ACCOUNTS

BOOKSOFORIGINALENTRIES

Thesearethebooksoffi
r s
tentry.Thetrans
ac t
ionsarefir
strec
ordedi
nt hes
e
booksbefo
rebeingenter
edi ntheledgerbooks
.Thesebooksar
eal s
ocal
ledas
booksofPrimeentryorSubsi
diarybooks
.Theyar esi
xinnumber.

1.Purchas
esJournal(
orPur
chasesBook)us
edt
orec
ordal
lcr
edi
tpur
chas
es
of
goods
.Itiswr
itt
enupfr o
minvo
ice.

2.SalesJour
nal(orS
alesBook)i
sus
edt
orec
ordal
lthec
redi
tsal
eso
fgo
ods
.
It
iswri
ttenupfromtheinvo
ice.

3.Sal
esRetur
nsJournal(or Ret
urnInwardsBook)
:Itisus
edt
orecor
dal
l
ret
urnsi
nwards.Iti
swrit
tenupfr o
mt hec
opiesofthec
redi
tno
tess
endto
cus
tomers
.

4.PurchasesRetur
nJournal(
orReturnsOut
war
dsBook):Iti
susedtoreco
rd
allpurchasesr
etur
ns.Iti
swri
ttenupfromthecredi
tno
tesrecei
vedfr
o mthe
suppli
ers.

5.CashBook:Iti
susedtorec
o r
dallrec
eipt
sandpaymentso
fcashand
cheques.
Itisbeengi
ventherul
ingi
ns uchawaythatitac
tsbo
thasaboo
ko fo
rig
inal
entryandledgerac
count.

6.Gener alJournal(orJournal)
:Thisboo
kisus
edt oreco
rdallt
hoseit
emso r
transacti
onsthatc annotber ec
ordedinanyotherbo
o kofo
rigi
nalentryl
ike
i
.Co r
rectionoferrors
i
i.Openingent r
ies
i
ii
.Pur c
has eorSaleofAs s
etsonCreditet
c.
 BOOKSOFFINALENTRY
LEDGERBOOKS

Ledgerbooksaret
hebooksoffi
nalent
rywhi
chcont
ainsthevari
ous
accountstowhi
chtheentr
iesmadeint
heBookso
fOrigi
nalentr
yare
transferr
ed.

DIVIS
IONOFLEDGERBOOK

1.Pur
chas
esLedg
erBo
ok:Thi
sbo
okc
ont
ainsal
ltheac
count
sofS
uppl
ier
s.

2.S
alesLedg
erBo
ok:Thi
sbo
okc
ont
ainsal
ltheac
count
sofCus
tomer
s.

3.Gener
alLedg
erBo
ok:Thi
sbo
okc
ont
ainsal
lther
esto
ftheac
count
sli
ke,

Ass
etsAccount
s ,expens esacc
ount,los
sesac c
o unt,etc
.,andalsotheTot
al
purc
hasesaccount ,Totalsal
esaccount,TotalS al
esreturnsac
count,Pur
chas
es
Ret
urnsaccount .Itisalsocal
ledasNo minalledger.

Adv
ant
agesOfDi
vidi
ngTheLedger
:

1.Itfac
ili
tat
esdi
vis
iono
flabo
uri
nthemai
ntenanc
eofl
edg
er.

2.Itbec
omeseas
ytol
ocat
eer
ror
sinl
edg
erac
count
s.

3.Ithelpst
hel
edg
erc
ler
kst
oco
mpl
etet
hei
rres
pec
tiv
ewo
rki
nti
mewi
th
perfec
tion.

4.Itbec
omeseas
ytor
efert
oanypar
tic
ularac
count
.

BUS
INES
SDOCUMENTS
1.Invoic
e:Whenev erthereisacr
edi tsal
e,thesell
ingbusinesswil
lsenda
documentt obuyershowingful
ldetailsofthegoodssold.Thisdocumentis
cal
ledasInv oi
ce.Itisknowntothebuyerasa“ Purchasesinvoi
ce”.Andtothe
sel
lerasa“ Sal
esinvoi
ce”.
Note:Entri
esinthesalesbookandt hepurchasesBookar emadewi ththehelp
ofani nvoi
ce.
2.DebitNote:Thisdoc
umentispr
epar
edbythepur
chaseranditi
ssenttot
he
suppl
iertor epo
rthimifanyfaul
tygo
odsar
ebeensentorsho
rtagesor
overc
har g
esar ebeenmade.

3.CreditNot
e:Wheng oodsar
er eturned,orther
ehasbeenano v
er -charge,a
suppli
ermayi s
sueac r
editno
tet othebuyer.Thi
sreduc
estheamo unto wedby
thecustomer.
Note:Thisdo
cumentisusedtomaket heentr
iesi
nboththepur
chas esreturns
Bookandt hesalesr
eturnsBook.

4.StatementofAc count:Thisdocumentispreparedandsenttothecus
tomer
by
thesuppli
er.Iti
sissuedtor emindthecustomerabouthi
sdueamo unt
.Itis
basi
callyasummar yo ft
het ransact
ionofac usto
merduringthemonthli
ke
sal
esmade,Ret urnsreceivedandCas hrecei
ved

CAS
HBOOK
Cashbooki
stheonlyboo
ko fo
rigi
nalent
rywhic
hisg i
venruli
ngi
nsuc
haway
thatitc
oul
dac tatthesameti
measabo oko
fo ri
ginalent
ryandasaledg
er
account
.

1.TradeDis
c ount:Itisanall
owanceordeduc
tio
ngi
venbyt
hes
uppl
iert
othe
ret
ailero
nt hec atal
oguepri
ceorli
stpri
ce.

i
.Iti
sgi
vent
oenc
our
agehi
mtobuyi
nbul
k.

i
i.Iti
sgi
vens
othatr
etai
lerc
oul
dmakes
omepr
ofi
t.

Not
e:Iti
sno
trec
ordedi
nthebo
oksei
therb
ythes
ell
ero
rthebuyer
.

