Accounting Process PDF

ACCOUNTING PROCESS Mr. JMN Wijekumara Lecturer M.Sc. (App. Fin - USJ), B.Sc. (Acc & Fin - RUSL), CTHE (RUSL) ACPM, ACMA, AAT, ACCA (Str. Prof. Level), CA (Str. Level), DABF (IBSL) Dept. of Accountancy and Finance...

ACCOUNTING PROCESS Mr. JMN Wijekumara Lecturer M.Sc. (App. Fin - USJ), B.Sc. (Acc & Fin - RUSL), CTHE (RUSL) ACPM, ACMA, AAT, ACCA (Str. Prof. Level), CA (Str. Level), DABF (IBSL) Dept. of Accountancy and Finance Faculty of Management Studies Rajarata University of Sri Lanka  01 Intended Learning Outcomes At the end of this chapter, you should be able to identify: Accounting functions and process 02 Stages in Accounting 03 Transactions and Events 04 Source Documents 05 Prime Entry Books  Process of Accounting Input Process Output Business Transaction Identifying Information & Recording to Events Classifying Users Via Financial Summarizing Statements Analyzing Interpreting Communicating Example:  Process of Accounting Input Process Output Business Transaction  Recording Entries in Prime  Statement of Income & Entry Books  Statement of Events  Making Entries in Ledger Financial Position  Preparing Trial Balance  Statement of Cash Flow  Statement of Changes in Equity Example:  Stages in Accounting Process 1. Measurement of “Transactions” and “events” of the business in money terms. 2. Recording in the Books of Prime Entry from the Source Document 3. Transferring information from the Books of Prime Entry to the ledgers. 4. Balancing the Ledger accounts and Preparing a Trial Balance Example: 5. Preparing the Financial Statements  Transactions and Events 1. Measurement of “Transactions” and “events” of the business in money terms. Transactions Purchasing a stock of goods worth Rs. 30,000 for trading purposes. Obtaining a bank loan of Rs. 50,000. Events A stock of goods getting destroyed. Example:  Stages in Accounting Process 1. Recording in the Books of Prime Entry from the Source Document Source Documents Various transactions take place in a business, and the documents issued detailing the relevant transactions are known as "source documents" or "original documents". The importance of source documents is given below:  Using the original document as the basis on which the accounting entry is recorded.  The ability to obtain all relevant information about the transaction. Example:  It can be used as documentary proof that the transaction took place.  The officer who has certified the original document can be held responsible for it.  Source Documents Recording transactions in the Source Document Source Documents Transactions Cash Receipts Payment Voucher Purchase Invoice Sales Invoice Debit Note Credit Note Example: Petty Cash Voucher Journal Voucher  Source Documents Recording transactions in the Source Document Source Documents Cash Receipts Example:  Source Documents Recording transactions in the Source Document Source Documents Payment Voucher Example:  Source Documents Recording transactions in the Source Document Source Documents Transactions Purchase Invoice Example:  Source Documents Recording transactions in the Source Document Source Documents Transactions Sales Invoice Example:  Source Documents Recording transactions in the Source Document Source Documents Debit Note Example:  Source Documents Recording transactions in the Source Document Source Documents Credit Note Example:  Source Documents Recording transactions in the Source Document Source Documents Transactions Petty Cash Voucher Example:  Source Documents Recording transactions in the Source Document Source Documents Journal Voucher Example:  Stages in Accounting Process Recording in the Books of Prime Entry from the Source Document Source Documents Prime Entry Book Cash Receipts Payment Voucher Purchase Invoice Sales Invoice Debit Note Credit Note Example: Petty Cash Voucher Journal Voucher  Prime Entry Books Cash Receipts and Payment Journal Cash Receipts Journal is the prime book of entry where receipts of money for whatever reason are recorded for the first time. The original document relevant to the receipt of money is the “Receipt Voucher”. When cash is paid out for various reasons, it is first recorded in the prime book of entry called the Cash Payments Journal. The original document relevant to cash payments Example: is the Cash Payment Voucher.  