary.
(b) Block codes provide a different sequence for each different group of items:
eg South East: 10,000–19,999
South West: 20,000–29,999
Wales: 30,000–39,999
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 21: ANSWERS TO LECTURE EXAMPLES

(c) Significant digit codes incorporate some digit(s) which are part of the description of the item coded:
eg 5000 – light bulbs
5025 – 25 Watt
5040 – 40 Watt
(d) Hierarchical codes use a tree structure where the interrelationship between items is of paramount
importance. Libraries commonly use this method as follows:
eg 5 Business
5.2 Finance
5.2.1 Cost accounting
5.2.1.4 Standard costing
5.2.1.4.7 Variance analysis
5.2.1.4.7.3 Fixed overhead variances
(e) Faceted codes made up of a number of sections each represent a different feature:
eg SU M B 40 17
SU – Garment type – suit
M – Customer type – male
B – Colour – blue
40 – Size
17 – Style

Chapter 16
Answer to Lecture example 1
Customer Credit Balance Current Up to 60 Up to 90 Over 90
name limit up to 30 days days days
days
RST Co 2,000 1,690 440 180 830 240

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Chapter 17
No Lecture examples

Chapter 18
No Lecture examples

Chapter 19
Answer to Lecture example 1
RECEIVABLES ACCOUNT
$ $
1.7.X0 Balance b/f 8,912 Bank 27,370
Sales 36,755 Payables ledger contra 3,046
Bank cheques dishonoured 489 Returns inwards 2,452
Bank refunds 53 Cash 10,707
31.7.X0 Balance c/f 2,634
46,209 46,209

PAYABLES ACCOUNT
$ $
1.7.X0 Balance b/f 4,402
Returns outward 629 Purchases 18,135
Discounts received 1,105
Bank 15,413
Receivables contra 3,046
31.7.X0 Balance c/f 2,344
22,537 22,537

Chapter 20
Answer to Lecture example 1
Total charge for wages and salaries for September:
$
Gross basic wages 10,500
Employer's benefit contributions 526
11,026

Net pay to employees $

Gross basic wages 10,500
Less employee benefit contributions (1,250)
Less employee tax (3,465)
5,785

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Answer to Lecture example 2

(a) (1) Debit wages control 50,000
Credit cash 50,000

(2) Debit wages control 10,000

Credit income tax and benefit payable 10,000

(3) Debit wages control 1,500

Credit income tax and benefit payable 1,500

(4) Debit wages control 4,000

Credit income tax and benefit payable 4,000

(5) Debit wages control 2,400

Credit pension fund payable 2,400

(6) Debit wages control 3,000

Credit pension fund payable 3,000

(7) Debit wages dept A 42,540

Credit wages control 42,540

(8) Debit wages dept B 28,360

Credit wages control 28,360

(9) Debit income tax and benefit payable 10,000

Credit cash 10,000

(10) Debit pension fund payable 5,400

Credit cash 5,400

(11) Debit income tax and benefit payable 6,500

Credit cash 6,500

(b)
WAGES CONTROL ACCOUNT
$ $
(1) Cash (net pay) 50,000 (7) Dept A 42,540
(2) Income tax 10,000 (8) Dept B 28,360
(3) Benefit contributions 1,500
(4) Benefit contributions 4,000
(5) Pension fund 2,400
(6) Pension fund 3,000
70,900 70,900

INCOME TAX AND BENEFIT PAYABLE

$ $
(9) Cash 10,000 (2) Wages control 10,000
(11) Benefit contributions 5,500 (3) Wages control 1,500
(4) Wages control 4,000

15,500 15,500

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DEPARTMENT A WAGES
$ $
(7) Wages control 42,540

DEPARTMENT B WAGES
$ $
(8) Wages control 28,360

CASH ACCOUNT
$ $
Balance b/d (per question) 100,000 (1) Wages control 50,000
(9) Income tax 10,000
(10) Pension fund 5,400
(11) Benefit contributions 5,500
Balance c/d 28,100
100,000 100,000

