POA Book Notes

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Principles of Accounts
CSEC Ms Fergusson

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ST. MARY’S COLLEGE

CSEC REVISION NOTES
TABLE OF CONTENTS INTRODUCTION TO
ACCOUNTING ACCOUNTING CONCEPTS AND CONVENTIONS INTRODUCTION
TO THE BALANCE SHEET SIMPLE VERTICAL FORMAT OF A
CLASSIFIED BALANCE SHEET ACCOUNTING CYCLE JOURNALS
LEDGERS TRIAL BALANCE CORRECTION OF ERRORS
ADJUSTING ENTRIES FINAL A/CS OF SOLE TRADERS
CONTROL SYSTEMS BANK RECONCILIATION STATEMENT CONTROL A/CS
SUSPENSE A/CS & CORRECTION OF ERRORS FINAL
A/C FORMATS RATIO ANALYSIS PAGE 3 4 5 9
10 12 17 22 23 24 28 30 32 35 38 43 63
INTRODUCTION TO ACCOUNTING
The Purpose of Accounting :

 Definition of accounting o Accounting is the process of classifying, summarizing,
recording, interpreting and communicating financial information.
      Identifying: Establishing the essential characteristics or features of.
Classifying and summarizing: sorting out data in a useful order. o To Classify - to
arrange or place items into categories or groups. o To Summarize – To create a
short description that gives the main facts in a condensed form. Measuring: placing
a value; assigning numbers; determining the size Recording: make an official note
of in writing, printing, or such. Interpreting: explain the meaning of something in
clear, understandable terms. Communicating / Reporting: Presenting data to
stakeholders like internal management and external users.
The purpose of accounting o The purpose of accounting is to provide information

about financial situation of an organization, so that informed decisions can be
made.
Difference between accounting and bookkeeping

o Definition of Bookkeeping – Bookkeeping is the recording of the accounting of a
business.  Bookkeeping consists of entering transactions into the journals, making
adjustments, maintaining precise and accurate records, and preparing reports that
keep management up to date on the financial condition of their company. Bookkeeping
is, therefore, a part of accounting, the part concerned with recording information
and preparing accounts. Accounting involves interpreting the information recorded
by the bookkeeper, and preparing reports in a way that management can use for
decision making. They prepare monthly financial statements and tax returns at year
end. Accountants may also prepare budgets for management and loan proposals for
bankers; They may also perform cost analysis for the company’s products or
services.
Accountants are responsible for the design and management of the financial systems
that bookkeepers use.   
Users of Accounting :

The Users of Accounting Information: need to know profitability & liquidity of

business, resources and liabilities Internal Users
o o o o o o Owners of the Business – need to know profitability & liquidity of
business; money in and out; financial resources Management: - need to know
profitability & liquidity of business - decision-making Employees / Trade Unions –
Collective bargaining…negotiations for better wages etc.
External Users
Potential Investors – general public and financial institutions e.g. unit trust –
risk and return of investment The Bank and other financial institutions – need to
know credit rating – risk of non-repayment of loans Suppliers – credit sales
The Types of Business Organizations :
 The various forms of business organizations are:
   Sole Trader: 1 owner Partnership: 2 – 20 owners / partners Limited Liability
Companies o Private Limited Companies: 2 – 50 owners / shareholders o Public
Limited Companies: 7 – unlimited owners / shareholders Cooperative Societies
(purpose is furthering the economic welfare of its members): open membership Non-
Profit Organizations
 
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Accounting Concepts and Conventions

Accounting Concepts and Conventions are the accounting rules that are followed when
recording transactions in the books. states that assets are valued and shown in the
accounts at their cost price (the amount asset is purchased for). states that only
transactions that can be measured in monetary terms should be recorded in the
books. states that the business is assumed to be in operation in the foreseeable
future. states that the items recorded in the business’ books are transactions that
affect the business (business transactions). The owner (s)’ private transactions
are kept separate from business transactions. states that revenue is
realized/recognized/earned and recorded as revenue when the goods or services are
passed to the customers and a liability is incurred. It is NOT based on when cash
has been received. states that the expenses incurred or used up in an accounting
period must be matched to the revenues earned in that period, and therefore,
recorded in the accounting period incurred. states that there are two aspects of
accounting, and both aspects are always equal to each other. Assets must always
equal Capital plus Liabilities (Accounting Equation). “Double entry” is the method
of recording the transactions for the dual aspect concept. states that only
relevant information, which has the ability to influence decisions, is reported.
Small amounts are not considered material and may either not be reported, or do not
have to follow accounting concepts. states that, in times of uncertainty, the
figure that understates profit should be reported, rather than the figure that
overstates profit. Expenses should be overstated rather than understated, and
revenue should be understated rather than overstated. states that the same method
should be used for the accounting treatment of similar items, and the same method
should be used from year to year. If the method is changed, the change should be
disclosed.
The Cost Concept
ACCOUNTINGCONCEPTS Therulesthatstatehowtransactionsaretoberecorded.
The Money Measurement Concept The Going Concern Concept
The Business Entity Concept
The Realization Concept (Revenue Recognition Concept)
The Accrual Concept (Matching Concept)
The Dual Aspect Concept
ACCOUNTINGCONVENTIONS Thesearetherulesthatstandardizethe accountingmethodsusedto

assurethat similaritemsaredealtwithinsimilarways.
Materiality
Prudence / Conservatism
Consistency
INTRODUCTION TO THE BALANCE SHEET
The Five classes/categories of Accounts :

 ALICE: Assets, Liabilities, Income, Capital, and Expenses.
A – Assets L – Liabilities I – income / Revenues C – Capital / Owner’s Equity E –

Expenses
Assets Assets are economic resources owned by a business that are used in its daily
operations to generate profit and benefit the business. Simply, they are a
company’s resources i.e. things the company owns.
Liabilities Liabilities are economic resources borrowed by a business from a person

or organization. They are the debts of the business i.e. amounts the business owes.
Income Income / revenues are amounts earned during the accounting period from the
daily operations of the business. Simply, they are what the business earns for
providing goods and services.
Capital / Owner’s Equity Capital is the economic resources that were contributed by
the owner(s) of the business to the business, either to start the business or to
continue its operations.
Expenses Expenses are the costs incurred by a business in its daily operations in
earning income. In other words, they are the cost of assets used by the business to
generate revenues.
A company’s financial position The financial position of a company is measured by:

1. Assets (what it owns) 2. Liabilities (what it owes to others) 3. Capital /
Owner’s Equity N.B. Every business transaction will have an effect on a company’s
financial position.
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The Balance Sheet and its major components :

 Definition of Balance Sheet • • The Balance sheet is a financial statement that
is produced in order to show the financial position of the enterprise shows It is
produced in order to show the assets of a business in relation to its liabilities
and capital at a particular point in time.
The major components of the Balance Sheet The financial position of a company is
measured by: 1. Assets (what it owns) 2. Liabilities (what it owes to others) 3.
Capital / Owner’s Equity Assets, Liabilities and Capital are, therefore, Balance
Sheet accounts • Assets  Assets are economic resources owned by a business that
are used in its daily operations to generate profit and benefit the business. 
There are two types of assets: o Fixed Assets: assets used to carry on the business
and generate profit. They are not purchased for resale but intended to be retained
permanently for the purpose of carrying on the business e.g. Land and Buildings,
Fixtures and Fillings, Machinery etc. Current Assets: assets consisting of cash and
other assets that would be consumed or easily converted into cash within one year.
Liabilities  Liabilities are economic resources borrowed by a business from a

person or organization. They are the debts of the business (the money owed by the
business).  There are two types of liabilities: o o Long Term Liabilities: These
are any debts or obligations owed by the business that are due more than one year
from the current date e.g. Mortgages, Bank Loans etc. Current Liabilities: These
are any debts or obligations owed by the business that are due within one year from
the current date e.g. Creditors (suppliers, short term loans), bank overdrafts etc.
Capital / Owner’s Equity  Capital is the economic resources that were contributed
by the owner(s) of the business to the business, either to start the business or to
continue its operations.  Capital is considered a special kind of liability. It is
a loan by the owner to the business and is, therefore, money owed by the business
to the owner. N.B. For accounting purposes, a business is regarded as being a
separate entity from its owner(s). (the business entity concept)
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The Accounting Equation :

The Accounting Equation (also called the balance sheet equation.) • • • The
Accounting Equation is the basic equation of double entry accounting that reflects
the relationship between a company's assets, liabilities, and equity. It shows how
assets were financed: either by borrowing money from someone (liability) or by
paying your own money (ownership equity). It is expressed as:
Assets = Liabilities + Capital
The double entry system is a method used to record each transaction twice in the
books as every transaction affects two items.
Additional Information
The Expanded Accounting Equation :

o The expanded accounting equation includes two components of Closing Capital:
Revenue and Expenses  Revenue – Expenses = the business’ Profit or Loss     If
Revenues > Expenses, there is a Profit If Revenues < Expenses, there is a loss
The owner of the business also has the option to withdraw capital from the business
for personal use: Drawings The expanded accounting equation is, therefore: Assets =
Liabilities + Capital + Revenues – Expenses – Drawings o o o Revenues increase
Capital / Owner’s Equity Expenses decrease Capital / Owner’s Equity Drawings
decrease Capital / Owner’s Equity
The Simple Balance Sheet :

o An elaborate form of the Accounting equation is presented in a Balance Sheet,
which lists all assets, liabilities, and equity, as well as totals to ensure that
it balances.
The Format of a simple Balance Sheet (Horizontal) Balance Sheet as at $ Assets X

Capital Liabilities XX Balance Sheet as at $ Fixed Assets Current Assets X X
Capital Long Term Liabilities Current Liabilities XX $ X X X XX $ X X XX
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The Balance Sheet – Arrangement of Assets and Liabilities

The assets and liabilities should be arranged in balance sheet in some specific
order. Arrangement of assets and liabilities in the balance sheet is called
'Marshalling of assets and liabilities'. There are two systems of arrangement of
assets and liabilities in the balance sheet: (a) Order of Liquidity. (b) Order of
Permanence.
The Balance Sheet – Order of Permanence:

PERMANENCE is the condition, quality or state of being lasting or fixed, primarily
judged by durability and useful life. ORDER OF PERMANENCE is where fixed assets are
entered in the balance sheet in descending order of permanence (i.e. land first,
then buildings, then equipment etc).
Balance Sheet as at $ Fixed Assets Current Assets X X Capital Long Term Liabilities
Current Liabilities XX $ X X X XX
The Balance Sheet – Order of Liquidity:

LIQUIDITY refers to the ability to quickly and easily convert assets into cash
without incurring a significant loss ORDER OF LIQUIDITY is when items on a balance
sheet are listed in descending order of liquidity. After cash, the other current
assets are listed in order of liquidity or nearness to cash (i.e. Accounts
Receivable first, then Inventory…).
Balance Sheet as at $ Current Assets Fixed Assets X X XX

N.B. The most permanent assets are the least liquid.
$ Current Liabilities Long Term Liabilities Capital X X X XX
Assets and Liabilities in Order of Permanence and Liquidity :

FIXED ASSETS
Order of Permanence Land Buildings Machinery Equipment Motor Vehicles Order of
Liquidity Motor Vehicles Equipment Machinery Buildings Land
CURRENT ASSETS
Order of Permanence Land Buildings Machinery Equipment Motor Vehicles Order of
Liquidity Motor Vehicles Equipment Machinery Buildings Land
LONG TERM LIAB.

