Accounting Source Documents and Journals

• Accounting Equation: Assets = Capital + Liabilities, Capital = Assets – Liabilities, Liabilities = Assets – Capital

Preparing Source Documents

• Sales Invoice: Details what has been ordered, date of dispatch, and amount owed.
• Cheque and Cheque Counterfoil: Contains details payments from, and made to the bank accounts.
• Petty Cash Voucher: Records details of payments made in petty cash, should have cash receipts for the expenditure.

Journals

• Sales Journal: Records credit sales from debtors
  • Total is posted to the credit side of the sales account in the general ledger.
• Purchases Journal: Records credit purchases from creditors.
  • Total is posted to the debit side of the purchases account in the general ledger.
• Return Inwards Journal: Records returns made by debtors to the business on credit sales.
  • Total is posted to the debit side of the return inwards account in the general ledger.
• Return Outwards Journal: Records returns made by the business to creditors on credit purchases.
  • Total is posted to the credit side of the return outwards account in the general ledger.
• Cash Book: Used for recording cash transactions and cash discounts.
  • Total of discounts allowed is posted to the debit side of discounts allowed account in the general ledger.
  • Total of discounts received is posted to the credit side of the discounts received account in the general ledger.
• Petty Cash Book: Records small cash transactions.
  • Totals of expense columns are posted to relevant expense accounts in the general ledger.
  • Entries in a column for payments to creditors are posted to the individual creditors accounts in the purchases ledger.
  • The total of this column is for reference only and is not posted.
• General Journal: Used for recording transactions that cannot be recorded in the other books.

Transactions and Double Entry Principle

• Real Accounts include assets, liabilities, and capital.
• To increase assets, debit them.
• To decrease assets, credit them.
• To increase liabilities, credit them.
• To decrease liabilities, debit them.
• To increase capital, credit it.
• To decrease capital, debit it.
• Nominal Accounts include expenses and revenue.
• To increase expenses, debit them.
• To increase revenue, credit it.

Ledgers

• Sales Ledger: Records debtors' accounts.
• Purchases Ledger: Records creditors' accounts.
• General Ledger: Records transactions from the other books of original entry.
  • Also records totals from the sales journal (credited), purchases journal (debited), returns inwards journal (debited), and return outwards journal (credited).

Trial Balance

• Designed to check the arithmetical accuracy of double entry records.
• Assets and expenses are entered under the debit column.
• Liabilities, revenue, capital, and provisions are entered under the credit column.
• The total of the debit and credit sides should be equal.

Sole Trader Trading, Profit and Loss Account/Income Statement

• Net Sales = Sales - Less Return Inwards/Sales Returns
• Cost of Goods Sold = Opening Stock + Purchases + Carriage Inwards - Less Return Inwards/Purchase Returns - Less Closing Stock
• Gross Profit = Net Sales - Cost of Goods Sold
• Net Profit = Gross Profit + Add any other revenue - Less all Expenses.

Sole Trader/Proprietor Balance Sheet/Statement of Financial Position

• Working Capital Format and Non-Working Capital Format are used.

Ratios & Profitability

• Current Ratio = Current Assets / Current Liabilities
• Measures a firm's ability to pay off current liabilities with current assets.
• The ideal ratio is 2:1.
• Acid Test (Quick) Ratio = (Current Assets - (Closing) Stock) / Current Liabilities
• Measures a firm's ability to pay off current liabilities with liquid current assets.
• The ideal ratio is 1:1.
• Inventory (Stock) Turnover = COGS / Average Inventory
• Reflects how many times stock is replenished.
• Average Inventory = (Opening Stock + Closing Stock) / 2
• Days Inventory = 365 / Inventory Turnover Ratio.
• Reflects hoe long the firm holds inventory on average.
• Accounts Receivable Turnover = Accounts Receivables / Sales
• Average Collection Period = 365 / Accounts Receivable Turnover
• Measures how many times receivables are collected throughout the year.
• Accounts Payable Turnover = Accounts Payable / Sales
• Average Collection Period = 365 / Accounts Payable Turnover
• Measures how long it takes the business to pay its creditors.
• Gross Profit Percentage/Margin = (Gross Profit / Sales) * 100
• Shows how well firm controls its cost of sales to generate profits.
• Net Profit Percentage = (Net Profit / Sales) * 100
• Measures how much income is generated from sales.
• Return on Capital Employed (ROCE) = (Net Profit / Sales) * 100
• Measures how efficiently a company generates profits from its capital employed.
• Markup = (Gross Profit / COGS) * 100
• The amount added to the cost price of goods to cover overheads and profit.

Accruals & Prepayments

• Revenue and Expenses Journal and Ledger Entries are important to note.

Bad Debts & Provision for Doubtful Debts

• Journal and Ledger Entries are important to note.

Depreciation

• Journal and Ledger Entries are important to note.

Control Accounts

• Sales Ledger (Debtors) Control Account: Items that increase Debtors appear on the debit side, whereas items that decrease it appear on the credit side.
• Purchases Ledger (Creditors) Control Account: Items that increase Creditors appear on the credit side, whereas items that decrease it appear on the debit side.

Bank Recon

• Bank Reconciliation Statement (as per cash book): Balance as per updated cash book +/- Unpresented cheques & Late lodgements = Balance as per bank statement
• Bank Reconciliation Statement (as per bank statement): Balance as per bank statement +/- Late lodgements & Unpresented cheques = Balance as per cash book
• Unpresented Cheques: Cheques paid to suppliers and recorded by the business, but not yet presented to the bank for payment.
• Late Lodgements: Cheques received and recorded in cash book by the business, but have not been loaded/lodged.

Errors

• Errors are corrected in the general journal and using a suspense account if it only affects one account.
• Error of Omission: Error because the transaction was completely left out.
• Error of Commission: Error because entry was made in the wrong account within the same class (real, nominal, personal).
• Error of Principle: Error because entry was made in the wrong account of a different class.
• Error of Original Entry: Error because original amount of transaction was entered incorrectly.
• Error of Complete Reversal of Entry: Error because both entries are recorded on the wrong side.
• Posting Errors: Error because both entries are recorded on the same side.
• Incomplete Entries: Error because only one entry was recorded.
• Overstated: Error because amount entered was too high.
• Understated: Error because amount entered was too low.

Partnership and Appropriation A/C

• Entries should be prepared in all relevant ledger accounts.

Manufacturing Accounts

• Key calculation is related to finding the Total Cost of Production which will then be used in the Trading, Profit and Loss Account/Income Statement to find Gross Profit.

Non-Trading (Non-Profit) Organisations

• Receipts and Payments A/C:
• All receipts of money are debited and all payments are credited
• Subscriptions is a revenue
• Subscriptions in arrears (accrued) is a current asset
• Subscriptions in advance (prepaid) is a current liability