2.CashDiscount:Itisanall
owanceordeducti
ongivenbyther
ecei
vero
fcas
h
to
thepayerofc as
hfo rpromptpayment.
Itiso
ft wot
ypesdi s
countall
owedanddi s
countrec
eived.

i
.Iti
sgi
vent
oenc
our
aget
hepayert
opayo
norbefo
ret
heduedat
e.

i
i.Note:Thi
sdisc
ountisrec
ordedi
nt heCas
hBo ok.Di
sco
untal
lowedis
r
ec o
rdedatt hedebi
tsideanddis
countrecei
vedo nt
hec r
edi
tside.

i
ii
.Not
e:Di
sco
untc
olumnsar
enev
erbal
anc
ed.Iti
sjus
tto
tal
led.
i
v .Note:EverymonththeTotal’
sofdi s
countall
owedc ol
umni stransfer
redt
o
debitsideofDisco
untall
owedac countinGeneralledgerandt hetotal
ofdi s
co unt
-recei
vedcol
umni stransferredt
ot hecredits
ideo fDis
count
receiv
ed
ac c
ounti ntheGenerall
edger.

3.Cont
raEntry:Whenatransact
ioneffec
tsbot
hc ashandbankac
count
sat
the
sametime,s
uchentri
esar
ec al
ledasContraEnt
ries.

PETTYCAS
HBOOK
ImprestSys
tem:Iti
sasystemwherear ei
mbursementi
smadeo ft
het o
tal
amount
pai
di naperiodo
ritcanalsobecal
ledasas ys
temwherepett
ycas
hierbeg
in
each
newac c
ounti
ngperi
odwit
ht hesameamo untofpett
ycash.

Adv
ant
agesOfPet
tyCas
hBook:

1.Thenumbero
fent
riesi
nthemai
ncas
hbo
oki
sreduc
ed.

2.Themai
ncas
hier
’sbur
deni
sreduc
ed.

3.Thec
hanc
eso
fmi
stakesi
nrec
ordi
ngi
smi
nimi
sed.

4.Po
sti
ngbec
omemo
reeas
ywi
tht
heTo
tal
’sAnal
ysi
sCo
lumns
.

Adv
ant
agesofus
ingAnal
ysi
scol
umns
:

Itletuskno wthemoneyspentoneachdi
ffer
entnatureofsmal
lexpense.
Thedo ubleentryfo
reachanalysi
sco
lumnbytrans
ferri
ngthetot
alsofthe
analysis
col
umnst othei
rres
pect
iveacco
untswhi
chareavai
labl
eintheGenerall
edger
.

TRIALBALANCE
Tri
albal
ancemaybedefinedasast
atemento
rali
stofalll
edg
eracc
ount
bal
ancestakenfromvari
ousl
edg
erboo
ksonapar
tic
ulardatet
ochec
kthe
ari
thmeti
calaccur
acy.
Obj
ect
ivesOrAdv
ant
agesOfTr
ialBal
anc
e

1.Itc
hec
kst
hear
ithmet
icalac
cur
acyo
fledg
erac
count
s.

2.Itg
ivesmat
eri
alfo
rpr
epar
ingFi
nalac
count
s.

3.Tohav
eapr
ooft
hatt
hedo
ubl
eent
ryo
feac
htr
ans
act
ioni
smade.

Impor
tantPoi
ntsToPr
epar
eTr
ialBal
anc
e:

1.Itshoul
dber
emember
edt
hatal
ltheAs
set
sandex
pens
esac
count
sar
e
always
debit
ed.

2.Al
lli
abi
li
ti
esandi
nco
mesar
eal
waysc
redi
ted.

3.Al
lpr
ovi
si
onsar
eal
waysc
redi
ted.

4.Clos
ingst
ocki
snev
ert
akeni
ntr
ialbal
anc
e.(
iti
stobes
howno
uto
fthet
rial
balance)
.

CAPITALANDREVENUEEXPENDITURE
I.Capi
talEx
pens
es:

1.Allexpens
esfo
rac
qui
ri
ngt
hefi
xedAs
set
sli
ke,Mac
hiner
y,Bui
ldi
ng,
Furnitureet
c;

2.Al
lexpensesinci
dent altot
heac qui
si
ti
ono
fFi x
edAss
ets.
Exampl
es :Transpo
rtingofMac hi
neryandFi
xingandRegi
str
ati
ono
fLand
andBuildingorBusiness.

3.Allexpens
est
oimpr
ovet
heex
ist
ingAs
set
stoi
ncr
eas
ePr
ofi
tear
ning
capacit
y.

4.Maj
orr
epai
rsandr
enewal
stoi
ncr
eas
etheeffi
cienc
yoft
hebus
ines
s.

II.Rev
enueEx
pens
es:

1.Allreg
ularexpenseswhi
chareinc
ur r
edinthedai
lyco
ur s
eo fbus
ines
s.
Example:Wages,Salar
ies
,Repai
rs,Admini
str
ati
onexpenses.
2.Pur
chas
eofRawMat
eri
alandg
oods
.

3.Lo
ssest
hro
ughbaddebt
sanddepr
eci
ati
on.

4.Int
eres
tpai
donbo
rro
wedfunds
.Et
c.

III.Capi
talIncome/CapitalRecei
pt:
Therecei
ptofmo ney,whic
har i
senotfromregul
ars
our
ceo
finc
ome
Examples
:i.Capit
alboughtintothebusi
nes
s.
i
i.Incomethroughbankloan.
i
ii
.Incomet hr
oughsaleoffix
edAs s
ets
.

IV.RevenueIncomes/RevenueRecei
pts
:
Therecei
ptofmo ney,whi
char i
ses
inregul
arcours
eo fbusi
ness.

1.S
alespr
oceedso
fbus
ines
s

2.Co
mmi
ssi
ono
rInt
eres
trec
eiv
ed

3.Di
sco
untr
ecei
ved.et
c.

FINALACCOUNTS
I.Tr
adi
ngAc
count
:

Asthenamei t
selfi
mpli
esthisacc
o untdealswi
th
tradi
ngi.
e.buyingandsel
li
ngo fgoods.Thisac
counts
howst
heGr
ossPr
ofi
t
earnedorlo
ssincurr
edont hegoodssold.

II.Pr
ofi
tandLos
sAc
count
:

Asthenameimpliesthi
sacco
untdealswi
th
pro
fitsandlo
sses
,g ai
nsandexpens
es.Thi
ssho
wst
hec
alc
ulat
iono
fFi
nal
Profi
torlo
ssofabus i
ness
.

III.Bal
anc
eSheet
:

“Thi
sisno
tanaccount
”butiti
sastat
emento
ffi
nanc
ial
posi
ti
onofabus
inesso
nac ert
aindat
e.