Order of Permanence Mortgage Bank Loan due in over a year Order of Liquidity Bank
Loan due in over a year Mortgage
CURRENT LIAB.
Order of Permanence Creditors Bank Overdraft Order of Liquidity Bank Overdraft
Creditors
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VERTICAL FORMAT OF A SIMPLE BALANCE SHEET OF A SOLE TRADER Owner’s Name Balance
Sheet as at _________ $ FIXED ASSETS: Land & Buildings Plant & Machinery Fixtures &
Fittings Motor Vehicles CURRENT ASSETS: Stock Debtors Bank * Cash Total Current
Assets LESS: CURRENT LIABILITIES Bank Loan (1yr or less) Creditors Bank overdraft *
Total Current Liabilities WORKING CAPITAL FINANCED BY: CAPITAL: Opening Capital
Add: Net Profit OR Less: Net Loss Less: Drawings Closing Capital LONG-TERM
LIABILITIES Mortgage Bank Loan (more than 1 year) Total Long Term Liabilities X X X
XX X X OR (X) X (X) X X X X X X X X X X X $ $
X X X (X) X XX
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ACCOUNTING CYCLE Ms Fergusson

Accounting Cycle
The accounting cycle is a series of steps for recording each transaction in the
accounting process, which are repeated every accounting period.
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NB. Journalizing and posting to ledgers are done through out the period, whereas
the rest of the cycle is done at the end of a period.
Categories and Types of Accounts

Categories of Accounts
A L I C E Assets Liabilities Income / revenue Capital Expenses
Types of Accounts
Personal Accounts – Debtors and Creditors Real Accounts – Assets & Liabilities
Nominal Accounts – Revenue and Expenses
Journals (Books of Original Entry)
Transaction
ALL CASH / CHEQUE TRANSACTIONS Capital: investment by owner Receipt from Loans and
repayment of Loans Purchase / Sale of Fixed Assets for cash or cheque Purchase of
Stock with cash or cheque (Cash Purchases) Sale of Stock for cash or cheque (Cash
Sales) Payment of expenses e.g. rent, salaries, insurance, interest on loan, etc.
Payment of creditors (suppliers) the amount owed to them Receipt of income/revenue
e.g. interest received, rent received, etc. Receipt of cash/cheque from debtors
(customers) the amount owed by them Drawings: money withdrawn from business for
personal use Discounts Received and Discounts Allowed CREDIT TRANSACTIONS INVOLVING
STOCK AND FIXED ASSETS Purchase of Stock on credit (Credit Purchases) Sale of Stock
on credit (Credit Sales) Sales Returns / Returns Inwards Purchases Returns /
Returns Outwards Purchase / Sale of Fixed Assets on credit TRANSACTIONS ENTERED IN
THE GENERAL JOURNAL Transactions that are entered in the cash book are also entered
in the GJ Capital: investment by owner Purchase / Sale of Fixed Assets for cash or
cheque Payment of expenses e.g. rent, salaries, insurance, and... - Discounts
Allowed - Carriage Inwards and Outwards Receipt of income/revenue e.g. interest
received, rent received, and... - Discounts Received Payment of creditors
(suppliers) the amount owed to them Drawings: money withdrawn from business for
personal use Non Cash Transactions are entered in the GJ Adjusting Entries -
Provision for Depreciation - Bad Debts written off - Provision for Bad Debts -
Prepayments and Accruals Cash Book Cash Book Cash Book Cash Book
Cash Book Cash Book Cash Book Cash Book Cash Book
Cash Book Cash Book
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Journal
Purchases Journal Sales Journal Ret. Inwards Journal Ret. Outwards Journal
General Journal
General Journal General Journal General Journal General Journal

General Journal
OTHER ENTRIES OF THE BUSINESS Opening Entries (list of opening balances of assets,
liabilities and capital a/cs) Correction of Errors Closing Entries (list of closing
balances of assets, liabilities and capital a/cs)
General Journal General Journal General Journal

Name of the Business Sales Journal Date Year dt dt dt End of mth Details Debtor
e.g. John Smith Debtor e.g. Jane Doe Debtor Transfer to Sales account

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Invoice #
Folio SL # SL SL GL
Amount $ X X X XX
Purchases Journal Date Year dt dt dt End of mth Details Creditor e.g. Will Browne
Creditor e.g. Alice Williams Creditor Transfer to Purchases account

Invoice #
Folio PL # PL PL GL
Amount $ X X X XX
Returns Inwards Journal Date Year dt dt End of mth Details Debtor e.g. John Smith
Debtor e.g. Jane Doe Transfer to Returns inwards account

Invoice #
Folio SL # SL GL
Amount $ X X XX
Returns Outwards Journal Date Year dt dt End of mth Details Creditor e.g. Will
Browne Creditor e.g. Alice Williams Transfer to Returns outwards account Invoice
# Folio PL # PL GL Amount $ X X XX
Cash Book
Date Details Folio Discount Allowed Cash Bank Date Details Folio Discount Received
Cash Bank
Year dt dt dt dt dt dt *dt *dt dt
$ Balance b/d Capital Sales Debtor Interest received Loan Bank Cash Balance b/d
GL GL SL GL GL GL GL
$ X X
$ X X X
X X X X XX X
X X XX X
Year dt dt dt dt *dt *dt dt dt
$ Purchases Motor Vehicle Creditor Drawings Cash Bank Interest on Loan Balance c/d
GL GL PL GL GL GL GL
$
X X X X X XX
$ X X X X X X XX

The Journal Date Year dt Details Account debited e.g. Motor Vehicle Account
credited e.g. Bank Account Narrative (description of transaction) e.g. to
record the purchase of Motor Vehicle Folio GL GL DR $ X CR $ X
TheJournal
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The General Journal is the journal used to record opening entries, closing entries,
adjusting entries and correction of errors.
Opening Journal (opening balances for assets, liabilities and capital accounts)
At the beginning of an accounting period, there is one journal entry which shows
all the opening balance of assets, liabilities and capital called an opening
journal entry. Because all assets have debit balance, so these are debited in
opening journal entry and all liabilities have credit balance, so these are
credited in opening journal entry. Capital is credited.
It is based on accounting equation

The balances can be taken from the balance sheet of previous year. To
creating the opening journal entry make a list of all Assets on debit side, all
Liabilities and Capital on credit side.
The Journal Date Year dt Details Land and Buildings Plant and machinery Motor
Vehicles Stock (Inventory) Debtors Bank Cash Mortgage Bank Loan Creditors Accrued
Expenses Provision for Depreciation: Motor Vehicles To record assets, liabilities
and capital of business at beginning of period Folio GL GL GL GL GL GL GL GL GL GL
GL GL DR $ X X X X X X X CR $
X X X X X XX
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Correction of errors, Adjusting entries, etc.

The Journal Date Year dt Details Account debited e.g. Motor Vehicle Account
credited e.g. Bank Account Narrative (description of transaction) e.g. to
record the purchase of Motor Vehicle Folio GL GL DR $ X CR $ X
PettyCashBook
Receipts $ X CB Folio Date 2011 Jan 3 Jan 7 Jan 10 Jan 14 Jan 19 Jan 25 Jan 26 Jan
31 X X X CB Feb 1 Feb 1 Balance b/d Cash Cash Postage Motor Exp. R. King Travel
Exp. Sundry exp. Cleaning Balance c/d X X X X X X X X X X X X X X X X X X X PL X X
Details Total $ Motor Expenses $ Travel Expenses $ Postage $ Cleaning $ Sundry
Expenses $ Ledger Folio Ledger Accounts $
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PettyCashBook
Receipts $ X CB Folio Date 2011 Jan 3 Jan 7 Jan 10 Jan 14 Jan 19 Jan 25 Jan 26 X XX
X Feb 1 Balance b/d CB Jan 31 Jan 31 Cash Postage Motor Exp. R. King Travel Exp.
Sundry exp. Cleaning Cash Balance c/d X XX X X X X X X X X X X X X X X X X X PL X X
Details Total $ Motor Expenses $ Travel Expenses $ Postage $ Cleaning $ Sundry
Expenses $ Ledger Folio Ledger Accounts $
PettyCashBook
Receipts $ 300 CB Folio Date 2011 Jan 3 Jan 7 Jan 10 Jan 14 Jan 19 Jan 25 Jan 26
Jan 31 300 204 96 CB Feb 1 Feb 1 Balance b/d Cash Cash Postage Motor Exp. R. King
Travel Exp. Sundry exp. Cleaning Balance c/d 5 20 30 15 12 14 96 204 300 20 15 5 14
14 12 30 15 12 20 PL 30 5 Details Total $ Motor Expenses $ Travel Expenses $
Postage $ Cleaning $ Sundry Expenses $ Ledger Folio Ledger Accounts $
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PettyCashBook
Receipts $ 300 CB Folio Date 2011 Jan 3 Jan 7 Jan 10 Jan 14 Jan 19 Jan 25 Jan 26 96
396 300 CB Feb 1 Balance b/d Jan 31 Jan 31 Cash Postage Motor Exp. R. King Travel
Exp. Sundry exp. Cleaning Cash Balance c/d 300 396 5 20 30 15 12 14 96 20 15 5 14
14 12 30 15 12 20 PL 30 5 Details Total $ Motor Expenses $ Travel Expenses $
Postage $ Cleaning $ Sundry Expenses $ Ledger Folio Ledger Accounts $
Ledgers (Double entry – T accounts)
A T-ACCOUNT is an individual record of business transactions that result in
increases and decreases in the specific asset, liability, or capital item. An
account consists of three parts: - The Title/Name of the account
- The left side (known as debit / Dr) - The right side (known as credit / Cr)
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Name of account e.g. Capital Date Details Folio Dr$ Date Details Folio Cr$
• •
Increases and decreases in assets, liabilities and capital are posted in the form
of debits and credits. Debit and credit, therefore, indicate on which side of a T
account numbers will be recorded. For some types of accounts debit means an
increase in the account balance, while for others debit means a decrease in the
account balance, as seen below: Category of Account
Assets Liabilities Income / revenue Capital Expenses
Entry to Increase
Debit Credit Credit Credit Debit
Entry to Decrease
Credit Debit Debit Debit Credit
LEDGERS are books of final entry containing the T-accounts of the business in which
transactions are posted in the form of debit and credits.
Ledgers
Sales Ledger Purchases Ledger General Ledger
T-Accounts
Debtor a/cs (personal accounts) e.g. John Smith Creditor a/cs (personal accounts)
e.g. Alice Williams Real a/cs: assets, liabilities and capital e.g. Motor Vehicles,
Stock, Loans etc. Nominal a/cs: income and expense a/cs e.g. Rent, Discount
Allowed, Interest received
Account
Debtor a/cs (personal accounts) e.g. John Smith Creditor a/cs (personal accounts)
e.g. Alice Williams Sales , Purchases, Returns Inwards, Returns Outwards a/cs Fixed
Asset a/cs (real accounts) e.g. Buildings, Motor Vehicles etc. Cash and Bank
separate a/cs Liability a/cs e.g. Mortgage Capital a/c and Drawings a/c Revenue
a/cs and Expense a/cs (nominal accounts) e.g. rent , salaries, etc
Ledger
Sales Ledger Purchases Ledger General Ledger General Ledger General Ledger
General Ledger General Ledger General Ledger
DOUBLE ENTRY requires that for each transaction, the amount

entered into the accounting records is entered in at least two different accounts,
with one account being debited and the other credited. All debit amounts equal all
credit amounts provided the double-entry accounting was properly followed.
Ledgers (Double entry – T accounts)
Name of the Business Sales Ledger Debtor a/c e.g John Smith Date Year dt Details
Sales Folio SJ Dr$ X Date Year dt dt dt Details Returns Inwards Cash/Bank Discounts
Allowed Folio RIJ CB CB Cr$ X X X
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Debtor a/c e.g Jane Doe Date Year dt Details Sales Folio SJ Dr$ X Date Year dt dt
dt Details Returns Inwards Cash/Bank Discounts Allowed Folio RIJ CB CB Cr$ X X X
Debtor a/c Date Year dt Details Sales Folio SJ Dr$ X Date Year dt dt dt Details
Returns Inwards Cash/Bank Discounts Allowed Folio RIJ CB CB Cr$ X X X
Name of the Business Purchases Ledger Creditor a/c e.g Will Brown Date Year dt dt
dt Details Returns Outwards Cash/Bank Discounts Received Folio ROJ CB CB Dr$ X X X
Date Year dt Details Purchases Folio PJ Cr$
Creditor a/c e.g Alice Williams Date Year dt dt dt Details Returns Outwards
Cash/Bank Discounts Received Folio ROJ CB CB Dr$ X X X Date Year dt Details
Purchases Folio PJ Cr$
Creditor a/c Date Year dt dt dt Details Returns Outwards Cash/Bank Discounts

