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Recording of Business Transactions – Books of Original Entry
Week 4
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In Your Textbook...
Roshayani Arshad, et al. (2007), Financial Accounting An Introduction, 2nd Edition, Malaysia, McGraw Hill.
Chapter 4: Accounting Cycle (pp. 47 – 54) Chapter 6: Books of Prime Entry and Subsidiary Ledger
(pp. 83 – 90) Chapter 10: Cash (pp. 180 – 184, 191)
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Journals
Journals are books in which information from source documents is first recorded.
Also called books of original entry, or books of prime entry.
Can be classified as:
1. Specialised journals
2. General journal
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The General Journal
The format of a General Journal:
General Journal
Date
Particulars Dr Cr
The name of the account to be debited
The name of the account to be credited
The narrative
$ $
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Recording into General JournalE.g. Andrew contributed RM100 to start his business.
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Computerised General Journal
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Purchases Journal
The purchases journal is designed for recording all
purchases on credit.
The purchases journal is designed for recording all
purchases on credit.
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Returns Outwards Journal
To record returned goods that are previously bought on credit.
Also used to record a reduction of invoice price resulting from previous overcharging in the invoice sent by the supplier.
Source document: Credit note from supplier acknowledging the receipt of returned items or the reduction given.
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Sales Journal
The sales journal is designed for recording all sales of goods on
credit.
The sales journal is designed for recording all sales of goods on
credit.
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Returns Inwards Journal
To record goods previously sold on credit and then returned by the customer.
Also records allowances or reductions in the customers’ account due to overcharging in previous invoices.
Source document: Credit note sent to customer to acknowledge goods returned or mistake made in previous invoice.
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Posting from the Journals
Posting is the process of transferring information from one book to another.
To post information from the journal to the ledger, journal entries are transferred to their respective debits and credits in the various accounts in the ledger.
Journal Ledger Posting
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Ledger
A collection of all accounts kept by the business.
General ledger: Consists of accounts other than debtors’ and creditors’ accounts.
Subsidiary ledger:1. Sales or Debtors Ledger - consists of individual debtors’ accounts2. Purchases or Creditors Ledger - consists of individual creditors’ accounts
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Posting from the General Journal
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Record the following transactions into the general journal and post them to the ledger.
June 1 Owner began operation with RM20,000 cash as capital.
3 Bought equipment for RM8,200 cash.
4 Bought goods from Enza Trading on credit RM4,700.
6 Cash sales generated amounting to RM1,500.
8 Paid rental of office space by cheque RM500.
12 Paid wages in cash RM800.
20 Paid electricity in cash RM250.
26 Paid Enza Trading RM1,500 by cheque.
27 Cash sales RM7,500.
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Date Particular Debit(RM) Credit(RM)
June 1 Cash
Capital
20,000
20,000
3 Equipment
Cash
8,200
8,200
4 Purchase
A/C Payable- Enza Trading
4,700
4,700
6 Cash
Sales
1,500
1,500
8 Office rental
Bank
500
500
12 Wages
Cash
800
800
20 Electricity
Cash
250
250
26 A/C Payable- Enza Trading
Bank
1,500
1,500
27 Cash
Sales
7,500
7,500
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Chart of Accounts
A list of all accounts tracked by a single accounting system.
Each account in the chart is assigned a unique identifier, typically an account number.
It places the five groups of accounts into an order to assist in locating ledger accounts.
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Chart of Accounts - Example1-100 Assets 101-
200Liabilities
1 Cash at bank 101 Bank overdraft
2 Petty cash 102 Loan by mortgage
3 Plant and machinery 103 Accounts Payable
4 Accounts Receivable 301-400
Revenue
201-300 Expenses 301 Sales
201 Purchases 302 Discount revenue
202 Purchase returns 303 Rent revenue
203 Rent paid 401-500
Owner’s Equity
204 Commission 401 Capital
205 Manager’s salary 402 Net profit
206 Electricity 403 Drawings
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Take A Break!