ADJUS
TMENTS
Ac
crual
s:

Iti
sthedue,whi
chhastobepaidforthebenefi
tors
ervi
ceenj
o yed
duri
nganaccounti
ngperi
od.Itcan al
sobecall
edasdue,anoutst
andi
ngo
r
an
arr
ears.

Pr
epayment
s:

Iti
sapaymentfo
rthebenefi
twhi
chhasno
tyetbeenenj
oyed.

BadDebt
s:

Iti
sadebtwhi
chi
sdeemedt
obei
rrec
over
abl
e.

BadDebt
sRec
over
ed:

Iti
sadebtwhi
chwaspr
evi
ous
lywr
itt
eno
ffandi
sno
w
pai
dtous.

Prov
isi
onForBadDebts:Iti
sas
avi
ngfr
ompr
ofi
tfo
rapo
ssi
blefut
urel
oss
that
mayo rmaynoto
ccur.

DEPARTMENTALACCOUNTS
DepartmentalAccount
saretheac
countsthatt
hro
ughli
ghtnoto
nlyonthe
tradi
ngresultofthebusi
nes
sasawholebutals
oonthetradi
ngres
ulto
feach
departmentindiv
iduall
y.

Reas
onsOrAdvant
agesOfMaki
ngDepar
tment
alAcc
ount
s:
OR
Reas
onsToKnowTheResul
tOfEac
hDepart
ment:

1.Itlet
suskno
wtheex
pens
esandi
nco
meso
feac
hdepar
tmentc
lear
lyato
ne
plac
e.

2.Ithel
psust
oco
mpar
ether
esul
tsi
.e.G.
PorN.
Pofo
nedepar
tmentwi
tht
he
other
.
3.Ithel
psust
ofo
rmul
atepo
lic
iesi
nor
dert
odev
elo
pthebus
ines
sonpr
oper
li
nes.

4.Todec
idewhet
hert
odr
opo
rst
artanewdepar
tment
.

5.Ithel
psust
orewar
dthedepar
tment
almanag
ers
.

Thi
ngst
obec
ons
ider
edbefor
ecl
osi
ngadepar
tment
:

1.Co
nsi
deral
lpo
ssi
blemeanst
oimpr
ovet
hedepar
tment
.

2.Themetho
dsusedtoappo
rti
ont
heex
pens
ess
houl
dbes
tudi
edt
oseei
fthey
are
infactt
hefair
estmetho
ds.

3.Theeffectoft
hec
los
ureo
fonedepar
tmento
ntheo
therdepar
tment
shoul
dbe
inves
tig
ated.

4.Theat
trac
tiv
eus
eso
fthes
pac
ebec
omi
ngav
ail
abl
eneedt
obec
ons
ider
ed.

5.Non-Monet
aryfacto
rssuc
hass t
affmo r
aleandt
heeffec
tons
uppl
iesand
cust
omersfai
thisal
sotobecons
idered.

MANUFACTURINGACCOUNT
Manufacturi
ngbusi
nessespreparemanufac t
uringaccounti
naddit
iont
othe
usualfi
nalAcco
unts.Manufac t
uringac
co untshowshowmuchdoesi
tcos
tthe
busi
nesstomanufactur
et hegoodsinafinancialyear
.

Cos
tOfRawMat
eri
alCons
umed:

Iti
stheval
ueofRawmat eri
alusedi
npr oduct
ion.Itcons
istofnetpurc
has
es
ofRawMateri
al,c
arr
iag
eo nr awmater
ialopeningsto
ckofr awmateri
al
cl
osi
ngst
ockofRawmaterial
.

Pr
imeCos
t:

Iti
sthebas
iccos
tofmanufac
t uri
ngthegoods
.Itc
ons
ist
sofdi
rec
traw
materi
aldi
rec
tlabo
uranddirectexpens
es.
Producti
onCost
:Itist
hetot
alco
s tofmanufact
ur i
ngthegoods.Itc
ons
ist
ofprimecostpl
usfact
oryex
penses,andi
tisafterany adj
us t
mentforwork-
i
npr o
gress
.

Work-in-progr
ess:
Thesearethegoodswhi
charepart
lymade,butwhi
char
eno
tyetc
ompl
eted
areknownaswo rk-i
n-pro
gres
s.

PARTNERS
HIPBUS
INES
S
Apartner
shipbus
ines
sisanAsso
ciat
ionoftwoormo
reper
sonsfo
rmedwi
th
t
heobj
ectofshari
ngprofi
tsari
si
ngoutofbusi
ness
.

Adv
ant
ages

1.HugeCapi
tal
:Mor
ecapi
talc
anb
esec
uredt
hani
nthec
aseo
fas
ole
tradi
ngbusi
ness
.

2.Wi
sedec
isi
on:Itenj
oyst
hebenefi
tofc
ombi
nedabi
li
ty.

3.Intr
oduct
ionofDiv
isi
onoflabour:Partner
shi
penj oysal
ladvantag
es
ofDivi
si
onoflabo
ur.Duti
escanbeas si
gnedtodiffer
entpar t
nersacc
ordi
ng
tothei
rqual
ifi
cati
onsandspeci
aliz
at i
on.

4.Gr
eat
erbo
rro
wingc
apac
ity:

5.Di
ffus
iono
fri
sk.

6.Mo
rec
ont
actwi
tht
hec
ust
omer
s.

Di
sadv
ant
ages

1.Unl
imi
tedl
iabi
li
ty

2.Del
ayi
ndec
isi
on.

3.Di
ffer
enc
eino
pini
ons
.

4.Noper
pet
ualex
ist
enc
e.

5.S
ecr
etsc
anno
tbemai
ntai
ned.
Ac
count
sofPar
tner
shi
pFi
rm

Par
tner
shi
pfi
rmspr
epar
ethefo
llo
wingfi
nalac
count
s:

1.Tr
adi
ngA/c

2.Pr
ofi
t&Lo
ssA/c

3.Pr
ofi
t&Lo
ssAppr
opr
iat
ionA/c

4.Cur
rentAc
count
s

5.Par
tner
sCapi
talAc
count
s

6.Bal
anc
esheet
.

1)Tr
adi
ngand2)Pr
ofi
t&Lo
ssA/ci
spr
epar
edi
ntheus
ualfo
rm.