Received Folio ROJ CB CB Dr$ X X X Date Year dt Details Purchases Folio PJ Cr$
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Name of the Business General Ledger Sales a/c Date Details Folio Dr$ Date Year dt
dt Details Cash / Bank Total credit Sales for the month Folio CB SJ Cr$ X X
Purchases a/c Date Year dt dt Details Cash/Bank Total credit Purchases for the
month Folio CB PJ Dr$ X X Returns Inwards a/c Date Year dt Details Total Return
Inwards for the month Folio RIJ Dr$ X Returns Outwards a/c Date Details Folio Dr$
Date Year dt Details Total Return Outwards for the month Folio ROJ Cr$ X Date
Details Folio Cr$ Date Details Folio Cr$
Motor Vehicles a/c Date Year dt Details Bank Folio CB Dr$ X Capital a/c Date
Details Folio Dr$ Date Year dt Details Bank Folio CB Cr$ X Date Details Folio Cr$
Bank Loan a/c Date Details Folio Dr$ Date Year dt Details Bank Folio CB Cr$ X
Rent a/c Date Year dt Details Cash / Bank Folio CB Dr$ X Date Details Folio Cr$
Commissions received a/c Date Details Folio Dr$ Date Year dt Details Cash / Bank
Folio CB Cr$ X
Balancing off Personal and Real accounts
An account balance is the difference between the debit and credit amounts.
Bank account Date 2010 March 1 March 13 March 25 Details Balance b/d Sales Loan
Folio CB GJ Dr$ 12 500 2 000 1 000 Date 2010 March 14 March 20 March 27 March 28
Details Purchases Equipment Drawings Rent Folio CB GJ GJ GJ Cr$ 1 300 1 000 200 2
000
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Simple steps: 1. Skip a line, draw total lines across from each other on the debit
and credit sides, as seen below:
Folio CB GJ Dr$ 12 500 2 000 1 000 Date 2010 March 14 March 20 March 27 March 28
Details Purchases Equipment Drawings Rent Folio CB GJ GJ GJ Cr$ 1 300 1 000 200 2
000
2. Total the side with the larger amount and enter the amount in both total boxes,
as seen below:
Folio CB GJ Dr$ 12 500 2 000 1 000 15 500 Date 2010 March 14 March 20 March 27
March 28 Details Purchases Equipment Drawings Rent Folio CB GJ GJ GJ Cr$ 1 300 1
000 200 2 000 15 500
3. On the side with the smaller amount, enter the date (last day of the month),
Balance c/d and the difference between the debit and credit amounts (account
balance), as seen below: 4. On the opposite side after the totals, enter the date
(first of the following month), Balance b/d and the account balance.
Folio CB GJ Dr$ 12 500 2 000 1 000 15 500 April 1 Balance b/d 10 000 Date 2010
March 14 March 20 March 27 March 28 March 31 Details Purchases Equipment Drawings
Rent Balance c/d Folio CB GJ GJ GJ Cr$ 1 300 1 000 200 2 000 10 000 15 500
5. Account balances are entered in the Balance Sheet to show the financial position
of the business.
Closing off Nominal accounts
Nominal accounts are temporary accounts, which are closed off at the end of a
period. The steps are the same as Real and Personal accounts, except that Nominal
a/c balances are NOT carried forward to following period but are transferred to the
Trading a/c or the Profit & Loss a/c as follows: Nominal account
Sales Purchases Returns Inwards / Outwards Expenses Revenue Name of Business The
Journal Date 2010 March 31 March 31 March 31 March 31 Details Sales Trading a/c
Trading a/c Purchases a/c Profit and Loss a/c Expense a/c e.g. Rent Revenue a/c
e.g. Commissions Received Profit and Loss a/c Folio DR $ X X X X X X X CR $ X
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Transfer to:
Trading a/c Trading a/c Trading a/c Profit & Loss a/c Profit & Loss a/c
Sales a/c Date 2010 Details Folio Dr$ Date 2010 March 13 March 31 Details Bank
Total Credit Sales for the month of March Folio CB SJ Cr$ 2 000 22 000 24 000
March 31 Transfer to Trading a/c
GJ
24 000 24 000 Purchases a/c
Date 2010 March 14 March 31
Details Bank Total Credit Purchases for the month of March
Folio CB PJ
Dr$ 1 300 22 000 24 000
Date 2010 March 31
Details
Folio
Cr$
Transfer to Trading a/c
GJ
24 000 24 000
Expense a/c e.g. Rent a/c Date 2010 March 14 March 25 Details Bank Cash Folio CB CB
Dr$ 300 600 900 Date 2010 March 31 Details Transfer to P&L a/c Folio GJ Cr$ 900 900
Revenue a/c e.g. Commissions Received Date 2010 March 31 Details Transfer to P&L
a/c Folio GJ Dr$ 1 000 1 000 Date 2010 March 13 Details Bank Folio CB Cr$ 1 000 1
000
Trial Balance
The Trial Balance is a list of all the debit and credit account balances for a
period.
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Type of Account
Personal and Real accounts Nominal accounts
Balance in Trial Balance

Balance c/d Transfer to Trading or P&L a/c
The account balances for a period are entered in the Trial Balance as follows:
Category of Account
Assets Liabilities Income / revenue Capital Expenses
Account Balances
Debit Credit Credit Credit Debit
Trial Balance as at ___________________ Dr $

Asset accounts Liability accounts Income accounts Capital account Expense accounts
X X X X X XX XX
Cr $
Trial Balance as at ___________________ Dr Cr $ $

Cash Bank * Stock (Opening Stock) Bank Loan Debtors Creditors Sales Purchases
Returns Inwards Returns Outwards Rent Carriage Inwards Carriage Outwards
Commissions received Wages and Salaries Interest Received Discounts Allowed
Discounts Received Interest on Loan Motor Vehicles Equipment Bank Overdraft *
Capital Drawings X X X X X X X X X X X X X X X X X X X X X X X X XX XX
All debit amounts equal all credit amounts provided the double-entry accounting was
properly followed.
Correction of Errors
Types of errors
There are two main classifications: Errors NOT affecting / revealed by the Trial
Balance
1. 2. 3. 4. 5. Errors of Commission (correct amount, wrong personal account) Errors
of Principle (correct amount, wrong type / category of account) Errors of Original
entry (incorrect amount entered in the journal / book of original entry) Errors of
Omission (no entry made in the books for transaction) Compensating Errors
(incorrect amount entered in double entry to ledger accounts cancelling out error)
Errors of Complete reversal of entries (correct amounts entered in the wrong sides
(DR/CR) of each a/c
23
6.
Errors affecting / revealed by the Trial Balance

• • • • • Errors of transposition in half of the double entry (resulting in
overstatement or understatement of amts). Errors caused by entries on the wrong
side of one half of the double entry. Errors caused by the omission of one half of
the double entry. Errors of calculation (miscalculation of the account
balances) Errors made in the Trial Balance.
Suspense Account (Errors affecting / revealed by the Trial Balance)

A temporary account called a suspense account has to be opened in the general
ledger with the difference to make the Trial Balance totals agree with each other.
It is opened with a balance, on the side of the a/c that the Trial Balance is less,
as seen below: General Ledger Suspense account Date Details Difference in
trial balance (DR side of TB less) Dr$ X Date Details Difference in trial balance
(CR side of TB less) Cr$ X
 
A credit balance in the Suspense account is a Current Liability in the Balance

Sheet. A debit balance in the suspense account is a Current Asset in the Balance
Sheet.
N.B. When errors are discovered, they must be corrected through journal entries
(separately), which are then posted to the ledger accounts affected by the error,
including the suspense account.
The Statement of Corrected Net Profit

Name of business Statement of corrected Net Profit for the year ended 31 March 2007
$ Net Profit per accounts Add: Expenses amount overstated Income / Revenue amount
understated / omitted Less: Income / Revenue amount overstated Expenses amount
understated / omitted Corrected Net Profit for the year X X X X X (X) XX $ X
st
Adjusting Entries
Adjusting entries are entries made at the end of an accounting period to allocate
revenue and expenses to the period in which they belong, as required by the
Matching / Accruals Concept. Expenses to be transferred to the Profit and Loss
account is the expenses incurred in the period, whether they have been paid or not.
Revenue to be transferred to the Profit and Loss account is the revenue earned in
the period, whether it has been received or not. TYPES OF ADJUSTING ENTRIES: 1. 2.
3. 4. Accruals – Accrued Expenses and Accrued Revenue Prepayments – Prepaid
Expenses and Prepaid Revenue Provision for Depreciation Bad Debts and Provision for
Bad Debts
24
Accruals and Prepayments 1. Accruals and Prepayments adjust revenue and expense
amounts in the Trial Balance as follows:
Profit and Loss Amount Trial balance Notes to accounts
EXPENSES
Expense Transferred to P&L a/c Expense Transferred to P&L a/c Revenue Transferred
to P&L a/c Revenue Transferred to P&L a/c
= = = =
Expense paid Expense paid Revenue received Revenue received
+ Accrued Expense - Prepaid Expense + Accrued Expense - Prepaid Expense
REVENUE
ADD ACCRUALS LESS PREPAYMENTS
2.
Accruals and Prepayments are included in the Balance Sheet as follows:

