Transcript Business Studies Transition Year Module

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Joan Martin
This module is revision for students who are studying Junior Certificate
Business Studies and have an interest in studying Accounting for Leaving
Certificate as part of their Transition Year course.
The student is introduced to and understand:
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Purpose of accounting records
Steps in Accounting
Source documents and day books
Double-entry bookkeeping and the trial balance
Assets, Liabilities, Expenses and Revenue
The function of each day book
Interpret ledger entries and balances
If you owned a business, what areas do you need to keep track of?
Businesses must complete a number of documents before transferring the
information to accounts. Can you name some of these documents?
Source Documents
Letter of
Enquiry
Statement
of Account
Quotation
Delivery
Docket
Order Form
Debit/Credit
Note
Invoice
What is the purpose of each document?
BALANCE
SHEET
PROFIT &
LOSS
ACCOUNT
TRADING
ACCOUNT
INVOICE
Transaction occurs
Credit
Note,
Cheques
Analysis of
transaction
Accounting Cycle
Preparation of final
accounts
TRIAL BALANCE
DR
Adjustment of
balances
Recording of
transactions
CR
Preparation of trial
balance
Posting to ledger
account
Source Documents
Books of First Entry
Sales invoices
Sales Book
Credit notes sent
Sales Returns/
Returns Inwards Book
Purchases invoices
Purchases Book
Credit notes received
Purchases Returns/
Returns Outwards Book
Lodgement slips, cheques, receipts Cash Book
Petty cash vouchers
Petty cash book
Financial correspondence
General Journal
Accounting is recorded in the following sequence
1.
2.
3.
4.
Books of First Entry
Ledger Accounts
Trial Balance
Final Accounts
a. Trading Account
b. Profit and Loss Account
c. Balance Sheet
Books of First Entry
The Books of First Entry are the first stage of Accounting for all new
businesses.
These books are:
• General Journal
• Sales Day Book
• Sales Returns Day Book
• Purchases Day Book
• Purchases Returns Day Book
• Cash Book (Receipts and Payments)
• Petty Cash Book
All transactions are posted twice from the Books of First Entry to the
Ledger Accounts. There are 3 Ledgers:
• Debtors Ledger
• Creditors Ledger
• General/Nominal Ledger
Class/Group Discussion
Goods/items can be bought or sold on credit or by cash?
What does buying on CREDIT mean?
General Journal
This Book is used to record entries that cannot be entered in any other Book
of First Entry for example opening entries of assets and liabilities at the start
of the year.
i.e. Purchase of a Fixed Asset
Worked Example
Martin’s Ltd had the following Assets and Liabilities on 1st January 2012;
Premises €350,000, Land €120,000, Stock €50,000, Bank Overdraft €40,000,
Share Capital €480,000
Click to access General Journal questions
2012
General Journal
1Jan
Premises
GL
€350,000
Land
GL
€120,000
Stock
GL
€50,000
Bank Overdraft
CB
€40,000
Share Capital
GL
€480,000
Assets, Liabilities
and capital as on
this date
€520,000
€520,000
Sales Day Book
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•
•
•
Goods that are sold on credit are entered in a Sales Day Book
There are three money columns, main column is Gross Sales (including VAT)
Analysis columns is divided into VAT and Net Sales
Entries from the Sales Day Book is used to update the Nominal/General
Ledger and Debtors Ledger
Worked Example:
1 June Sold goods on credit to J Knox Invoice 1 €5,400
4 June Sold goods on credit to T Reilly Invoice 2 €6,500
Sales Day Book
Date
Details
F
In. No.
Net
Sales
VAT @
23%
Total
Sales
1 June
J Knox
DL1
1
€5,400
€1,242
€6,642
4 June
T Reilly
DL2
2
€6,500
€1,495
€7,995
€11,900 €2,737
€14,637
Sales Returns Day Book
Businesses will issue credit notes to customers when:
1.
Goods previously sold are returned due to be faulty or damaged
2.
Where prices charged on the original invoices were miscalculated and
need to be corrected
Worked Example:
5 June J Knox returned goods Credit note 1 €400
8 June T Reilly returned goods Credit note 2 €200
Sales Returns Day Book
Date
Details
F
5 June
J Knox
8 June
T Reilly
Cr. No.