Pr
ofi
tandLos
sAppr
opr
iat
ionAc
count

Thisac
c o
unti
sacont
inuat
ionofthepr
ofi
tandlo
ssaccountanditi
s
preparedtos
howt
heappropri
ati
onofpro
fit
sandlo
ssesamongthepar
tner
s.

Cur
rentAc
count
s

Inapar tnershi
pbusines
samountwit
hdrawnbyapart
nerisgener
all
y
accounted
forseparatelybydebit
ingthecur
rentacco
untsoft
hepartnerwhowi
thdraws
the
amo untfromt hebusi
ness.

Capi
talAc
count
s

Inapar tners
hipbus i
nessther
eareasmanyc api
talacco
untsasarepar tners
.
A
partner’
scontributi
ontothebusi
nessisc
alledhiscapi
tal
.Italwaysshowsa
credit
balancewhic
hi salwaysfix
ed.Ithaschangesonlywhenextr
ac api
talisbought
i
n
t
othebus
ines
sar
eanewpar
tnerent
ersi
ntot
hebus
ines
s.

Goodwi
ll

Goodwi
llmeansthegoo
dr eputat
ionoft
hebusines
swhic
henabl
esi
ttoenj
oy
reg
ularflo
wo fc
usto
mer .Itisanint
angi
blefi
xedAss
et.

INCOMPLETERECORDS
/SINGLEENTRYS
YSTEM
Iti
sasys
temwhichi
sdefinedasanysys
temwhic
hisnotexactl
ythedo
ubl
e
ent
rys
ystem.Iti
sdevel
opedbycert
ainsmal
lbus
ines
speople.

Comput
ati
onofPr
ofi
t:

NetPr
ofi
t:

(
Clo
singCapi
tal+Dr
awi
ngs
)–(
Openi
ngCapi
tal+Addi
ti
onalCapi
tal
)

Mar
k-up:g
ros
spr
ofi
tcal
cul
ati
onasaper
cent
ageo
fco
stpr
ice

Mar
k-up= Pr
ofi
t x100
Co
stpri
ce

Mar
gin:Thec
alc
ulat
iono
fGr
ossPr
ofi
tasaper
cent
ageo
fSel
li
ngpr
ice.

Mar
gin= Profi
t x 100
S
ell
ingpri
ce

CONTROLACCOUNT
Co
nt r
olacco
unt
sares
omet
imesknownasto
talaccounts
.Acont
rolacco
unt
actasasummaryo
fthel
edgerwhi
chitc
ontro
ls.Therearet
wocontr
ol
acco
unts.

1.S
alesl
edg
erc
ont
rolac
count/To
taldebt
orsac
count

2.Pur
chas
esl
edg
erc
ont
rolac
count/To
talc
redi
tor
sac
count
.
1.Sal
esLedgerControlAcc
ount:Itres
emblest
heacco
untofanindivi
dual
debto
r.Iti
sanac co
untr ecor
dinginto
talt
hetrans
actio
nsaffec
tingal
lthe
debto
rs.

S
our
cesOfInfor
mat
ionForS
alesLedgerCont
rolAc
count
:

Sales Sal
esBook
CashandChequesr
ecei
ved CashBook
Dis
honour
edCheques Cas
hBo o
k

Di
sco
untal
lowed Cas
hBo
ok

Baddebt
s Jo
urnal

2.Pur
chas
esLedgerCont
rolAc
count
:

Itres
emblestheac
countofani
ndi
vidualc
redi
tor
.Itr
eco
rdst
het
rans
act
ions
effec
tingal
lthecr
edito
rs.

S
our
cesOfInfor
mat
ionForThi
sAc
count

Pur
chas
es Pur
chas
eBo
ok

Pur
chas
esRet
urns Pur
chas
eRet
urnsBo
ok

Cas
handc
hequepai
d Cas
hBo
ok

Di
sco
untr
ecei
ved Cas
hBo
ok

Cas
hrefund’
sfr
omc
redi
tor
s Cas
hBo
ok

Note:So
met i
mesitcanhappenthattherei
sas mal lo
peningDebi
tbalanceo na
purchasesledgercont
rolacc
ountinadditi
ont otheusualcredi
tbalance.It
happenswhent hebus
ines
shasoverpai
dac redit
o r
,orhasreturnedtheg o
ods
afterpayingt hedueamount.

Note:Someti
mess
alesledgercontr
olacco
unttooal
sohassmallopeni
ngcredi
t
balanceb/donasalesledgerc
o nt
rolac
count
,inaddit
iontotheusual
openingdebi
tbal
ance.Ithappenswhenadebtorhasoverpai
dhi sac
countor
hasr
etur
nedg
oodsaft
erpayi
nghi
sac
counto
rdueamo
unt
.

Adv
ant
agesOfCont
rolAc
count
:

1.Ithel
psi
nlo
cat
inger
ror
s.

2.Ithel
psi
nchec
kingt
hear
ithmet
icalac
cur
acyo
fthel
edg
eri
tco
ntr
ols
.

3.Itgi
vesusreadymadefi
gur
esfo
rTo
taldebt
orsandTo
talc
redi
tor
sona
cert
aindate.

4.Fr
audi
smademo
redi
ffi
cul
tbyt
heus
eofc
ont
rolac
count
.

BANKRECONCILIATIONS
TATEMENT
Thepurpos
eofbankrec
onci
li
ati
onstat
ementistoexplai
nanydifferenc
e
betweent
hebankbal
anceappeari
ngonthebankstatementpr
ovidedbythe
bank..

Reas
onsForDi
ffer
enc
e:

So
metimesits
ohappenthatsomeent
riesar
emadei
ncas
hbo
okbutt
heyar
e
notr
ecordedint
hebank.Like.

1.Chequesdepo
sit
edbutno
tcr
edi
tedi
ntheBank.

2.Chequesi
ssuedbutar
eno
tpr
esent
edi
nthebank.

S
ometi
mesits
ohappenst
hatso
meent ri
esar
emadei
nbanks
tat
ementbut
t
heyareno
treco
rdedincas
hbook.Li
ke.

1.Di
rec
tdepo
sit
sint
hebankbyo
urc
ust
omer
s

2.Di
rec
tco
llec
tio
nsmadebyt
hebanko
nourbehal
f

3.Di
rec
tpayment
smadebybank

4.Int
eres
tal
lowedbyt
hebankandc
har
gedbyt
hebank

5.Di
sho
nour
edc
heques
.
Therefor
eastat
ementispreparedtorec
onci
let
hisdi
ffer
enc
e.Thi
sst
atement
iscal
ledas“
BankReconci
li
ationstat
ement”
.