PENSION FUND CREDITOR

$ $
(10) Cash 5,400 (5) Wages control 2,400
(6) Wages control 3,000
5,400 5,400

Answer to Lecture example 3

$
30 units at $2.15 64.50
20 units at $2.25 45.00
6 unit at $2.40 14.40
123.90

Plus guaranteed weekly minimum 220.00

Weekly gross wage 343.90

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END OF ANSWERS TO LECTURE EXAMPLES

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 Appendix A

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 APPENDIX A

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 Appendix A

Chapter 1: Overview summary

Business entity and the dual Business transactions

effect

Two types:
 Cash

Business  Credit

Business and
business transactions

Discounts External Internal

documentation documentation

 Trade discounts
 Settlement (cash) discounts Invoices and credit
notes

Sales tax Storage of information

 Output tax

 Input tax
Retention periods Data protection

For the protection of individuals

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 Appendix A

Chapter 2: Overview summary

Financial statements

Asset expenditure versus Assets, liabilities and the

expenses charged to accounting equation
profit or loss

Assets and liabilities Accounts payable and

accounts receivable

 Assets are owned by the business

 Liabilities are owed to third parties

The accounting equation

ASSETS = CAPITAL + LIABILITIES

Expresses the statement of financial position as an equation

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 Appendix A

Chapter 3: Overview summary

 Categorise similar  Receivables ledger –

Recording, summarising amounts owed by each
transactions together
and posting transactions
customer

 Payables ledger – amounts

owed to each supplier

Books of prime entry Memorandum ledgers

Cash book Sales day book Purchase day Petty cash book Journal book
book

 Cash receipts  Credit sales  Credit  Small incidental  Correcting

into the bank purchases expenses errors

 Cash payments  Period-end

out of the bank adjustments

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 Appendix A

Chapter 4: Overview summary

Ledger accounts and

double entry

Ledger accounts Double entry

 The books of prime entry are totalled

and posted to the nominal ledger using
double entry

Debit Credit

Increase: Increase:
– Expenses – Liabilities
– Assets – Income
– Drawings – Capital

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 Appendix A

Chapter 5: Overview summary

Accounting for sales tax

Completing ledger
accounts and financial
statements

Accounting for discounts

Balancing off the ledger

accounts

Trial balance

A list of balances brought down on each ledger account

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 Appendix A

Chapter 6: Overview summary

Errors: Solutions:
 Source document issues  Training
 Transposition errors Data entry errors  Well-designed systems and
source documents
 Poorly skilled staff
 Drop-down menus
 Malicious intent
 Validity checks

Manual and computerised

systems

Accounting systems Batch processing and

controls

Accounting modules  Integrated system Coding

Receivables ledger

 Inputs – amendments and transaction

data
 Processing – balance forward or open
item method
 Outputs – reports, customer lists,
outputs to other modules

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 Appendix A

Chapter 7: Overview summary

The journal
A book of prime entry

Correction of errors

Errors Suspense accounts

 Error of omission: Transaction not recorded 'A temporary account which never
 Error of commission: Debits and credits balance appears in
but the entry is made to the wrong account the financial statements'
For example, an expense is debited to the rent  Used when:
account rather than the electricity account – an accountant is unsure of a
 Error of principle: Debits and credit balance but the double entry
entry is made to the wrong 'type' of account – a preliminary trial balance does
For example, machine repairs debited to the not balance
machine asset account  Must be cleared out
 Compensating error: Two separate errors are  Steps:
made which correct each other (1) What entry was made?
 Transposition error: Here two figures have been (2) What entry should have been
inverted. made?
For example, the posting of a credit sale of $210 as (3) What entry is required to correct
Dr Trade receivables $120 the entries?
Cr Sales $120

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 Appendix A

Chapter 8: Overview summary

Security considerations

Receiving and checking Remittance advices

money

Usually sent by trade

customers listing invoices to
which a payment relates

Cheques Card receipts Other payments

 Banker's draft
 Standing order
EFTPOS  Direct debit

System which allows amount to be

deducted from customer's bank
account immediately

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 Appendix A

Chapter 9: Overview summary

Banking monies received

Banking systems Banker/customer Banking receipts

relationship

Cheque clearing system is  Receivable/payable

the system whereby banks
 Bailor/bailee
settle cheques
 Agent/principal
 Mortgagor/mortgagee