Net
Sales
VAT @
23%
Total
Sales
DL1 1
€400
€92
€492
DL2 2
€200
€46
€246
€600
€138
€738
Sales Day Book/Sales Returns Day Book
The figures can be transferred to ledger accounts as follows:
Sales Day Book
NET
VAT
TOTAL
€
€
€
Debit side Debtors A/C
Credit side VAT A/C
Credit Side Sales A/C
Sales Returns Day Book
Credit Side Debtors A/C
Debit Side VAT A/C
Debit Side Sales Returns A/C
Purchases Day Book
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•
•
•
This book records credit purchases
Main column is Gross/Total purchases (including VAT)
Analysis columns divided into VAT and Net Purchases
Information from the Purchases Book is used to update both the
Nominal/General Ledger and Creditors Ledger on a monthly basis
Worked Example
1 July
4 July
Purchased goods on credit Invoice No. 34 from J. Clarke €3,000
Purchased goods on credit Invoice No. 35 from T. Jones €2,400
Date
Details
F
In. No. Net
VAT @
Purchases 23%
Total
Purchases
1 July
J. Clarke
CL1
34
€3,000
€690
€3,690
4 July
T. Jones
CL2
35
€2,400
€552
€2,952
€5,400
€1,242
€6,642
Purchases Returns Day Book
Businesses receive credit notes from suppliers when:
1. You have returned goods to the supplier due to damage or faulty
2. When you have been overcharged on an invoice from a supplier
Worked Example:
6 July
9 July
Returned goods to J. Clarke Credit Note No. 21 €200
Returned goods to T. Jones Credit Note No. 22 €140
Purchases Returns Day Book
Date
Details
F
Cr. No. Net
VAT @
Purchases 23%
6 July
J. Clarke
CL1 21
€200
€46
9 July
T. Jones
CL2 22
€140
€32.20 €172.20
€340
€78.20 €418.20
Click here to access Day Books questions
Total
Purchases
€246
Purchases Returns Day Book
Debit Side Creditors A/C
Credit Side VAT A/C
Credit Side Purchases Returns A/C
Cash Book – Cash Receipts
• This book records cash receipts and payments
• Main columns are cash received, payments and balance
• Analysis columns are Debtors, Cash Sales and more if required
• Discount allowed in separate column
• Information from Cash Receipts Book is used to update the
Nominal/General Ledger and Debtors ledger on monthly basis
Cash Book – Cheque Payments
• Records cheque payments and bank debits i.e. direct debits, standing
orders
• Main column is cheque amount
• Analysis columns are Creditors and other payment types
• Discount received in separate column
• Information from Cash Payments Book is used to update the
Nominal/General ledger and Creditors ledger on monthly basis
Cash Book
Cash Receipts
Cheque Payments
Bank Statements
Copy of receipts
Lodgements
Cheque book
Bank Statements
Receipts received
Cash Receipts and Payments Book
Worked Example
Record the following transactions of Smith Ltd using the following
headings:
Debit Side:
Debtors, Sales
Credit Side:
Creditors, Purchases, Wages
1 April
1 April
3 April
5 April
6 April
9 April
10 April
Cash at bank €3,500
Purchased goods by cheque (No. 23) €1,450
Paid wages by cheque (No. 24) €1,230
Paid Clarke Ltd by cheque (No. 25) €1,330
Cash Sales lodged €4,500
Purchased good by cheque (No. 26) €550
Received cheque from Holmes Ltd €800 lodged
Task: Complete the transactions on the next slide.
Cash Receipts and Payments Book
Debit Side
Date
Details
F
Bank
Debtors
1 April
Cash
b/d €3,500
Sales
Credit Side
Date
Details
F
Bank
Purchases
PB
€1,450
Wages
€1,230
Creditors
Purchas
es
Wages
€1,450
€1,230
PETTY CASH BOOK
What is Petty Cash Book used for?
What is a float?
Name some items that belong in a Petty
Cash Book?
Petty Cash Book
• Petty cash book operates as an Imprest system, it has a float paid in at the
beginning of each month.
• Records small cash receipts and payments
• Main columns are bank/cash, receipts and payments
• Analysis columns are used to group similar payments such as stationery,
postage etc.
• Information from the petty cash book is used to update the
Nominal/General Ledger on a monthly basis
Worked example:
Record the following transactions in the Petty Cash book of Martin Ltd for April
2012, following are column headings:
Postage, Canteen, Sundries
1 April
3 April
5 April
7 April
8 April
Cash on hand (imprest) €200
Stamps Voucher No. 1 €3.00
Coffee Voucher No. 2 €1.50
Charity donation Voucher No. 3 €5.00
Stamps Voucher No. 4 €1.80
Click here to access Petty Cash Book questions
Solution
Martin Ltd Petty Cash Book
Petty Cash Book Receipts – Dr Side
Date
Details
F
Cash
1 April
Balance
b/d
€200
Petty Cash Book Payments – Cr Side
Date
Details
Voucher Cash
No.
Postage
3 April Stamps
1
€3.00
€3.00
5 April Coffee
2
€1.50
7 April Charity
3
€5.00
8 April Stamps
4
€1.80
Balance
Canteen Sundries
€1.50
€5.00
€1.80
€184.20
€200.00
€4.80
€1.50
€5.00
Ledger Accounts
Sales Day Book, Sales Returns Day Book, Purchases Day Book and Purchases
Returns Day book entries are transferred to the Ledger accounts:
Debtors Ledger: these are the accounts of debtors or customer i.e. people
who owe the business money.