Met
hodsOfPr
epar
ingBankRec
onc
ili
ati
onS
tat
ement
:

StepI:Co
mpar et hebankcol
umno fthecashbo
okwi t
ht hebankstatement
.
Ti
c k
al
lt ho
serecei
ptsandpayment swhic
hcanb efoundinbo ththecash
bookandt hebanks t
atement,whenthi
shasbeendo ne,thereremains
so
meunt i
c kedit
emsi ncas
hbo okandthebankstatement .

StepII:MakeAdj us
tedc as
hbo okbytakingi
ntoaccountallt
heexist
ingcas
h
bookentri
esplustheunt i
ckedbanks tat
ementitemsintothecashbook
andc al
culat
et henewbal ance.Thi
sbalancei
sconsi
der edasthetrue
bankbalanceoft hebusinessandthisfi
gurewil
lbeshowninthebalance
sheetasbankbalanc e.

S
tepIII:Pr
epar
eBankRec
onc
ili
ati
onS
tat
ement
.

Not
e:Whenwepr epareB.
R.S.wedonotl
ookatt
heentr
iesofbankst
atement
.
Wejus
ttakeint
oac co
unttheentri
eswhi
charei
nCas
hBo okbutnoti
n
BankSt
atement.

1.S
tar
twi
tht
hebal
anc
esho
wni
ntheAdj
ust
edc
ashbo
ok.
.

2.Addtheentri
est
hatarecredi
tedinthecas
hbo
okbutno
tdebi
tedo
n
thebankst
atement
.(unpres
entedcheques
)

3.Deductanyit
emsthataredebi
tedi
nthec
ashbo
okbutar
eno
t
credi
tedinthebankst
atement.

Ther
esul
ti
ngfi
gur
esho
uldbeequalt
oBankS
tat
ementbal
anc
e.

Reas
onsForPr
epar
ingbankRec
onc
ili
ati
onS
tat
ement
:

1.Toens
uret
hatt
hec
ashbo
okent
riesar
eco
mpl
ete.

2.Todi
sco
verbanker
ror
s.

3.Todi
sco
verer
ror
sinc
ashbo
ok.
4.Toc
hec
kFr
audandembez
zlement
.

5.Todi
sco
verdi
sho
nour
edc
heques
.

DEPRECIATION
“Depr
eci
ati
onist
heg
radualandper
manentdec
reas
eint
hev
alueo
fanas
set
fromanycaus
e.”

Caus
esOfDepr
eci
ati
on:

1.S
omeAs
set
sgetwo
rno
rto
rno
utduet
oit
sco
nst
antus
einpr
oduc
tio
n.

2.S
omeAs
set
sgetdec
reas
edi
nthei
rval
uewi
tht
hepas
sag
eoft
ime.

3.SomeAs
set
smaymeetanac
cidentandt
her
efo
rei
tmayg
etdepr
eci
atedi
n
it
s
value.

Reas
onsForPr
ovi
dingDepr
eci
ati
on:

1.Tor
evealt
hec
orr
ectpr
ofi
torl
osso
fabus
ines
s.

2.Tos
howc
orr
ectfi
nanc
ialpo
sit
iono
fabus
ines
s.

3.Tomakepr
ovi
si
onfo
rrepl
acemento
fanas
set
.

Met
hodsOfPr
ovi
dingDepr
eci
ati
on:

Ther
ear
ethr
eemet
hodso
fpr
ovi
dingdepr
eci
ati
on

1.Str
aightLineMet
hod:Thi
sisal
sotermedasFixedi ns
tal
mentmethod.Under
thi
smet hodFix
edPerc
entag
eo nori
ginalco
sti
swr i
ttenofftheas
setever
y
year.
Theamo untofdepr
eci
ati
oniscal
culatedasfo
llo
ws.

AnnualDepr
eci
ati
on = Co
stoftheAsset-S c
rapeVal
ue
No
.ofyearsinuse
RateofDepr
eci
ati
on= AnnualDepreci
ati
on x100
CostofAss
et-S cr
apeValue
2.Reduci
ngBalanceMet hod:Thismethodisal
soknownasDimini
shi
ng
bal
ancemet hodorwri
ttendo wnvaluemethod.Underthi
smethod
deprec
iat
ionischarg
edatafi x
edr ateo
nt hereducedbal
anceever
yyear
.

3.Rev aluationMethod:Sometimesi
tisnotpo ssi
bletomaintai
ndet ail
ed
records
ofc ertaintypesoffixedAsset
s,suc
hasv erys malli
temsofequipmentpac ki
ng
casesandhandt ool
s.Insuchcasetherevaluati
onmet hodisused.underthis
met hodt heassetsarereval
uedattheendo feac hyearandt hi
svalueis
compar edwi ththevalueatthebegi
nningo ftheper i
od.Thedifferencei
s
treatedasdepr eci
ati
on.

Formul
a=ValueofAs
set
sbeg
inni
ng+Pur
chas
eso
fAs
set
sdur
ingt
heper
iod
–v
alueofAs
setatt
heend.

Provi
si
onForDepr
eci
ati
on:Itmeanss
avi
ngapar
tofpr
ofi
tfo
rthe
repl
acement
oftheAss
et.

PrudenceConc ept:Accor
dingtothi
sconceptallthelo
ssesi
nc ur
redo rex
pect
ed
tobeincurredar etobetakenintoaccountbutno tal
lanti
cipatedprofi
tst
o
be
takenintoconsiderat
ionwhil
efindingtheprofi
t.Toapplythisconc
eptthatwe
take
depreci
atio
ni nt heprofi
tandlossacco
unt.

CONCEPTSOFACCOUNTING
Thes
earethebasi
cassumptio
nsorr
ulest
obefo
llo
wedwhi
ler
eco
rdi
ngand
pres
ent
ingacco
untinginfo
rmati
on.

1.Bus
inessEnti
tyConcept:Thi
sc o
nceptexpl
ainst
hatthebus
ines
sisdi
sti
nct
fromthepropr
ietor
.Thus,thetransact
ionso
fbusines
sonl
yaretobereco
rded
in
thebo
o kso
fbusines
s.