Mr. A: “How is your son doing in accounting class?”
Mr. B: “Great. Now instead of asking us for his allowance. He bills us for it.”
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Cash
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Many companies need several cash accounts to account for different cash categories and funds.
Most companies have multiple bank accounts. The title for each bank account should be: Cash in Bank—(Name of Bank)
Internal controls to protect cash from theft and misuse of cash.
Control Over Cash
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Retailers’ Sources of CashRetailers’ Sources of CashRetailers’ Sources of CashRetailers’ Sources of Cash
Cash Receipts
CASHIER’S DEPARTMENT
ACCOUNTINGDEPARTMENT
Register records
Mail Receipts
Remittance advices
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1
ACCOUNTINGDEPARTMENT
Deposit ticket
Bank
CASHIER’S DEPARTMENT
Deposit receipt
Retailers’ Sources of CashRetailers’ Sources of CashRetailers’ Sources of CashRetailers’ Sources of Cash
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Cash and Bank Accounts
A cash transaction involves money kept at the office will be recorded in the Cash Account.
A cash transaction involves money kept in the current account at the bank will be recorded in the Bank Account.
Both are asset accounts. Increase = debit side, decrease = credit side.
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Cash and Bank Accounts
Dr Cash Account Cr
Receipts of cash kept in the office
Payments with office cash
Dr Bank Account Cr
Receipts of cash and cheques banked into the current account at the bank
Payments with cheques from the current account at the bank
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Cash Book
The cash book is part of the ledger but it contains only two accounts: the Cash Account and the Bank Account.
Also serves as a book of original entry where information from source docs is recorded straight into the Cash Book.
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Cash Book
1. A Cash Book has columns for date, particulars, folio, discount, cash and bank, on both debit and credit sides.
2. The cash column represents the Cash Account while the bank column represents the Bank Account.
3. The discount column on the debit side represents Discount Allowed, while credit side represents Discount Received.
4. The debit side records all receipts and the credit side records all payments.
Dr. Cash Book Cr.
Date Details F Disct Cash
Bank Date Details F Disct Cash
Bank
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Cash Discount
A deduction from the amount due. Given to encourage prompt
payment of debts. Cash discount is made known to the
customer in the invoice issued when goods are sold on credit.
Example terms: 5% 7 days; 3% 30 days
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Cash Discount - Discount Allowed The cash discount given by the trader to his
customer is considered a cost to the trader because he receives a smaller amount than what is owed to him.
Example:Jun 10 Sold goods to Kay on credit RM400.
Terms of payment: 10% 14 days. 20 Kay paid for the amount owed by
cheque and received a cash discount of 10%.
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Discount Allowed (Example)
Dr Kay Cr
Date Particulars Amt Date Particulars Amt
Jun 10 Sales 400 Jun 20 Bank
Discount
allowed
360
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Dr Bank Account Cr
Date Particulars Amt Date Particulrs Amt
Jun 20 Kay 360
Dr Discount Allowed Account Cr
Date Particulars Amt Date Particulars Amt
Jun 10 Kay 40
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Cash Discount - Discount Received When a trader receives a cash discount from
his supplier, he pays less than what he owes. The cash discount received is a gain and is
credited to the Discount Received Account. The Discount Received Account is a revenue
account and the gains add to the profits of the business.
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Discount Received (Example)
Jun 4 Bought goods on credit from Major RM900. 9 Paid Major RM855 by cheque, having deducted RM45
cash discount.
Dr Major Cr
Date Particulars Amt Date Particulars Amt
Jun 9 Bank
Discount
received
855
45
Jun 4 Purchases 900
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Discount Received (Example)
Dr Bank Account Cr
Date Particular Amt. Date Particulars Amt.
Jun 9 Major 855
Dr Discount Received Account Cr
Date Particulars Amt Date Particulars Amt
Jun 9 Major 45
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Trade Discount
Trade discount – a deduction off the list or catalogue price of goods given by one trader when he sells to another trader.