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 Appendix A

Chapter 10: Overview summary

 Segregation of duties Controls over recording Cash registers

receipts
 Bank reconciliations (Chapter 14)

Recording monies
received

Posting cash receipts to DR Cash

the general ledger CR Income analysis

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 Appendix A

Chapter 11: Overview summary

 Documentary evidence

 Authorisation Controls over recording

receipts
 Restriction of authority

Authorisation and making

payments

Making payments Documentation

 Cash  Cheque requisitions

 Cheque  Expense claim forms

 Giro credits

 Standing order

 Direct debit

 Banker's draft

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 Appendix A

Chapter 12: Overview summary

 Bank reconciliation Controls over recording

payments

Recording payments Computerisation of

payments recording

Automated credits

For example, payroll

Posting to the general

ledger

DR Expense analysis
CR Cash
CR Discounts received

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 Appendix A

Chapter 13: Overview summary

 Authorisation of payments

 Secure storage Security of petty cash

 Vouchers for accurate record

keeping

Maintaining petty cash Postings to the general

records ledger

DR Expense analysis
CR Petty Cash

The imprest system

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 Appendix A

Chapter 14: Overview summary

Bank reconciliations

Cash book balance Bank statement balance

 Business' records of the cash held by  Bank's records of the cash held by the
the business at any point in time business at any point in time

Differences

Timing differences Errors by the business Errors by the bank

 Items in the cash book not currently on  Items on the bank statement  Rare, for example charges
the bank statement, for example but omitted by the business, incorrectly debited
unpresented cheques and unrecorded for example bank charges and  Adjust bank statement balance
lodgements direct debits
 Adjust bank statement balance  Adjust cash book balance

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 Appendix A

Chapter 15: Overview summary

Sales and sale returns day

books

Sales day book Sale returns day book

DR Receivables DR Sales
CR Sales DR Sales tax
CR Sales tax CR Receivables
Coding

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 Appendix A

Chapter 16: Overview summary

 Personal accounts
Receivables Ledger  Credit customers
 Memorandum ledgers – not part of
double entry process

Offering credit Irrecoverable debts

Age analysis of Allowances for receivables

receivables

 Listing of receivables balances

 Categorised by age
 Used to decide action to take
regarding collection of receivables

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 Appendix A

Chapter 17: Overview summary

Purchases and purchase

returns day books

Purchases day book Purchase returns day

book

Dr Purchases Dr Payables
Dr Sales tax Cr Purchases
Cr Payables Cr Sales tax

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 Appendix A

Chapter 18: Overview summary

 Personal accounts
Payables Ledger  Credit suppliers
 Memorandum ledgers – not part of
double entry process

Payment of suppliers Contra

 Maximise credit periods  Settlement of payables and

 Maintain relationship with suppliers receivables on a net basis where
 Optimise inventory levels supplier is a customer also
 DR Payables
CR Receivables

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 Appendix A

Chapter 19: Overview summary

Control accounts

Receivables ledger control account Receivables ledger

Payables ledger control account Payables ledger

 RLCA: Total
RLCA: Total owed
owed by
by all
all customers
customers at
at aa  RL: List
RL: List of
of amounts
amounts owed
owed byby individual
individual
point in time
point in time customers at a point in time
customers at a point in time
 PLCA: Total owed to all suppliers at a  PL: List of amounts owed to individual
 PLCA: Total owed to all suppliers at a Reconciliations  PL: List of amounts owed to individual
point in time suppliers at a point in time
point in time suppliers at a point in time

The RLCA and RL and the PLCA and PL

are showing the same information from
the same source documents so the
balances should reconcile

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 Appendix A

Chapter 20: Overview summary

Recording payroll
transactions

Accounting for payroll Deductions Payroll systems

Total expense  Piecework system

Wages control account collects
Less employer deductions  Overtime
all transactions as part of double
Gross pay (per contract  Bonus
entry bookkeeping process
Less employee deductions  Hourly rate
Less income tax  Commission
Net pay ($ paid)

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