2.Duali
tyConcept
:Ac co
rdingtothisc
oncepteverytr
ansacti
onhastwoaspect
s
i
.e.thebenefi
trecei
vingaspec
tandbenefi tg
ivingas
pec
t .Thes
etwoaspect
s
are
toberecordedinthebooksofacc
o unts
.

3.Money Meas
urementConc
ept
:Ac
cor
dingt
othi
sco
ncepto
nlyt
hos
e
tr
ansac
tionswhi
char
eex
pres
sedi
nmo
neyt
ermsar
etober
eco
rdedi
n
acco
unti
ngbooks.

4.GoingConcernConc
ept
:Thisco
nceptassumest
hatt
hebus
ines
shasa
perpetuals
uccess
iono
rcont
inuedexi
stenc
e.

5.Real i
sati
onConcept:Thisconceptspeaksaboutr
ecordingofonlytho
se
transactio
nswhichareac tuall
yreali
sed.ForexampleSaleorPr
o fi
tonsales
will
bet akenintoacc
ounto nlywhenmo neyisreali
sedi.
e.eit
hercashisrec
eiv
edo r
legalownershi
pistransferred.

6.Mat c
hingConcept:Iti
sreferredtoasmat chi
ngofexpensesagainsti
ncomes.
Itmeanst hatalli
ncomesandex pensesrel
ati
ngt ot
hefinancialperi
odto
which
theaccountsrel
ateshoul
dbet akenint oacco
untwitho
utregardt othedateof
recei
ptsorpayment .

7.Consi
stenc
yConcept:Thi
sCo
nc epts
aysthatt
heAcc
ount
ingpract
icess
houl
d
notchangeormustremainunchangedoveraperi
odo
fsev
eralyears
.

8.Prudenc eConcept:Ac cordingt othisco

nc eptallthel os
sesincurredo r
expectedt obeincurr
edar etobet akenintoac countbutno tal
lant i
cipated
profi
t stobetakenintoc onsiderat i
onwhilefindingt hepr ofi
t.S
imi l
arlywhil
e
findingt heval
ueo fclo
sings tock,leastofthet woval uesi.
e.Mar ketpriceor
Costpr i
ceistobetakenint oac count.
“Lowero fthecostornetr ealisablevalue”.

ACCOUNTSOFCLUBSANDS
OCIETIES
ReceiptsandPayment sAcc
ounts:Iti sasummar yofcashbook,i.e.allcash
and
bankt r
ans acti
o nsduringagiv
enper iodoft i
me.Itstart
swithano pening
balance
anddeb i
tedwithal li
temsofreceipt si
rrespecti
veofwhethert heyar eo f
capit
al
natureo rrevenuenat ureandwhet hertheyar epert
aini
ngt ot hec urrent
perio
do r
not.Itiscreditedwi t
hallpayment smadedur ingtheyear.Tho sepayment s
maybe
ofCapitalorRev enuenaturewhet herpert ai
ningtothecurrentyearo rnot
Not
e:Thi
sac
countdo
esno
ttakei
ntoac
counto
uts
tandi
ngsandpr
epayment
s.

IncomeandEx penditureAccount:Incomeandexpenditur
eac co
unti sa
nominal
account.Itisdebi
tedwi t
hallexpensesandlos
sesandcreditedwit
hal l
inc
omes
andg ai
ns .Thi
saccountservesexact
lythesamepurpos
east heprofitandlo
ss
accountinat radi
ngc oncer
n.

Ac
cumul
atedFund:Iti
sthes
urpl
usac
cumul
atedwi
thi
ntheo
rgani
sat
ion.

Di
ffer
enc
eBet
weenTheTer
msUs
edIn

Tr
adi
ngBus
ines
s Non-Tr
adi
ngBus
ines
s

1.Cas
hBo
ok Rec
eipt
sandpayment
sac
count

2.Profi
tandLo
ssAc
count Inc
omeandex
pendi
tur
e
acco
unt

3.NetPr
ofi
t S
urpl
us

4.NetLo
ss Defi
cit

5.Capi
tal Ac
cumul
atedfund

S
our
cesOfInc
omeToCl
ub:

1.Do
nat
ions

2.S
ubs
cri
pti
ons

3.Ent
ranc
efees

4.S
aleso
fOl
dAs
set
s

CORRECTIONOFERRORS

Typeo
fer
rorNat
ureo
fer
rorEx
ampl
es
1.Er roro f Omi ssion
2.Er roro fCo mmi ssio n
3.Er roro fPr i
nc iple
4.Er roro rOr iginalEnt ry
At rans ac ti
oni sc o mpl etel yomi tted
fromt hebo o ks.
Apur chas eo rs alei sent er edi nt he
wr o
ngc r edito ro rdebt orac count
Ani t emi sent er edi nac ompl etely
wr o
ngc las so fac count .
Awr ongamo unti sent eredi nabo ok
Apur chas eo fg o odsi sno t
reco rdedbec aus et hepur chas e
invo icehasbeenmi s l
aid
As al eo fg oo dst oJTyl eri s
po s
t edt oJTayl or’
sac count
Apur chas eo fafi xedas setis
po s
t edt ot hepur chas esac count .
As al esc lerki nahur r
yr eadsanwww. st
udygui
de.
pk
Studyg ui de. PKAc count sRev isio
nNo tesPage17
5.Co mpens at i
ngEr r orsI
6.Co mpens at i
ngEr r orsII
7.Rev er salo fEnt ries
8.Ent riesDo net wic e
ofo r iginalent ryandt hi sfi g
ur ei sthen
usedfo rpo stingt ot hel edg er.
Byc oinc idenc e,aner roro nt hedebi t
sidec anc elso utas epar at eand
independenter roro ft hes ameamo unt
ont hec redi ts i
de.
Twoer ror sc ompens at efo reac ho ther
ont hes ames i
de.
Thedebi tent ryiswr it
teno nt hec redit
sideandt hec r editent ryi swr itteno n
thedebi ts ide.
Thedo ubl eent r yisc orrec tly
compl et edbutt wodebi tsandt wo
credi tsar eent er ed
invo iceo f£10000as£1000and
ent er st hel at terfi g urei nt hes al es
daybo ok
Thewag esac counti so ver castby
£200andt hecredito
rsar ealso
overstatedby£200.
Adv erti
singisunder s
tatedby£50
andel ectrici
tyisoverst
at edby
£50.
Ac ashsal eisdebit
edt othes ales
accountandc reditedtot hec ash
account
Apur chas eofg oo
dsbyc hequei s
debitedt wicetothepur chases
accountandc reditedtwic etothe
bankac c ount

Effec
tofEr
ror
sonPr
ofi
torLos
s

Someerr
orsaffec
tthepro
fitwhi
leother
sdonot
.Thisdi
sti
nct
iondo
esno
t
al
ways
co
inci
dewithwhet
herornotthet
rialbal
anc
ebalanc
es.