CURRENT ASSETS CURRENT LIABILITIES
Prepaid Expenses Accrued Revenue
Accrued Expenses Prepaid Revenue
Bad Debts Profit and Loss a/c Provision for Bad Debts Profit and Loss a/c Balance
Sheet Increase in Provision for Bad Debts (Expense) Decrease in Provision for Bad
Debts (Revenue) Total Provision for Bad Debts (Current Assets: Debtors less
Provision) Expense (amount written off)
Depreciation Profit and Loss a/c Balance Sheet Annual Depreciation (Expense)
Accumulated Depreciation (Fixed Assets less Depreciation)
A djusting Entries: Journal entries
ACCRUALS AND PREPAYMENTS
25
Expenses (Rent, Salaries, Insurance, etc.) The Journal Date Year dt Details Expense
a/c Cash / Bank a/c To record payment of expense during the year Expense a/c
Accrued Expense a/c To record expense incurred but still owing at the end of period
Prepaid Expense a/c Expense a/c To record expense not incurred but paid in advance
Profit & Loss a/c Expense a/c To close off Expense a/c and transfer to Profit &
Loss a/c Folio GL CB DR $ X CR $ X
End of yr
GL GL GL GL
X X X X
End of yr
End of yr
X GL X
Revenue (Interest received, commissions received, rent received, etc.) The Journal
Date Year dt Details Cash / Bank a/c Revenue a/c To record revenue received during
the year Accrued Revenue a/c Revenue a/c To record revenue earned but still owing
at the end of period Revenue a/c Prepaid Revenue a/c To record revenue not earned
but received in advance Revenue a/c Profit & Loss a/c To close off Revenue a/c and
transfer to Profit & Loss a/c Folio CB GL DR $ X CR $ X
End of yr
GL GL GL GL
X X X X
End of yr
End of yr
GL
X X
NB. Accrued Expenses / Revenue and Prepaid Expenses / Revenue accounts are not
opened for CSEC. The Accruals and Prepayments are recorded as c/d and b/d figures
that are recorded in the Balance sheet as Current assets or Current liabilities.
A djusting Entries: Journal entries
Bad Debts and Provision for Bad Debts The Journal Date Year dt Details Bad Debts
a/c Debtors a/c To write off Bad debts and reduce Debtor amount Profit & Loss a/c
Bad Debts a/c To close off Bad Debts a/c and transfer to Profit & Loss a/c Profit &
Loss a/c Provision for Bad Debts a/c To create a Provision for Bad debts a/c and
transfer to P& L a/c as an expense. Profit & Loss a/c Provision for Bad Debts a/c
To transfer an increase in Provision for Bad debts to P& L a/c as an expense.
Provision for Bad Debts a/c Profit and Loss a/c To transfer a decrease in Provision
for Bad debts to P& L a/c as revenue. Folio GL SL DR $ X CR $ X X GL X
26
End of yr
End of yr
X GL X
End of yr
X GL X
End of yr
X GL X
NB. Bad Debts is treated as an expense account. It is, therefore, debited when a
debt is written off. At the end of the period, the amount of Bad Debts is
transferred to the P & L account like all expenses. Bad Debts is NOT recorded in
the Balance Sheet. Provision for Bad Debts is a contra asset account as it reduces
Debtors in the Balance Sheet. It, therefore, has a credit balance. Changes in the
provision are recorded in the P & L a/c. Increases in provision for Bad Debts are
treated as expenses in the P&L a/c while decreases are revenue in the P&L a/c.
Total Provision for Bad Debts is entered in the Balance Sheet and reduces Debtors
in Current Assets.
Depreciation The Journal Date Year End of yr Details Profit & Loss a/c Provision
for Depreciation a/c To transfer annual depreciation to P& L a/c as an expense.
Folio DR $ X CR $ X
GL
NB. Provision for Depreciation is a contra asset account as it reduces the value of
Fixed Assets in the Balance Sheet. It, therefore, has a credit balance. Annual
Depreciation is transferred to the P&L a/c at the end of a period as an expense.
Total / Accumulated Depreciation is entered in the Balance Sheet and reduces the
relevant Fixed Asset to record the Net Book Value of the Asset.
CONTRA ASSET accounts have BOTH a P&L figure AND a Bal c/d figure (Balance Sheet)
at the end of a period.
A djusting Entries: Ledger entries
Accruals and Prepayments Expense a/c e.g. Rent a/c Date Year Opening dt Closing
Opening Details Prepaid Expense b/d Cash / Bank Accrued Expense c/d Prepaid Expense
b/d Folio Dr$ X X X XX X Date Year Opening
End of yr
27
Details Accrued Expense b/d Transfer to P & L a/c Prepaid Expense c/d Accrued
Expense b/d
Folio
Cr$ X X X XX X
CB
GJ
Closing Opening
Revenue a/c e.g. Commissions Received a/c Date Year Opening

End of yr
Details Accrued Revenue b/d Transfer to P & L a/c Prepaid Revenue c/d Prepaid
Revenue b/d
Folio
Dr$ X X X XX X
Date Year Opening dt Closing Opening
Details Prepaid Revenue b/d Cash / Bank Accrued Revenue c/d Accrued Revenue b/d
Folio
Cr$ X X X XX X
GJ
CB
Closing Opening Bad Debts
Bad Debts a/c Date Year

Dt
Details Debtor
Folio
Dr$ X XX
Date Year
End of yr
Details Transfer to P & L a/c (expense)

Folio
Cr$ X XX
Provision for Bad Debts Provision for Bad Debts a/c Date Year
End of yr End of yr End of yr End of yr
Details Balance c/d Balance c/d P & L a/c Balance c/d (revenue)
Folio
Dr$ X X XX X X XX
Date Year
End of yr Beginning End of yr Beginning
Details P & L a/c (expense)
Folio
Cr$ X X X XX X XX
Balance b/d P & L a/c (expense) Balance b/d
Beginning
Balance b/d
Depreciation Provision for Depreciation Date Year

End of yr End of yr End of yr
Details Balance c/d Balance c/d Balance c/d
Folio
Dr$ X X XX X
Date Year
End of yr Beginning End of yr Beginning
Details P & L a/c (expense)
Folio
Cr$ X X X XX X
Balance b/d P & L a/c Balance b/d

Final A ccounts: Income Statement

28
Owner’s Name Trading & Profit & Loss A/c for the _______ ended _________ $ Sales
Less: Sales Returns Net Sales LESS: COST OF GOODS SOLD: Opening Stock Purchases
Less: Purchases Returns Add: Carriage In Net Purchases Cost of Goods Available for
sale Less: Closing Stock Cost of Goods Sold GROSS PROFIT (or GROSS LOSS) **Add:
Rent Received Interest received Discount received Decrease in Provision for bad
debts **Less: Expenses Wages/salaries Utilities Increase in provision for bad debts
Depreciation Bad debts expense Carriage Outwards Discount allowed Total expenses
NET PROFIT (or NET LOSS) X X X X X X X X X X X X (X) X or (X) $ $ X (X) X X X (X) X
X X X (X) (X) X or (X)
**These are a few examples, however the list can be exhaustive in reality
NB. This is an Income Statement for a sole trader. For other types of businesses
with more than one owner, an Appropriation a/c is prepared to share out the net
profit amongst the owners and calculate profit retained in business. For
Manufacturing Businesses, a Manufacturing a/c is prepared before the Trading &
Profit & Loss a/c For Non profit organizations, an Income and Expenditure a/c is
prepared instead of a Trading and Profit and Loss a/c.
Final A ccounts: Balance Sheet
29
Owner’s Name Balance Sheet as at _________ FIXED ASSETS: Land & Buildings Plant &
Machinery Fixtures & Fittings Motor Vehicles CURRENT ASSETS: Stock Debtors Less:
provision for bad debts Net debtors Prepaid expenses Revenues owing Bank Cash Total
Current Assets LESS: CURRENT LIABILITIES Creditors Accrued expenses Advanced
revenues Bank overdraft Total Current Liabilities WORKING CAPITAL FINANCED BY:
Opening Capital Add: Net Profit OR Less: Net Loss Less: Drawings Closing Capital
LONG-TERM LIABILITIES Mortgage Bank Loan X X X XX X X OR (X) X (X) X X X X X (X) X
XX X X (X) X X X X X X COST $ X X X X X ACC DEP. $ (X) (X) (X) (X) (X) NBV $ X X X
X X
NB. This is a Classified Balance Sheet for a sole trader. For other types of
businesses there may be other items like proposed dividends, current a/c
(partnership) etc.
30
CONTROL SYSTEMS Ms Fergusson

31
St. Mary’s College Principles of Accounts
Control Systems
Control Systems are the procedures designed and established to check, record,
regulate, supervise, and safeguard assets, and ensure that the figures in the
financial statements can be relied upon to be accurate, by reducing the incidence
of unintentional errors and intentional irregularities. The need for Control
Systems in Accounting. Control systems are needed to protect the organization’s
assets and ensure the preparation of reliable and timely financial statements.
THE THREE COMMON CONTROL SYSTEMS ARE: 1. Bank Reconciliation Statements 2. Control
Accounts 3. Suspense Accounts
Bank Reconciliation Statement

A Bank Reconciliation Statement is a statement prepared to reconcile the difference
between the balances in the bank column of the cash book and the bank statement on
any given date.
Control Accounts
Control Accounts are general ledger accounts whose balances reflects the total of
balances of related subsidiary ledger accounts. Debtors /Accounts Receivable and
Creditors / Accounts Payable are the most commonly used control accounts, and their
balances serve as a crosscheck (control) of the accuracy of the associated
subsidiary records (personal accounts).
Suspense Accounts
A suspense account is an account in the general ledger in which amounts are
temporarily recorded until the correct entry could be determined. When the proper
account / amount is determined, the amount will be moved from the suspense acc.
Suspense accounts are used when accounting for errors to ‘balance” the trial
balances until the bookkeeper finds the errors and finishes recording the
transactions.
St. Mary’s College Lesson Notes
32
Bank Reconciliation Statement :

SET INDUCTION: The Cash Book and the Bank Statement
BANK ACCOUNT
BUSINESS
Cash Book
BANK
Bank Statement
The business records all the bank account’s cheque and cash transactions in the
Cash Book.
The bank records all the bank account’s cheque and cash transactions in a Bank
Statement, which is sent to the business periodically.
The Cash Book: • • The Cash Book is the business’ record of the business’ bank
account. It consists of information regarding the bank account’s cash and cheque
receipts and payments and the balance at the end of the period, as prepared by the
business.
The Bank Statement • • • The Bank Statement is the bank’s record of the business’
bank account. It is a summary that consists of information regarding the bank
account’s cash and cheque receipts and payments and the balance at the end of the
period, as prepared by the bank. A Bank Statement is produced by the bank monthly,
quarterly or annually and sent to the business.
Main accounting difference between the Cash Book and the Bank Statement: Receipts /
Deposits CASH BOOK – business’ record BANK STATEMENT – bank’s record DR CR Payments
/ Withdrawals CR DR
33
Differences / Discrepancies
between the Cash Book balance and the Bank Statement balance at the end of a
specific period.
• • There are usually timing differences between when the transaction information
is recorded / entered in the banks systems and when it is recorded in the business’
cash book. Therefore, there is sometimes a difference / discrepancy between the
cash book (bank column) account balance and the bank statement account balance at
the end of the specific period.
Reasons for the differences between the Cash Book balance and the Bank Statement
balance:
 Entries recorded in the Bank Statement but not in the Cash Book • Direct Deposits
- Dividends received - Credit transfers – receipts from debtors made into the bank
account directly through the bank. Standing Orders and Direct Payments - These are
payments made by the bank from the bank account on behalf of the business - E.g.
Insurance payments Bank Charges (service charges on the bank account taken directly
from the account by the bank) Interest Received (interest on the bank account
deposited directly into the account by the bank) Dishonoured / Returned cheques -
bounced cheques that were deposited and have been returned to the bank as
dishonored. - The business was not notified as yet because it takes a few days
(timing difference)
• • •
 Entries recorded in the Cash Book but not in the Bank Statement These occur
because of a time lag between the recording of the receipt or payment in the cash
book and the recording in the bank: • Unpresented / Outstanding Cheques - These are
cheques issued by the business as payment to persons / businesses that have not
been presented to the bank for payment yet. NB The payee has 6 months to present /
“cash” a cheque. - The business has it recorded in the cash book as a payment made
but the bank has not because they have not “cashed” the cheque as yet. Unrecorded
deposits - These are mainly cheque deposits to be made in the bank account that
have been recorded in the cash book but not by the bank as they have not received
the deposits as yet. - The business records the cheques as having been received /
deposited on one day, while the bank records the deposit on another day when the
cheques are brought in from the business.
 Errors in the Cash Book and in the Bank Statement The most common types of errors
are the overstatements and the understatements of receipts and payments due to
errors in the amounts and receipts being entered as payments and vice versa.
34
Bank Reconciliation :
It is necessary to reconcile the cash book balance and the bank statement balance
at the end of each period to ensure that both are correct.
Bank reconciliation is the process of comparing and matching figures from the cash
book against those shown on a bank statement:
• to locate the reasons for the discrepancies, • adjust cash book with those items
which must be included and • clarify and support any remaining difference between
adjusted cash book balance and bank statement balance.
The Steps of Bank Reconciliation:

1. Compare the Bank Statement and the Bank column of the Cash Book. Check for:
Entries made in the Bank Statement but not the Cash Book. Entries made in the Cash
Book but not the Bank Statement. Incorrect amounts. Entries made on the incorrect
side of the Cash Book. Start with the Cash Book balance at the end of the period /
month in question. Enter all the items that appear in the Bank Statement but not
the Cash Book e.g. Bank Charges, Int. Rec… Correct any errors made in the Cash
Book. Balance / Close off the Revised cash Book.
2. Prepare a Revised Cash Book to update the CB with entries made in the Bank
Statement but not the CB.
Revised Cash Book (Bank Column)

Date Details Balance b/d Interest received Credit Transfer (debtor personal a/c)
Other Receipts not entered in CB Receipts understated Payments overstated Dr$ X X X
X X X XX Balance b/d X Date Details Bank Charges Standing Order e.g. Insurance
Dishonoured chqs (debtor personal a/c) Other Payments not entered in CB Receipts
overstated Payments understated Balance c/d Cr$ X X X X X X X XX
3. Prepare a Bank Reconciliation Statement, which deals with items recorded in the
Cash Book but not in the Bank Statement. There are two methods:
- Method 1: Start with the Revised Cash Book closing bal. Add Unpresented chqs and
Less Unrecorded deposits.