Creditors Ledger: these are the accounts of creditors or suppliers i.e. people
the business owe money to.
Double-entry Bookkeeping system
• In your study of double entry so far, every accounting entry is based on the
double-entry principle. There are two aspects to every transaction. The
basic rule is:
• DEBIT – Assets and Expenses
• CREDIT – Liabilities and Revenue
If a business wanted to reduce an asset or an expense – entry on the credit
side of asset or expense account.
If a business wanted to reduce a liability or revenue – entry on the debit side
of the liability or income account.
It follows that if all the debit and credits are entered correctly in the ledger
at the end of the accounting period the totals of the debits will equal the
totals of the credits.
These balances are listed in a Trial Balance.
A business will have ASSETS. These are something of value for example:
• Buildings
• Motor Vehicles
• Delivery Vans
• Equipment
• Cash
• Stock (items for resale)
Your business will also have LIABILITIES. These are something you owe
for example:
• Loan
• Bank Overdraft
If you sell on credit, you owe money to a Debtor.
If you buy on credit, a Creditor owes you money.
Is a Debtor an Asset or a Liability?
Is a Creditor an Asset or a Liability?
Discussion
When a business is starting up it requires Capital and this money is lodged
in the Bank.
Which of the underlined words is the ASSET and which is the LIABILITY?
Explain why?
All transactions can be recorded in 4 different types of
accounts:
ASSETS – resources owned by a business such as land,
buildings, machinery etc.
LIABILITIES – these are amounts owed by the business to
outsiders such as bank overdraft, long term loans, creditors,
capital and owners equity.
EXPENSES – these are costs suffered in generating the
revenue of a business such as wages, rent, light and heat etc.
REVENUE – these are earnings from selling goods and services
or other income earned such as bank interest, sales
An account is maintained for every Asset, Liability and every
category of expense and revenue.
Rules of Entry – Recording transactions affecting Assets,
Liabilities and Capital
Rule 1
To record an increase in an Asset – Debit the Account
To record a decrease in an Asset – Credit the account
Asset A/C
Rule 2
Dr Side
Cr Side
Increase (+)
Decreases (-)
To record an increase in a Liability – Credit the Account
To record a decrease in a Liability – Debit the Account
Liability A/C
Dr Side
Cr Side
Decreases (-)
Increases (+)
Rule 3
To record an increase in Expense – Debit the Account
To record a decrease in Expense – Credit the Account
Expense A/C
Dr Side
Cr Side
Increases (+)
Decreases (-)
Rule 4
To record an increase in revenue – Credit the Account
To record a decrease in revenue – Debit the Account
Revenue A/C
Dr Side
Cr Side
Decreases (-)
Increases (+)
For every Debit entry there must be a Credit entry of equal
amount and vice versa
Class Questions/Activities
Click to access the Double Entry Quiz
Day Books questions
Double Entry questions
Double Entry worksheet
Full questions, all accounts
General Journal questions
Petty Cash Book questions
Layout of Accounts
Accounting Worksheets
Each transaction is entered into an account
Account Name
Credit Side
Debit Side
Date
Details
F
€
Date
Details
F
€
Date: Date of transaction
Details: Other account involved in the transaction
Folio: Reference to where the other account can be found
€: Amount of money involved
See additional notes on T Accounts and Balancing Accounts and Trial Balance.
Layout of Accounts.docx
Double-entry Bookkeeping
With every transaction there is a debit and credit side entry
Rule:
Debit Receiver
Credit Giver
Example:
1st June: Paid insurance by cash €450
Dr
1/6
Dr
Insurance Account
Cash
Cr
€450
Cash Account
1/6
See Worksheet for additional Questions
Double entry questions.docx
Cr
Insurance €450
After all transactions are completed in the ledger accounts, the accounts are
balanced off and the closing balances are transferred to a Trial Balance.
Trial Balance
Details
F
Sales
GL
Bank
CB
Debit
Credit
€230,000
€230,000
€230,000 €230,000
From a Trial Balance the Final Accounts are prepared:
• Trading Account
• Profit and Loss Account
• Balance Sheet
Full questions all accounts.docx
Summary: An Overview
Business
Documents
Transactions
Credit Purchases
Credit Sales
Purchases Book
Sales Book
Returns Inwards
Returns
Outwards
Returns Inwards
Book
Cash
Receipts and
Payments
Returns
Outwards Book
Unusual
Transactions
Petty Cash Book
General Journal
Cash Book
Debtors Ledger
Creditors Ledger
General Ledger
Trial
Balance