The amount of trade discount given will depend on:
1. The quantity of goods purchased
2. The regularity of purchase
3. The nature of goods
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Dishonoured Cheques
A cheque received from a customer may, when presented to the bank, be refused payment or dishonoured because:1. the drawer may not have enough money in his Current Account;2. the cheque may be post-dated; or3. the cheque may contain errors (e.g. signature missing, amount written wrongly, and etc.)
When this happens, the trader will be informed and his books must be adjusted to cancel the entries made earlier.
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Dishonoured Cheques (Example)2005
Apr 1 Joe owed RM150.
3 Joe paid RM135 in full settlement of his account.
9 Joe’s cheque was returned by the bank marked “Insufficient
funds”.
Dr Cash Book Cr
Date Part. Disc.
Cash Bank Date Part. Disc.
Cash Bank
2005
Apr 3 Joe
RM
15
RM RM
135
2005
Apr 9 Joe (cheque dishonoured)
RM RM
135
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Dishonoured Cheques (Example)Dr Joe Cr
Date Particulars Folio Amt Date Particulars Folio Amt
2005
Apr 1
9
Balance b/d
Bank (cheque dishonoured)
Discount allowed (withdrawn)
RM
150
135
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Apr 3 Bank
Discount
allowed
RM
135
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Dr Discount Allowed Account Cr
Date Particulars Folio Amt Date Particulars Folio Amt
2005
Apr 30
Sundries
RM
…
2005
Apr 9 Joe (cheque dishonoured)
RM
15
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Bank Overdraft
The debit balance of the Bank Account shows the amount available in the current account.
The Bank Account can have a credit balance when the trader overdraws from his current account (overdraft facility with the bank).
The company is only allowed to overdraw up to a certain amount and he has to pay interest on the amount overdrawn.
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Bank Overdraft (Example)
2005
Jan 1 Yang’s Bank Account shows a debit balance of RM500.
5 Yang’s application for an overdraft facility of up to
RM10,000 is approved by the bank.
10 Yang paid a cheque of RM4,500 to purchase office equipment.
Dr Cash Book Cr
Date Part. Folio Cash Bank Date Part. Folio Cash
Bank
2005
Jan 1
Bal b/d
RM RM RM
500
2005
Jan 10
Office equipment
RM RM
4,500
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Bank Overdraft
In the case where a company overdraws his Current Account, any money paid into the company’s Current Account will be debited to the bank column in the Cash Book and hence will reduce or cancel the overdraft.
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Bank Loan
A form of finance obtained from a bank, to be repaid with interest on or before a fixed date
A separate Loan Account is opened to record loan from the bank or other people.
Double-entry:
Dr. Bank Account
Cr. Loan Account
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Interest on Bank Loan
Interest on a bank loan is accounted separately from the principal amount of the loan.
Double-entry for interest paid:
Dr. Interest Expense Account
Cr. Bank Account
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Petty Cash
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Petty Cash
Petty cash fund is kept for the purpose of paying minor expenses.
Usually held under control of the petty cashier to meet daily small expenditure.
Can you think of examples of expenses
that might be paid from petty cash?
Can you think of examples of expenses
that might be paid from petty cash?
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Petty Cash Book
PETTY CASH BOOK
Payment Analysis
Received$
Date Fol Details Voucher No.
Total Paymnt
$
Postage
$
Stationery
$
Fare
$
Misc-ellaneous
$
100.00 Sep 1 8 Cash received
Sep 4 12 Stamps 8 20.00 20.00
Sep 9 13 Stapler 9 10.00 10.00
Sep 17 6 Teabags/Coffee 10 7.00 7.00
Sep 24 12 MRT fare 11 1.50 1.50
Sep 30 12 Taxi fare 12 8.00 8.00
TOTAL 46.50 20.00 10.00 9.50 7.00
Balance c/d 53.50
100.00 100.00
53.50 Balance b/d
46.50 Oct 1 Cash received