Revised Cash Book Balance Add: Unpresented cheques Less: Unrecorded deposits Bank
Statement Balance $ X X X (X) XX
- Method 2: Start with the Bank Statement balance. Add Unrecorded deposits and Less
Unpresented cheques.

Bank Statement Balance Add: Unrecorded deposits Less: Unpresented cheques Revised
Cash Book Balance $ X X X (X) XX
- For both methods, correct errors by adding or subtracting amounts.

35
Control Accounts
A control account is a summary account in the general ledger that shows the totals
of transaction amounts entered in a subsidiary ledger such as sales or purchases
ledger during the month. Its balance reflects the aggregate balance of the related
subsidiary ledger accounts and is, therefore, used to control the subsidiary
ledgers and verify that entries have been made. They provide totals of debtors and
creditors quickly when a trial balance is being prepared. Control accounts are an
important system of control on the reliability of ledger accounts. They indicate
that errors may have occurred in the ledgers they control.
Ledger Sales Ledger Purchases Ledger Accounts debtors’ personal accounts creditors’
personal accounts Control Account Sales Ledger Control Account (totals of items in
the sales ledger) Purchases Ledger Control Account (totals of items in the
purchases ledger)
The purpose of Control Accounts

The reasons for having control accounts are as follows: 1. To check on the accuracy
They provide a check on the accuracy of entries made in the personal accounts in
the sales ledger and purchase ledger. It is very easy to make a mistake in posting
entries, because there might be hundreds of entries to make. - Figures might get
transposed while some entries might be omitted altogether, so that an invoice or a
payment transaction does not appear in a personal account as it should. It is
possible to identify the fact that errors have been made by comparing: • The total
balance on the debtors account with the total of individual balances on the
personal accounts in the sales ledger. • The total balance on the creditors account
with the total of individual balances on the personal accounts in the purchase
ledger. 2. To locate errors By using the control account, a comparison with the
individual balances in the sales or purchase ledger can be made for every week or
day of the month, and the error found much more quickly than if accounts did not
exist. 3. To provide debtors and creditors balances more quickly for producing a
Trial balance or B Sheet. A single balance on a control account is obviously
simpler and quicker than many individual balances in the sales or purchase ledger.
This means also that the number of accounts in the double entry bookkeeping system
can be kept down to a manageable size.
36
CONTROL ACCOUNTS
Ledger Sales Ledger Purchases Ledger Accounts debtors’ personal accounts creditors’
personal accounts Control Account Sales Ledger Control Account (totals of items in
the sales ledger) Purchases Ledger Control Account (totals of items in the
purchases ledger)
The Sales Ledger Control Account

The sales ledger control account is also known as the Debtors Control Account and
the Total Debtors Account. It comprises the totals of all accounts of a similar
nature related to debtors. All items that appear in a debtor’s account are also
recorded in the debtors control account. The total of each type of transaction
related to debtors is entered on the relevant side of the control account. Items /
types of transactions related to debtors include: • • • • • • • • Total opening
balances of all debtors for the period Total credit sales for the period Total
sales returns for the period Total cash received and cheques received from debtors
for the period. Total Discounts Allowed for the period Total Bad Debts written off
for the period Dishonoured / Returned cheques from debtors for the period Total
closing balances of all debtors for the period
The Purchases Ledger Control Account

The purchases ledger control account is also known as the Creditors Control Account
and the Total Creditors Account. It comprises the totals of all accounts of a
similar nature related to creditors. All items that appear in a creditor’s account
are also recorded in the Creditors Control Account. The total of each type of
transaction related to creditors is entered on the relevant side of the control
account. Items / Types of transactions related to creditors include: • • • • • •
Total Opening balances of all creditors for the period Total Credit Purchases for
the period Total Purchases Returns for the period Cash payments and cheque payments
to creditors for the period Total Discounts received for the period Total closing
balances of all creditors for the period
Contra entries (appear in both Control Accounts)

A contra entry is an item that offsets, cancels or partially reduces another item.
There maybe situations where a firm is both a supplier and a customer (creditor and
debtor). Two separate accounts are kept to record the relevant transactions.
Instead of making a payment by cheque for the full amount owed to him as a
creditor, his accounts can be settled by “setting off” the amount owed to him by
the company and the amount owed by him to the company. A contra entry which is
recorded in the personal accounts in the Sales and Purchases Ledger needs to be
reflected in both Control accounts to ensure that they balance with the sum of the
balances in the ledger accounts. The amount that is set off in the accounts would
be the smaller amount.
37
CONTROL ACCOUNTS - FORMAT
Items Opening and Closing Balances: Sales Ledger Control Account
Source Sales Ledger
Notes A credit balance may be caused by overpayment or return of goods already paid
for by debtor. Credit balances must NOT be deducted from debit balances, but shown
separately on the credit side of the control account. A debit balance may be caused
by overpayment or return of goods already paid for to creditor. Debit balances must
NOT be deducted from credit balances, but shown separately on the debit side of the
control account.
Purchases Ledger Control Account
Purchases Ledger
Credit Sales Credit Purchases Discounts Allowed / Discounts Received Sales Returns
Purchases returns Cash / Cheque received and paid Bad Debts written off Refunds
from suppliers / to customers Dishonoured cheques Contra Entries
Sales Journal Purchases Journal Cash Book Sales Returns Journal Purchases Returns
Journal Cash Book General Journal Cash Book Cash Book General Journal A Contra
Entry in a control account is when the smaller amount is offset against the larger
amount.
The Sales Ledger Control Account Date Details Balance b/d (total debtors’ debit
bals from previous period) Credit Sales Refunds to debtors/customers Dishonoured
cheques Interest on overdue accounts Balance c/d (if any) Balance b/d X Dr$ Date X
X X X Balance b/d (if any) (total debtors’ credit bals from previous period) Sales
Returns Cash/Cheques received from debtors Discount allowed Bad Debts written off
Contra Entries / set offs Balance c/d Balance b/d (if any) Cr$ X X X X X X X
The Purchases Ledger Control Account Date Details Balance b/d (if any) (total
creditors’ debit bals from previous period) Purchases Returns Cash/Cheques paid to
creditors/suppliers Discount received Contra Entries / set offs Balance c/d Balance
b/d (if any) Dr$ Date X X X X X X Balance b/d Balance b/d (total creditors’ credit
bals from previous period) Credit purchases Refunds from suppliers/creditors
Balance c/d (if any) X Cr$ X X X X
St. Mary’s College
38
Suspense accounts and Correction of Errors

TYPES OF ERRORS There are two main classifications of errors: 1. Errors that affect
the Trial Balance (errors revealed by the Trial Balance) 2. Errors that DO NOT
affect the Trial balance (errors not revealed by the Trial Balance)
Errors that affect the Trial balance

Certain errors cause the Trial Balance totals to be unequal i.e. not balance. These
include: • Errors of transposition in half of the double entry (resulting in
overstatement or understatement of amounts). • Errors caused by entries on the
wrong side of one half of the double entry. • Errors caused by the omission of one
half of the double entry. • Errors of calculation(miscalculation of the account
balances) • Errors made in the Trial Balance.
Examples: A cash payment of $450 is entered in the Cash Book as $540. This is an
error of transposition resulting in an overstatement of $90 on the CR side of the
CB and, therefore, the TB.
(A transposition error happens when you reverse two digits in a number or leave a
zero off the end of a number)
Cash sales of $1000 were entered correctly in the CB but incorrectly in the Sales
account as a Debit. This would result in the Trial balance Debit balance being more
by $2000!!!!!
Errors that do not affect the Trial Balance

• Errors of Commission (correct amount, wrong personal account) • • • • • Errors of
Principle (correct amount, wrong type / category of account) Errors of Original
entry (incorrect amount entered in the journal / book of original entry) Errors of
Omission (no entry made in the books for transaction) Compensating Errors
Errors of Complete reversal of entries (correct amounts entered in the wrong sides
(DR/CR) of each a/c
Examples: Errors of Commission (correct amount, wrong personal account) e.g. Goods
sold to M. Smith on credit is entered in N. Smith’s account in error. Errors of
Principle (correct amount, wrong type / category of account) e.g. Motor expenses
( expense) were entered in the Motor vehicles’ account (asset) in error. Errors of
Original Entry (incorrect amount entered in the journal / book of original entry)
e.g. Goods purchased from T. Tall for $475 was entered in the Purchases Journal as
$457 in error. As a result, the incorrect amount of $457 was posted to the ledger
accounts: T. Tall and Purchases. Errors of Omission (no entry made in the books for
transaction) e.g. Rent received of $1200 was never entered in the cash book, and
therefore the accounts. Compensating Errors (incorrect amounts entered in each
ledger account (double entry), cancelling out error) e.g. Goods sold to J. Bond for
$200 was entered correctly in the Sales Journal, but posted to the ledger accounts
as $300 (DR: J. Bond CR: Sales). Errors of Complete reversal of entries (correct
amounts entered in the wrong sides (DR/CR) of each account) e.g. $800 Rent paid in
cash was entered incorrectly as DR: Cash CR: Rent
N.B. When errors are discovered, they must be corrected through journal entries,
which are then posted to the ledger accounts affected by the error.
39
Errors that do NOT affect the Trial Balance

 • • • • • • There are certain errors that are not revealed by the Trial Balance,
as the debit and credit totals are not affected by the error so they are equal.
These errors are: Errors of Commission (correct amount, wrong personal account)
Errors of Principle (correct amount, wrong type / category of account) Errors of
Original entry (incorrect amount entered in the journal / book of original entry)
Errors of Omission (no entry made in the books for transaction) Compensating Errors
Errors of Complete reversal of entries (correct amts entered in the wrong sides
(DR/CR) of each a/c When these errors are discovered, correcting the errors require
double entry journal entries which will
be posted to the accounts affected by errors.
CorrectionofErrorsNOTaffectingtheTrialBalance
Errors of Commission (correct amount, wrong personal account) Correcting the error
requires journal entries to be posted to: • • The account incorrectly posted to -
DR if the account was credited / CR if the account was debited The correct account
– post to the correct account
Errors of Principle (correct amount, wrong type / category of account) Correcting

the error requires journal entries to be posted to: • • The account incorrectly
posted to - DR if the account was credited / CR if the account was debited The
correct account – post to the correct account
Errors of Original Entry (incorrect amount entered in the journal / book of

original entry) 1. 2. 3. Identify whether the correct incorrect amount entered was
overstated or understated. Calculate the amount by which the entry was understated
or overstated i.e. the difference. Prepare the journal entry to correct the error:
If the amount was understated: DR: the account debited CR: the account credited
With the difference calculated to increase the amount to the correct amount If the
amount was overstated: DR: the account credited CR: the account debited With the
difference calculated to decrease the amount to the correct amount Errors of
Omission (no entry made in the books for transaction) Correcting the error requires
journal entries to be posted to the relevant accounts in the double entry.
Compensating Errors (incorrect amounts entered in each ledger account (double
entry), cancelling out error) Correcting these errors require the same steps as
correcting Errors of Original entry. Errors of Complete reversal of entries
(correct amounts entered in the wrong sides (DR/CR) of each account) The journal
entry to correct the error: DR: the account credited CR: the account debited With
twice the amount of the error (to cancel the error / remove from incorrect side and
post to correct side)
NB.Theremustbeadoubleentrytocorrecttheerrors.
40
Errors that affect the Trial Balance