Er
ror
saffec
tingPr
ofi
torLos
s

Theseerror
saffec
tthoseac
countswhi
char ei
ncl
udedint
heTradi
ngand
Profi
tand
LossAcco
untegpurchas
es,s
ales
,expensesetc
.Wemustas
kthefol
lowi
ng
questi
ons:

1)Do
est
heer
roraffec
ttheg
ros
spr
ofi
t,t
henetpr
ofi
torbo
th?

(a)Error
swhichaffec
titemsthatgointot
hetradingacc
ountaffectg
ros
s
profi
t
andnetpr ofi
ttothes
ameex tentandinthesamedirec
tion.S
uchit
emsare
sal
es,purchas
es,r
eturns
,stoc
k,c ar
riag
einwardsetc
.

(b)Er r
orswhichaffecti
temsthatareenter
edintheprofitandlosssec
tio
nof
the
account,i.
e.operati
ngexpens
es,affecto
nlynetprofi
t.Purchas
eso ffi
xed
assetsaffectprofi
tonlyi
ndir
ectlythr
oughpro
vis
ionsfordepreci
ation.

(a)Ifsal
esareov
ers
tat
edorpurc
hasesunders
tated,bo
thg
ros
spr o
fitand
net
profi
tareto
ohig
handmustbereduc
edbyt herel
evantamo
unt.Thesame
appl
iesi
fsal
esr
etur
nsar
eunder
stat
edo
rpur
chas
esr
etur
nso
ver
stat
ed.

(b)Ifsalesareunderst
atedorpurc
hasesov
erstated,bothg
rossprofi
tandnet
profi
taret oolo
wandmus tbeinc
reasedbytherelevantamount.Thesame
appli
esifsalesret
urnsareov
erst
atedorpurchasesretur
nsunderstat
ed.

(c
)Ifmi sc
ell
aneousrec
eipt
sareov
ers
tatedori
fexpens
esar
eunders
tat
ed,
gr
os s
profi
tisnotaffec
tedbutnetpr
ofi
twi
llbehi
ghandmustbereduc
ed.

(d)Ifmisc
ellaneo
usrecei
ptsar
eunders
tatedorifex
pens
esareoverst
at ed,
again
gros
spro
fitisnotaffec
tedbutnetpr
ofi
tistool
owandmustbeinc
r eased.

(e)Ifc api
talexpenditureiswronglytreat
edasr ev
enueexpenditur
e,egifthe
purchaseofafi xedassetistreatedasanex pens
e,thennetpr o
fitwil
lbeto
o
lowandmus tbeincr
eas ed.Theoppo s
iteappl
iesi
frevenueexpendit
ureis
treatedascapitalexpenditure.

3)Doest heerro
rsthataffecti
t emsint hebalancesheetaffectprofi
taswel l
?
The
answeri sonl
ythosethatwereadj ustedafterthetrialbalanc
ewaspr epared.
Error
s
affectingfix
edas s
ets,curr
entas set
sandl i
abili
ti
esdono tnormallyaffect
profi
tbut
ifoneo ftheseit
emshasc hangedasar esul
tofanadj ust
ment ,t
henpr ofi
tis
affected.Forexample:

(
a)Ift heclo
singst
ockhasbeeno verval
ued,thest
ockfigurei
nthebalanc
e
s
heetistoohighandsoarethegr o
s spro
fitandthenetpr o
fit
.The
o
pposi
teistrueofac l
osi
ngstoc
kwhi c
hisunderval
ued.Rememberthat
c
los
ingstockaddsontog r
ossprofi
tando peni
ngstoc
ktakesawayfrom
i
t.

(b
)Ifanac c
ruedo rprepai
dex pensei
sthewrongamo
unt,bothpr ofi
tandthe
i
temint hebalancesheetarewrong.Ifanamountowi
ngisoverstatedor
aprepaymenti sunderst
ated,profi
tisto
olowandmustbeincreased,and
vi
ceversa.

(c
)Theoppo
sit
eto(b)appl
iesi
nthecas
eo fac
cruedorprepai
dr ecei
pts
.
Est
imati
ngt
heeffect
soferror
scanbeconfus
ingandyoumus tkeepaclear
mind.
Thi
nkhowtheo
rigi
nalfi
gurehasaffect
edpro
fitandt
hent
ryt
oseei
nwhi
ch
dir
ect
iont
heerro
risaffec
tingthepro
fit.

ANALYS
ISANDINTERPRETATION
1.Whati
stheo
thernameo
fGr
ossPr
ofi
tRat
io?

Gr
osspr
ofi
tasaper
cent
ageo
fTur
nov
er.

2.Whati
sthefo
rmul
atofi
ndo
utt
heGP%?

GP x100
S
ales

3.Whatwo
uldbet
her
eas
onfo
rthei
ncr
eas
einGP%?Gi
ve2r
eas
ons
.

(
a)S
ell
ingg
oods
,athi
gherpr
ices
.

(
b)Buyi
ngt
heg
oodsatc
heaperpr
ices
.

4.Whatwo
uldbet
her
eas
onfo
rdec
reas
eint
heGP%?Gi
ve2r
eas
ons
.

(
a)S
ell
ingg
oodsathi
gherpr
ices
.

(
b)Offer
ingTr
adedi
sco
unt
s.

(
c)No
tpas
singo
ninc
reas
epr
ices
.

(
d)Ho
ldi
ngs
eas
onals
ales
.

5.Whati
sthefo
rmul
atofi
ndo
utNPRat
io?

NP x100;
S
ales

6.Whati
stheo
thernameo
fNPRat
io?

NPasa% o
fsal
es

7.Whati
smeantbyl
iqui
dit
y?
Iti
stheabi
li
tyo
fthebus
ines
stoc
onv
erti
tsas
set
sint
ocas
h.

8.Whati
smeantbywo
rki
ngc
api
tal
?

Iti
sthemo
neyr
equi
redt
omeeti
tsev
erydayex
pens
es.