   When the Trial Balance totals are not equal, the errors affecting the Trial
Balance may not immediately be found and corrected. A temporary account called a
suspense account has to be opened in the general ledger with the difference to make
the Trial Balance totals agree with each other. A suspense account should only be
opened when all attempts to find the error(s) have been unsuccessful and the final
accounts are needed urgently.
Suspense Account A Suspense account is a temporary ‘holding’ account in the General

ledger that is opened to place the difference in the trial balance to make it
balance when the causes of the difference cannot immediately be found and
corrected. How to open a Suspense Account A suspense a/c is opened with a balance,
on the side of the a/c that the Trial Balance is less. The Suspense Account will,
therefore, have a credit balance when the credit total in the Trial Balance is less
and a debit balance when the debit total is less. General Ledger Suspense account
Date Details Difference in trial balance (DR side of TB less) Dr$ X Date Details
Cr$
Suspense account Date Details Dr$ Date Details Difference in trial balance (CR side
of TB less) Cr$ X
Example: S. James st Trial Balance as at 31 December 2009 DR $ 100 000 100 000 CR $
99 960 40 100 000
Totals (sum of all balances) Suspense a/c
Suspense account Date Details Dr$ Date

31 Dec
Details
Difference in Trial Balance
Cr$
40
The Suspense Account and the Balance Sheet
 AcreditbalanceintheSuspenseaccountisaCurrentLiabilityintheBalanceSheet.  Adebit
balanceinthesuspenseaccountisaCurrentAssetintheBalanceSheet.
41
Correction of Errors and the Suspense Account

 When the errors are discovered after a Suspense a/c has been opened, the errors
have to be corrected by movingtheamountfromthesuspenseaccounttotheproperaccount.
Correcting the errors require double entry journal entries which will be posted to:
1. The Suspense account 2. The other account(s) affected by the error
N.B. To correct the error, there MUST be an entry in the suspense account to cancel
the amount entered.
Examples: A Creditor for $95 was posted as $68 in the personal a/c. The credit side
would have been less by $27 so the Suspense account would have been credited.
Therefore, the journal entry to correct the error is: DR: Suspense a/c $27 CR:
Creditor’s personal a/c $27 Discounts Received $70 had been posted to the Purchases
ledger but NOT to the Discounts Received. The credit side would have been less by
$90 so the Suspense account would have been credited. The journal entry to correct
the error is: DR: Suspense a/c $70 CR: Discounts Received a/c $70 Rent expense of
$200 was recorded twice on the same side of the cash account, but entered correctly
in the Rent expense a/c The credit side would have been more (debit side less) by
$200 so the Suspense account would have been debited. The journal entry to correct
the error is: DR: Cash a/c $200 CR: Suspense a/c $200 A cheque for $225 received
from Jays Co had been posted to the debit side of their account. As the entry was
made on the wrong side of the account, the credit side would have been less (debit
side more) by $248, so the Suspense account would have been credited with $450. The
journal entry to correct the error is: DR: Suspense a/c $450 CR: Jays Co a/c $450
Some errors do not affect the double entry and would, therefore, be corrected with
a single entry in the Suspense account. These errors include: - account balance
entered incorrectly in the Trial Balance e.g. $248 entered as $284 - account
balance placed on the wrong side in the Trial balance (double the amount)
Examples: The total of the Sales a/c of $1500 had been omitted from the Trial
Balance. The credit side of the TB would have been less by $1500 so the Suspense
account would have been credited. Therefore, the journal entry to correct the
error: DR: Suspense a/c $1500 The total of the purchases a/c of $1400 had been
entered in the Trial Balance as $1200. The debit side of the TB would have been
less by $200 so the Suspense account would have been debited. The journal entry to
correct the error: CR: Suspense a/c $200 Discount received of $67 was entered as
$76 in the Trial Balance. The credit side of the TB would have been more (debit
side less) by $9 so the Suspense account would have been debited. The journal entry
to correct the error: CR: Suspense a/c $200 The total of the Bank Loan a/c of $1500
was entered on the debit side of the Trial Balance. As the entry was made on the
wrong side of the account, the credit side would have been less by $3000 so the
Suspense account would have been credited. The journal entry to correct the error:
DR: Suspense a/c $1500
N.B.THEBALANCEINTHESUSPENSEACCOUNTMAYBECAUSEDBYMORETHANONEERROR
• • Enter each journal entry to correct the error separately. Post each entry to
the Suspense account and close off.
42
The Statement of Corrected Net Profit

 Errors affect the calculation of the Net Profit if the errors affect any of the
components of the Trading and Profit and Loss account. • Income and Net Profit have
a direct relationship: - When an error results in Income being overstated, Net
profit is also overstated. - When an error results in Income being understated, net
profit is also understated. Expenses and Net Profit have an inverse relationship: -
When an error results in Expenses being overstated, net profit is understated. -
When an error results in Expenses being understated, net profit is overstated.
To correct Net Profit, amounts resulting in Net profit being understated have to be
added, and amounts resulting in Net Profit being overstated have to be lessened.
This is done using a “Statement of Corrected Net Profit”. Name of business
Statement of corrected Net Profit for the year ended 31 March 2007 $ Net Profit per
accounts Add: Expenses amount overstated Income / Revenue amount understated /
omitted Less: Income / Revenue amount overstated Expenses amount understated /
omitted Corrected Net Profit for the year X X X X X (X) XX $ X
st
Example:
• On January 17 2010, an error was found where an invoice of $100 had been credited
to the supplier’s a/c but had not been debited to the purchases account.
If Purchases was understated, then Net Profit was overstated and has to be
corrected as follows:
th
Statement of Corrected Net profit for the year ended 31 December 2009 Net Profit
per accounts Less: Purchases undercast Corrected Net Profit for the year $ $ 2 120
(100) 2020
st
43
FINAL ACCOUNTS Ms Fergusson

44
VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A SOLE TRADER
Owner’s Name Trading & Profit & Loss A/c for the _______ ended _________ $ Sales
Add: Carriage Inwards Less: Purchases Returns Net Purchases Cost of Goods Available
for sale Less: Closing Stock Cost of Goods Sold GROSS PROFIT (or GROSS LOSS) **Add:
REVENUE Interest received Rent Received Discount received Decrease in Provision for
bad debts Total Revenue **Less: EXPENSES Wages/salaries Utilities Increase in
provision for bad debts Depreciation Bad debts expense Carriage Outwards Discount
allowed Total expenses NET PROFIT (or NET LOSS) X X X X X X X (X) X or (X) X X X X
(X) X X (X) (X) X or (X) X X X X X X $ $ X (X) X
**These are a few examples, however the list can be exhaustive in reality
45
VERTICAL FORMAT OF THE BALANCE SHEET OF A SOLE TRADER Owner’s Name Balance Sheet as
at _________ FIXED ASSETS: Land & Buildings Plant & Machinery Fixtures & Fittings
Motor Vehicles CURRENT ASSETS: Stock Debtors Less: provision for bad debts Net
debtors Prepaid expenses Revenues owing Bank * Cash Total Current Assets LESS:
CURRENT LIABILITIES Creditors Accrued expenses Advanced revenues Bank overdraft *
Total Current Liabilities WORKING CAPITAL FINANCED BY: Opening Capital Add: Net
Profit OR Less: Net Loss Less: Drawings Closing Capital LONG-TERM LIABILITIES
Mortgage Bank Loan Total Long Term Liabilities COST $ X X X X X ACC DEP. $ (X) (X)
(X) (X) (X) X X (X) X X X X X X NBV $ X X X X X
X X X X (X) X XX X X OR (X) X (X) X
X X X XX
VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A PARTNERSHIP Partnership
Trading & Profit & Loss Appropriation A/c for the _______ ended ________ $ Sales
Add: Carriage In Less: Purchases Returns Net Purchases Cost of Goods Available for
sale Less: Closing Stock Cost of Goods Sold GROSS PROFIT (or GROSS LOSS) Add:
Revenue Rent Received; Discount Rec. etc Decrease in Provision for bad debts Less:
Expenses Carriage Outwards; Discount allowed etc. Wages/salaries etc Increase in
Provision for Bad Debts Depreciation NET PROFIT (or NET LOSS) Add: Interest on
drawings Partner 1 Partner 2 Less: Interest on Capital Partner 1 Partner 2 Salary:
Partner 1 X X X X X X X (X) XX Share in Profits: Partner 1 Partner 2 X X XX
* The last section (starting from Net Profit) is called the Approriation A/C
46
$ X (X) X
X X X X (X) X X (X) (X) X / (X) X X X X X X (X) X / (X)
X
47
TIME APPORTIONMENT OF INTEREST ON CAPITAL AND INTEREST ON DRAWINGS Interest on

Capital is based on number of months the capital was in use.
Capital in use: Date of capital investment to Year end e.g. Capital $5000 on June 1
to Dec 31 (year end) = 7 months Interest on capital (10%): Partner 1: ($5000 x 10%)
x 7/12mths
Interest on Drawings is based on number of months the drawings was in use.

Drawings in use: Date of drawings to Year end e.g. Drawings $300 on April 1 to Dec
31 (year end) = 9 months Interest on drawings (5%): Partner 1: ($300 x 5%) x
9/12mths
PROFIT SHARING Profits or Losses may be shared according to a stated Profit Sharing
ration or in proportion to Partners’ Capital (Partnership Deed). If it is not
stated how to share profits, share equally according to the Partnership Act. THE
PARTNERSHIP CAPITAL AND CURRENT ACCOUNTS (Columnar Format) Partnership Co. Capital
Account
Date 2010 Dec 31 Balance c/d Details Partner 1 $ X XX Partner 2 $ X XX 2011 Jan 1
Balance b/d Date 2010 Jan 1 Feb 1 Details Balance b/d Bank Partner 1 S X X XX X
Partner 2 $ X XX X
Current Account
Date 2010 Dec 31 Dec 31 Details Drawings
P&L Appropriation: Interest on drawings
Partner 1 $ X X
Partner 2 $ X X
Date 2010 Jan 1 Dec 31
Details Balance b/d

P&L Appropriation: Interest on Capital Salary Share of profits
Partner 1 S X X X X XX
Partner 2 $ X X X XX X
Dec 31
Balance c/d
X XX
X XX 2011 Jan 1 Balance b/d
X
48
VERTICAL FORMAT OF THE BALANCE SHEET OF A PARTNERSHIP Partnership Balance Sheet as

at _________
FIXED ASSETS: COST $ ACC DEP. $ NBV $
Land & Buildings Plant & Machinery Motor Vehicles
X X X X
(X) (X) (X) (X)
X X X X
CURRENT ASSETS:
Stock Debtors Less: provision for bad debts Net debtors Prepaid expenses Accrued
revenue Bank Cash Total Current Assets
LESS: CURRENT LIABILITIES
X X (X) X X X X X X
Creditors Accrued expenses Advanced revenues Bank overdraft Total Current

Liabilities WORKING CAPITAL
X X X X (X) X XX
FINANCED BY: CAPITAL ACCOUNTS Partner 1 Partner 2 CURRENT ACCOUNTS Partner 1

Partner 2 LONG-TERM LIABILITIES Mortgage X X X X XX
X X X
FORMAT OF THE BALANCE SHEET OF A PARTNERSHIP: FULL DETAILS Partnership Balance
Sheet as at _________
49

CURRENT ASSETS:
X X X X
(X) (X) (X) (X) X
X X X X
X (X) X X X X X X
Creditors Accrued expenses Advanced revenues Bank overdraft Total Current

Liabilities WORKING CAPITAL
X X X X (X) X XX
FINANCED BY: CAPITAL ACCOUNTS Opening Capital Capital introduced CURRENT ACCOUNTS
Opening balance Add: Interest on Capital Salary Share in Profits Less: Drawings
Interest on drawings LONG-TERM LIABILITIES Mortgage X X X X (X) (X) X X X X (X) (X)
X Partner 1 X X X Partner 2 X X X
X X XX
50
FORMATION OF A PARTNERSHIP (MERGER OF TWO SOLE TRADERS) When forming a partnership

by merging two sole traders, an opening journal is prepared as follows: • • • State
partnership name Draw Journal with DR and CR columns, as seen below List the assets
and liabilities of the new partnership. Combine / Add each asset and liability of
the sole traders forming the partnership * Bank and Bank overdrafts are combined
into one net figure which is EITHER a Bank figure (Current asset) or Bank Overdraft
(Current liability) *The Capital of EACH partner (former sole traders) must be
stated separately. The Capital of each partner is calculated using C = A-L, using
the individual sole trader figures.
• •
Narrative for formation of partnership DR and CR Totals must balance (Accounting

equation) Partnership The Journal
Date
Details
DR $
CR $
Buildings Fixtures and Fittings Motor Vehicles Stock Debtors Bank * Cash Mortgage
Bank Loan Creditors Bank Overdraft * *Capital: Partner 1 Partner 2 To record assets
and liabilities at formation of partnership
X X X X X X* X X X X X* X X
XX
XX
51
FORMATS FOR FINAL ACCOUNTS OF NON PROFIT ORGANIZATONS

Non Profit Organizations include: • • • • • • • Associations Clubs Societies Unions
Charities Universities Churches
Non-profit making organizations belong to their members. Members pay subcriptions.