9.Whatdo
esc
urr
entRat
iomeas
ure?

Itmeas
urest
heabi
li
tyo
fthebus
ines
stomeeti
tsc
urr
entl
iabi
li
tyast
heyfal
l
due.

10.Whatist
hest
andar
dc ur
rentRat
iofo
rabus
ines
s?
Somewher
ebet
ween 1.
5–2:1.

11.Whatar
etheeffec
tso
fno
thav
ingeno
ughwo
rki
ngc
api
tal
?

(
i)Pr
obl
emsi
nmeet
ingdebt
sast
heyfal
ldue.

(
ii
)Inab
ili
tyt
otakeadv
ant
ageo
fcas
hdi
sco
unt
.

(
ii
i)Di
ffi
cul
tyi
nobt
aini
ngfur
thers
uppl
ies
.

(
iv)Inabi
li
tyt
otakeadv
ant
ageo
fbus
ines
soppo
rtuni
tyast
heyar
ise.

12.Quo
te5wayso
fimpr
ovi
ngwo
rki
ngc
api
tal
.

(
i)Int
roduc
tio
noffur
therc
api
tal
.

(
ii
)Obt
aini
ngl
ong
-ter
mlo
an.

(
ii
i)Reduc
ingo
wner
sdr
awi
ngs
.

(
iv)S
ell
ingo
utus
eles
sfi
xedas
set
s.

13.Whati
stheo
thernameo
fQui
ckr
ati
o?

Ac
idt
estRat
io

14.Whati
sthefo
rmul
atofi
ndo
utQui
ckRat
io?

CA–stoc
k
CL
15.Whati
sthes
tandar
dqui
ckr
ati
o?

1:
1

16.Whati
sthefo
rmul
atoc
alc
ulat
est
ockt
urno
verr
ati
o?

Co
stofgo
odssol
d
Av
erag
esto
ck

17.Inwhatwaykno
wingt
her
ateo
fst
ockt
urno
verwi
llbeus
efult
othe
bus
ines
smen.

(
i)Fo
rst
ockr
epl
acement
.

(
ii
)Fo
rco
mpar
iso
n.

(
ii
i)Fo
rco
rrec
tiv
eac
tio
n.

(
iv)Fo
rident
ifyi
ngc
aus
eso
fchang
es.

18.Whatar
etheo
thernameso
fdebt
orsr
ati
os?

Debt
orsRat
io/S
alesRat
io.

19.Gi
ve4wayso
fimpr
ovi
ngt
hec
oll
ect
ionper
iodfr
omdebt
ors
.

(
i)Offerc
ashdi
sco
unt
.

(
ii
)Char
gei
nter
esto
nov
erdues
.

(
ii
i)Refus
efur
thers
uppl
ies
.

(
iv)S
endr
egul
arr
emi
nder
.

20.Gi
vefo
urwayso
freduc
ingt
her
isko
fbaddebt
s.

(
i)Obt
ainr
efer
enc
efr
omnewc
ust
omer
s.

(
ii
)Fi
xal
imi
tfo
reac
hcr
edi
tcus
tomer
.

(
ii
i)Fo
llo
wupo
verduespr
ompt
ly.
(
iv)Refus
efur
thers
uppl
iesunt
ilo
ldduesar
epai
d.

21.Gi
vet
wopr
obl
emo
fint
er-fi
rmc
ompar
iso
n.

1.Al
lbus
ines
sesar
eno
tsamei
nal
lsens
e.

2.Di
ffer
entbus
ines
sesfo
llo
wdi
ffer
entac
count
ingpo
lic
ies
.

3.Onebus
ines
smayno
tbeo
fthes
ames
izel
iket
heo
ther
.

4.Lo
cat
iono
fthebus
ines
smayno
tbeatt
hes
amepl
ace.

5.Theymi
ghthav
est
art
edatdi
ffer
entdat
es.

22.Gi
vefo
urus
erso
fac
count
ingi
nfo
rmat
ion.

1.o
wner
.

2.bankmanag
er

3.bus
ines
smanag
er.

4.c
redi
tor

23.Whatar
ethel
imi
tat
ionso
frat
ioanal
ysi
s?

Answer:
Account
ingstatementsandrati
oanal ys
isprovi
dev al
uabl
ei nformat i
onabout
thebusi
ness
’sperformancebuti
t’si
mpo rtanttoremember,ho weverthat
theydohavelimitati
ons
.Thecomparisonwithotherfi
rmso rpreviousyear
s
shoul
dbeunder takenwit
hcauti
onfo rthefo l
lowi
ngreaso
ns :

(
i)Di
fferenc
einthetypeofst
ockwhic
haffec
tst
her
ateo
fst
ock
t
urnoverandthegr
osspro
fitmargi
n.

(
ii
)Di
ffer
enc
einthefir
m’spol
icybec
ausesomefi
rmsaresell
ingo
n
c
ashandoncr
edi
tterms.Ot
her
sdono tus
ethesamepol
icy.

(i
ii
)Differenceinexperi
encebecauses
omefirmsmaynotoper
ate
profi
tablyinthei
rearlyyearsoftradi
ngbutthi
ssho
uldno
t
necess
arilybethecaseexpec
tedinfutureyears
.
(
iv)Di
ffer
encei
nmanagement:Bec
ausesmal
lfi
rmssuc
hasas o
le
t
raderareno
texpec
tedtous
eaneffic
ientmanager
saswel
laslar
ge

(v)Di
fferenc
einl oc
ati
on:becausei
ncomeandtas
tesandperhaps
gover
nmentpo l
ici
esmayvaryfr o
mo neareat
oanother
,whi
chwill
affectt
heperformanceoft hefi
rm.

(v
i)Differ
entacco
unti
ngperi
ods
:becaus
edifferentfi
rmsareno
t
expec
tedtostar
tthei
rtradi
ngact
ivi
ti
esatt
hes amedat e.

(vi
i)Differenceincapit
alemployedbecausesomefi
rmsmayhav e
enoughc apit
alemployedtofinancepurchasesofpr
emis
esand
mac hi
ner ywhil
eothersdonotandfo rc
edt opaymoreexpens
es.

(v
iii
)Differ
enceinacc
ount
ingpoli
ci
essuc
hast heappl
icat
iono
fthe
accounti
ngconcept
sandmethodsofdeprec
iat
ion.