The Cash book is called the Receipts and Payments Account and the Trading and
Profit and Loss Account is called the Income and Expenditure Account. Differences
in accounting terms / procedures PROFIT MAKING FIRMS Cash Book Trading a/c for
buying and selling of goods for profit Profit & Loss a/c Net Profit Net Loss
Capital a/c Balance Sheet NON PROFIT ORGANIZATIONS Receipts and Payments a/c
Trading a/c for fundraising activities only e.g. Bar Trading a/c Income and
Expenditure a/c Surplus of income over expenditure (Surplus) Excess of expenditure
over income (Deficit) Accumulated Fund Balance Sheet
___________________________________________________________________________________
______
FORMAT FOR RECEIPTS AND PAYMENTS A/C Non Profit Organization Receipts and Payments
Account for the period ended ________________________ Receipts Balance b/f Bar
Sales Subscriptions Donations Received Other Receipts e.g. Rent Received Gate
Receipts Raffles and other competitions Interest Received on bank a/c Sale of old
equipment Balance b/f $ X X X X X X X X XX X Payments Bar Purchases General
Expenses Other Payments e.g. Insurance Purchase of refreshments Purchases of Prizes
Purchase of new equipment Rent of hall for Annual Dinner Maintenance Balance c/f $
X X X X X X X X X XX
52
THE SUBSCRIPTION ACCOUNT OF NON PROFIT ORGANIZATONS

Non Profit Organizations receive subscriptions from its members. The Subscription
Account is a revenue account (credit balance). The Subscription account must
account for any Accruals and Prepayments, like all revenue accounts, as follows:
Non Profit Organization Subscription a/c Date Year Dt @ start Year end Details
Accrual b/d Income & Expenditure** Prepayment c/d Dr$ X X X XX Date Year Dt @ start
Year end Details Prepayment b/d Bank (Receipts) Accrual c/d Cr$ X X X XX
**The amount for “Income & Expenditure” is entered in the Income & Expenditure
account for Subscriptions in the Income section.
___________________________________________________________________________________
LIFE MEMBERSHIP Many clubs and societies have life membership schemes where members
can pay a relatively large amount at the beginning and then never pay any more
membership fees. The payment of a life membership fee should be spread over the
estimated / expected membership period. An annual amount from the total payment
would be entered in the Income & Expenditure a/c, and the remainder would be
entered in the Balance Sheet as a long-term liability. Example: A member paid $20
000 life membership at age 20 and expected to be a member until 40 years old.
Therefore, the annual amount to be entered in the Income & Expenditure a/c for
subscriptions should be $20 000 / 20 years which is $1 000. In the first year, the
remaining $19 000 would be entered in the Balance Sheet as a long-term liability.
In the second year, the remaining $18 000 would be entered in the Balance Sheet as
a long-term liability. …
53
FORMATS FOR FINAL ACCOUNTS OF NON PROFIT ORGANIZATONS

The Trading a/c is prepared to calculate whether the non profit organization made a
profit or a loss on its fundraising activities e.g. bar, disco, dances, etc. The
Income & Expenditure shows whether the accumulated fund (capital) has increased or
decreased over the period.
Non Profit Organization Bar Trading a/c for the period ended
____________________________ $ Bar Sales Less: Cost of Goods Sold Opening Stock
Add: Purchases Less: Closing Stock Gross Profit Less: Barman’s Salary Profit / Loss
transferred to Income & Expenditure a/c* $ X X X X (X) (X) X (X) XX
Income & Expenditure a/c for the period ended ____________________________ $ Income
Profit from bar* Subscriptions** Donations received Rent received Interest Received
Receipts from Raffles etc. Any other income for period… Expenditure Loss from bar*
Wages General Expenses Donations Depreciation of Equipment Depreciation of
Furniture & Fittings Any other payments in period Surplus of income over
expenditure ** X X X X X X X X X X X X X X X (X) XX $
**If Expenditure exceeds Income, the difference is Excess of expenditure over

income N.B. The amounts entered in the Income & Expenditure a/c include Accruals
and exclude Prepayments. Therefore, Accruals are added to amounts and Prepayments
are subtracted from amounts.
54
FORMAT FOR THE BALANCE SHEET OF NON PROFIT ORGANIZATONS
Non Profit Organization Balance Sheet as at ________________ FIXED ASSETS: Club

Premises Furniture & Fittings Sports Equipment CURRENT ASSETS: Bar Stock Prepaid
Expenses Accrued Revenues e.g. Accrued Subscriptions * Bank Cash Total Current
Assets LESS: CURRENT LIABILITIES Creditors Accrued expenses Advanced revenues e.g.
Advanced Subscriptions * Total Current Liabilities WORKING CAPITAL X X X (X) X XX
FINANCED BY: ACCUMULATED FUND Accumulated Fund @ start of period (Opening Balance)
Add: Surplus of income over expenditure Less: Excess of expenditure over income OR
X X OR (X) X X X X X X X COST $ X X X X ACC DEP. $ (X) (X) (X) NBV $ X X X X
Accumulated Fund @ end of period (Closing Balance) LONG-TERM LIABILITIES Mortgage

Life Membership Fee** Total Long Term Liabilities X X
X XX
55
FORMATS FOR FINAL ACCOUNTS OF COOPERATIVE SOCIETIES
Name of the Business Income and Expenditure Account for the year ended
___________________________________ $ Income Membership dues Interest and Dividends
Other Expenditure Telephone Stationary & Office Supplies Traveling Repairs and
Maintenance Motor Vehicle expense Bank Charges Interest on members deposits
Interest on Loans Application: Subscriptions and dues Annual General Meeting (AGM)
expenses Auditors’ fees/remuneration Provision for Depreciation $ X X X X X X X X X
X X X X X X X (X) X X X X X X X X (X) Undistributed surplus c/f to next year XX $
Surplus/Deficit for the year Add: Undistributed surplus at the beginning of year
b/f Less: Appropriations Transfer to reserves: Statutory reserve Special reserve
Honoraria Proposed dividend
Note: • • • • Statutory Reserves – by law / statute a minimum percentage of net

income should be transferred to this reserve. Special Reserve – a reserve for any
specific named purpose e.g. Investment reserve; Building reserve Honoraria –
voluntary payments to members of the committee of management as appreciation for
services performed. Proposed Dividends – dividends fixed at the AGM.
56
FORMATS FOR FINAL ACCOUNTS OF COOPERATIVE SOCIETIES
Name of Business Balance Sheet as at _________________________________________

Employment of Capital Fixed Assets Premises Equipment Motor Vehicles Current Assets
Stock Receivables: Membership dues Prepayments Bank Cash Less: Current Liabilities
Honoraria Owing Proposed Dividends * Working Capital Net Assets Capital Employed
Share Capital Reserves: Statutory reserve Special reserve Undistributed surplus
income X X X X XX $ Cost X X X X $ Accumulated Depreciation -(X) (X) X X X X X X X
X X (X) X XX $ Net Book Value X X X X
Note: A Cooperative Society’s primary source of capital is from its members.

VERTICAL FORMAT OF THE TRADING & PROFIT & LOSS A/C OF A COMPANY Limited Liability
Company Trading & Profit & Loss Appropriation A/c for the _______ ended ________ $
$ $ Sales X Less: Sales Returns (X) Net Sales X LESS: COST OF GOODS SOLD: Opening
Stock Purchases Less: Purchases Returns Add: Carriage In Net Purchases Cost of
Goods Available for sale Less: Closing Stock Cost of Goods Sold GROSS PROFIT (or
GROSS LOSS) Add: Revenue Rent Received; Discount Rec. etc Decrease in Provision for
bad debts Total revenue Less: Expenses Carriage Outwards Utilities ; Wages/salaries
etc Discount allowed Increase in provision for bad debts Bad debts expense
Depreciation *Directors’ Remuneration *Debenture Interest Total expenses NET PROFIT
(or NET LOSS) Add Retained Earnings b/f Less: Appropriations Transfer to General
reserves Proposed dividends: Preference share dividends Ordinary Share Dividends
Retained Earnings for the year * The last section (starting from Net Profit) is
called the Approriation A/C X X (X) X X X X (X) (X) X / (X) X X X X X X X X X X X
(X) X / (X) X X X X X (X) X
57
VERTICAL FORMAT OF THE BALANCE SHEET OF A COMPANY Limited Liability Company Balance
Sheet as at _________
58

CURRENT ASSETS:
X X X X X (X)
(X) (X) (X) (X) X X X X X X X
X X X X
Creditors *Debenture Interest Payable Accrued expenses Advanced revenues *Proposed

Dividends: Ordinary Preference Bank overdraft Total Current Liabilities WORKING
CAPITAL FINANCED BY: Authorized Share Capital Ordinary Shares @ $ par value %
Preference Shares @ $ par value Issued Share capital Ordinary Shares @ $ par value
% Preference Shares @ $ par value Reserves General Reserves Retained Earnings
LONG-TERM LIABILITIES
X X X X X X X (X) X XX
X X X X X X X X X X
Mortgage * % Debentures
X X X XX
FORMAT OF THE MANUFACTURING ACCOUNT
Manufacturing Business Manufacturing Account for the _______ ended ________
$ Opening Stock of Raw Materials Add: Purchases of Raw Materials Carriage Inwards
(Raw Materials) Less: Closing Stock of Raw Materials Cost of Raw Materials consumed
(Direct Materials) Direct Labour Direct expenses PRIME COST Add: Factory Overhead
Expenses Indirect labour / Pay (Factory workers) General Factory expenses /
Indirect expenses Fuel and Power Factory rent; Factory Insurance… Depreciation of
Plant and machinery Lubricants PRODUCTION COST Add: Opening Work-in-Progress Less:
Closing Work-in-Progress PRODUCTION COST OF GOODS COMPLETED C/D* $ $ X X X X (X) X
X X X X X X X X X X X X X (X) X
59
Trading and Profit and Loss Account for the ________ended ________
$ Sales Less: Sales Returns (Finished Goods) NET SALES Less: Cost of Goods Sold
Opening Stock of Finished Goods
Add: Purchases of Finished Goods (if any) Less: Purchases Returns of Finished Goods
(if any) X X .
$ X X X
X X X X (X) (X) X X X
X
Net Purchases *Add: Production cost of goods completed b/d* Less: Closing Stock of
Finished goods GROSS PROFIT Less: Administrative Expenses Administrative Staff pay
Rent; Insurance; Depreciation etc Less: Selling and Distribution Sales Staff pay
Commission on sales; Carriage Outwards, etc Financial Charges Bank Charges
Discounts Allowed NET PROFIT
X X
X
X X
X
(X) X
60
MANUFACTURING ACCOUNT (INCLUDING COST OF PACKAGING)

The Cost of Production may include the cost of the packaging of the finished goods
e.g. boxes, bottles, cases etc. This Cost has to be included in the Manufacturing
Account in addition to the cost of Raw Materials. This can be done after Cost of
Raw Materials Consumed is calculated, or in columnar format as seen below:

$ Raw Materials Opening Stock Add: Purchases Carriage Inwards Less: Closing Stock
of Raw Materials Cost of Direct Materials & Boxes consumed Direct Labour Direct
expenses X X X X (X) X $ Packaging e.g Boxes X X X X (X) X XX X X $ Total
PRIME COST
Add: Factory Overhead Expenses Indirect labour / Pay (Factory workers) General
Factory expenses / Indirect expenses Fuel and Power Factory rent; Factory
Insurance… Depreciation of Plant and machinery Lubricants PRODUCTION COST Add:
Opening Work-in-Progress Less: Closing Work-in-Progress PRODUCTION COST OF GOODS
COMPLETED C/D* X X X X X X
X X X X (X) X
* Factory Overhead Expenses are for ALL INDIRECT EXPENSES (Factory Expenses), even
though it appears to be under the “Boxes” Column.
61
The following format is the long way of including the Cost of Packaging in the
Manufacturing Account. The Packaging cost is calculated after the “Cost of Raw
Materials consumed” as follows:

$ Opening Stock of Raw Materials Add: Purchases of Raw Materials Carriage Inwards
(Raw Materials) Less: Closing Stock of Raw Materials Cost of Raw Materials consumed
(Direct Materials) Opening Stock of Packaging e.g. Boxes Add: Purchases of Boxes
Carriage Inwards (Boxes) Less: Closing Stock of Boxes Cost of Direct Materials and
Boxes consumed Direct Labour Direct expenses X X X X (X) X XX X X $ $ X X X X (X) X
PRIME COST
Add: Factory Overhead Expenses Indirect labour / Pay (Factory workers) General
Factory expenses / Indirect expenses Fuel and Power Factory rent; Factory
Insurance… Depreciation of Plant and machinery Lubricants PRODUCTION COST Add:
Opening Work-in-Progress Less: Closing Work-in-Progress PRODUCTION COST OF GOODS
COMPLETED C/D* X X X X X X
X X X X (X) X
62
FORMAT OF THE BALANCE SHEET OF A MANUFACTURING BUSINESS

The Current Asset Section is the only section that differs in the Balance Sheet for
a Manufacturing Account as Stock is now divided into THREE types: 1. Raw Materials
2. Work-in-Progress 3. Finished Goods
Manufacturing business Balance Sheet as at ________________ FIXED ASSETS: Land &

Buildings Plant & Machinery COST $ X X X CURRENT ASSETS: Stock* Raw materials Work
in progress Finished Goods Debtors Less: provision for bad debts Net debtors
Prepaid expenses Revenues owing Bank * Cash Total Current Assets LESS: CURRENT
LIABILITIES Creditors Accrued expenses Advanced revenues Bank overdraft * Total
Current Liabilities WORKING CAPITAL FINANCED BY: Opening Capital Add: Net Profit OR
Less: Net Loss Less: Drawings Closing Capital LONG-TERM LIABILITIES Mortgage Bank
Loan Total Long Term Liabilities X X X XX X X OR (X) X (X) X X X X X (X) X XX X X X
X X (X) X X X X X X ACC DEP. $ (X) (X) (X) NBV $ X X X
63
RATIO ANALYSIS Ms Fergusson

64
Accounting Ratios:
A ratio that expresses the relationship between one accounting result and another,
intended to provide a useful comparisons.
Liquidity Ratios: assesses the business’ ability to cover its short-term debt as
they become due.
Current Ratio =
Current Assets . Current Liabilities

= $12 500 = $5 000 2.5:1
Also known as “Working Capital Ratio” Ratio expressed as the number of times
current assets can cover the current liabilities in the accounting period. 2.5
Current assets cover 1 Current liability
Example:
Current Assets Current Liabilities
Quick Ratio =
Current Assets - Stock . Current Liabilities
Also known as “Acid Test Ratio” Ratio expressed as the number of times quick assets
can cover the current liabilities in the accounting period.
Example:
Current Assets - Stock Current Liabilities
= $12 500 - $2 500 = $5 000
2:1
2 Quick Assets cover 1 C. Liability
Debtor: Sales Ratio =
Debtors / Acc. Receivable x 12mths Annual Sales $3 600 x 12mths = 1.35 months $32
000
Expressed as the average no. of months debtors take to pay business amounts owed.
Debtors take 1.35 months on average to pay business amounts owed.
Example:
Debtors Sales
Creditor: Purchases Ratio =
Creditors / Acc. Payable x 12mths Annual Purchases

Expressed as the average no. of months the business takes to pay creditors /
suppliers amounts owed.
Example:
Creditors = $2400 x 12mths = 1.04 months Purchases $27 700
The business takes 1.04 months on average to pay creditors amounts owed.
Debtor: Creditor Ratio =
Debtor . Creditor
1.5:1
Measures the relationship between how much credit is granted by the business to
customers and how much credit is received from suppliers. …for every $1.50 owed by
a debtor, the business owes $1 to a creditor.
Example:
Debtors Creditors
= $3 600 = $2 400
Profitability Ratios: assesses the business’ overall efficiency and performance
during a specific period. Gross Profit as a Percentage of Sales = Example: Gross
Profit x 100 = Net Sales $12 900 $32 000
65
Gross Profit Net Sales

x 100 = 40.3%
x 100
Expressed as a % Amount of Sales that result in Gross Profit
The business made a Gross profit of $0.40 for every $1 of Sales.
Net Profit as a Percentage of Sales =
Net Profit Net Sales
x 100
Expressed as a % Amt of Sales that business keeps as profits after cost of sales &
expenses
Example: Net Profit x 100 = $7 200 x 100 = 22.5% Net Sales $32 000
The business made a profit of $0.22 for every $1 of Sales after deducting all costs
& expenses.
Net Profit as a Percentage of Capital Employed = (Return on Capital Employed)
Net Profit x 100 Capital Employed
Expressed as a %
This ratio measures the amount of returns a business receives from resources made
available to them from funds supplied by owners. Sometimes, funds supplied by
creditors (long term liabilities) are included in capital employed as well. There
are different Formulas for Capital Employed. Most popular for CSEC: Capital
Employed = Opening Capital + Closing Capital 2 Example: Net Profit x 100 = $7 200
Capital Employed $21 600 x 100 = 33.3%
The business earned $0.33 for every $1 of Capital Employed.
Rate of Turnover or Stock turnover =
Cost of Goods Sold . Average Stock Average Stock

Cost of Goods Sold
Expressed as the no. of times per annum stock is sold or turned over. Expressed as
the average no. of months or days the stock is sold or turned over.
Rate of Turnover or Stock turnover =
x 12mths / 365dys
Average Stock = Opening Stock + Closing Stock 2 Example1: $19 100 $2 300 = 8.3
times Example2: $2 300 $19 100 x 12mths = 1.45 months
66
Accounting Ratios and Incomplete Records:

MARK UP AND MARGIN (PROFIT EXPRESSED AS A % OF PRICE)
MARK UP: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS
SOLD MARGIN: Profit expressed as a fraction / percentage of SELLING PRICE / SALES
REVENUE FORMULAS: MARK UP: Profit expressed as a fraction / percentage of COST
PRICE / COST OF GOODS SOLD Mark up (%) = Gross Profit Cost Price / Cost of Goods
Sold
NB: Sales = Cost of Goods Sold + Mark up Profit
X 100
MARGIN: Profit expressed as a fraction / percentage of SELLING PRICE / SALES

REVENUE Margin (%) = Gross Profit Selling Price / Sales
NB: Cost of Goods Sold = Sales – Margin Profit
X 100
USING MARK UP AND MARGIN IN INCOMPLETE RECORDS

MARK UP: Profit expressed as a fraction / percentage of COST PRICE / COST OF GOODS
SOLD NB: If Mark up % is given and Cost of Goods Sold, Gross Profit and Sales can
be calculated as follows: Gross Profit ($) = Mark up (%) x Cost of Goods Sold ($)
Sales ($) = Cost of Goods Sold ($) + Gross Profit (mark up) Example: Solution: Cost
of Goods Sold = $5000 Gross Profit = 20% x $5000 = $1000 Therefore, Sales = $5000 +
$1000 = $6000 MARGIN: Profit expressed as a fraction / percentage of COST PRICE /
COST OF GOODS SOLD NB: If Margin % is given and Sales Revenue, Gross Profit and
Cost of Goods Sold can be calculated as follows: Gross Profit ($) = Margin (%) x
Sales ($) Cost of Goods Sold ($) = Sales ($) - Gross Profit (margin) Example:
Solution: Sales = $6400 Margin = 25% Mark up = 20%
Gross Profit = 25% x $6400 = $1600 Therefore, Cost of Goods Sold = $6400 + $1600 =
$4800
RELATIONSHIP BETWEEN MARK-UP AND MARGIN (how to use one to find the other if
necessary) MARGIN = Mark-up numerator . (fraction) Mark-up numerator + Mark-up
denominator MARK UP = (fraction) Margin numerator . Margin numerator - Margin
denominator

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1

ST. MARY’S COLLEGE

The Purpose of Accounting :

The purpose of accounting o The purpose of accounting is to provide information

Difference between accounting and bookkeeping

The Users of Accounting Information: need to know profitability & liquidity of

Accounting Concepts and Conventions

The Cost Concept

The Money Measurement Concept The Going Concern Concept

The Business Entity Concept

The Realization Concept (Revenue Recognition Concept)

The Accrual Concept (Matching Concept)

The Dual Aspect Concept

ACCOUNTINGCONVENTIONS Thesearetherulesthatstandardizethe accountingmethodsusedto

The Five classes/categories of Accounts :

A – Assets L – Liabilities I – income / Revenues C – Capital / Owner’s Equity E –

Liabilities Liabilities are economic resources borrowed by a business from a person

A company’s financial position The financial position of a company is measured by:

INTRODUCTION TO THE BALANCE SHEET

The Balance Sheet and its major components :

Liabilities  Liabilities are economic resources borrowed by a business from a

INTRODUCTION TO THE BALANCE SHEET

The Accounting Equation :

Assets = Liabilities + Capital

The Expanded Accounting Equation :

The Simple Balance Sheet :

The Format of a simple Balance Sheet (Horizontal) Balance Sheet as at $ Assets X

INTRODUCTION TO THE BALANCE SHEET

The Balance Sheet – Arrangement of Assets and Liabilities

The Balance Sheet – Order of Permanence:

The Balance Sheet – Order of Liquidity:

Balance Sheet as at $ Current Assets Fixed Assets X X XX

$ Current Liabilities Long Term Liabilities Capital X X X XX

Assets and Liabilities in Order of Permanence and Liquidity :

LONG TERM LIAB.

ACCOUNTING CYCLE Ms Fergusson

Categories and Types of Accounts

General Journal General Journal General Journal General Journal

General Journal General Journal General Journal General Journal

General Journal General Journal General Journal

Year dt dt dt dt dt dt *dt *dt dt

Year dt dt dt dt *dt *dt dt dt

It is based on accounting equation

Correction of errors, Adjusting entries, etc.

DOUBLE ENTRY requires that for each transaction, the amount

Creditor a/c Date Year dt dt dt Details Returns Outwards Cash/Bank Discounts

March 31 Transfer to Trading a/c

24 000 24 000 Purchases a/c

Date 2010 March 14 March 31

Details Bank Total Credit Purchases for the month of March

Dr$ 1 300 22 000 24 000

Date 2010 March 31

Transfer to Trading a/c

Balance in Trial Balance

Trial Balance as at ___________________ Dr $

Trial Balance as at ___________________ Dr Cr $ $

Errors affecting / revealed by the Trial Balance

Suspense Account (Errors affecting / revealed by the Trial Balance)

A credit balance in the Suspense account is a Current Liability in the Balance

Year dt dt dt dt dt dt dt dt dt

Year dt dt dt dt dt dt dt dt