Prime Entry Books Cash Receipts Journal Cash Receipt Journal Analysis (Rs.) Discount Allowed (Rs.) Receipt No. Description (Rs.) Other receipts Other Income Date Cash Sales L.F. Value Debtors Xx xxx xx Xx Example: xx xx ^1& ^2& ^3& ^4& ^5&  Prime Entry Books Example 01 Visal’s business transactions of cash receipts and similar transactions during the month of April 2024 are given below. (Rs.) 2024. 04.05 Cash sales R.N. 01 120,000 2024. 04.10 Building rent received R.N. 02 10,000 2024. 04.15 Received/bank loan R.N. 03 200,000 2024. 04.18 Receipts from Siri (Debtor) R.N. 04 18,000 Discount Given to Siri 1,000 2024. 04.18 Cash sales R.N. 05 100,000 2024. 04.18 Receipts from Harin (Debtor) R.N. 06 96,000 Discount Given to Harin Example: 4,000 2024. 04.25 Commission received R.N. 07 2,000 2024. 04.28 Investing additional capital R.N. 08 40,000  Prime Entry Books Cash Payment Journal Cash Payment Journal Voucher Discount Value Descriptio Date Received Analysis (Rs.) n No. (Rs.) (Rs.) Cash Payments to Other Example: Purchases Creditors Expenses Payments L.F. xx xxx xx xx xx xx  Prime Entry Books Example 02 Visal’s business transactions of cash payments and similar transactions during the month of April 2024 are given below. Prepare the Cash Payments Journal based on such transactions. (Rs.) 2024. 04. 06 Payment of monthly electricity bill (P.V.01) 12 000 2024. 04. 08 Paid to Mahinda (a creditor) (P.V.02) 24 000 Discount received 2 000 2024. 04. 10 Cash Purchases (P.V.03) 36 000 2024. 04. 12 Payment of monthly insurance (P.V.04) 24 000 2024. 04. 14 Paid to Sagara (a creditor) (P.V.05) 32 000 Discount received 2 000 2024. 04. 16 Purchased office furniture Example:(P.V.06) 100 000 2024. 04. 18 Payment of wages and salaries (P.V.07) 60 000 2024. 04. 20 Payment of bank loan installment (P.V.08) 24 000 2024. 04. 22 Cash Purchases (P.V.09) 44 000 2024. 04. 26 Cash drawings (P.V.10) 10 000  Prime Entry Books Petty Cash Payment Journal Petty Cash Payment Journal is maintained to record minor payments in an entity. There are very small value transactions that take place in a business. Some examples are; - Entertainment expenses - Purchase of stamps and envelops - Purchase of file covers - Cost of purchasing a pen - Cost of travel Those small value payments can be identified as Petty cash expenses. Example: Among the daily transactions that take place in a business, the low-value transaction must be identified and recorded in a separate book of prime entry. The book of prime entry is identified as the Petty Cash Payment Journal.  Prime Entry Books Imprest system The different systems that are used to maintain petty cash in organizations. The most often used method for keeping track of small cash is the imprest system. The whole amount of money for petty costs for a certain period is computed and sent to the cashier ahead of time under the imprest method. Petty Cash Payment Journal Analysis Columns Date V. Amount (Rs.) Stationary Miscellaneous Ledger Details Labour Travelling (Rs.) Others No. (Rs.) (Rs.) Folio (Rs.) (Rs.) Example:  Prime Entry Books Example 03 A few transactions from Nayani's business during the first two weeks of March 2024 are shown below. Record the transactions in the General Ledger and prepare the Petty Cash Payment Journal. Petty Cash Imprest Amount is Rs. 6,000/- Date Voucher No Nayani's Business transactions Rs. 04th March 2024 01 Entertainment 600 05th March 2024 02 Stamps and envelops 560 06th March 2024 03 Cleaning 800 08th March 2024 04 Postage 800 09th March 2024 05 Vehicle hire charges 700 Example: 10th March 2024 06 Paid to Sumal 1,400 11th March 2024 07 Cleaning expenses 500  Prime Entry Books Purchase Journal The book of prime entry used to record goods purchased on credit is the Purchases Journal or Purchases Day Book. The source document relevant to the Purchases Journal is the Invoice (Purchase Invoice). While a certain percentage will be reduced from the marked price when goods for trading are purchased, this is known as a Trade discount. The transactions relevant to the Purchase Journal in a VAT-registered organization will be posted to the General Ledger as follows; Purchase Journal Supplier Amount (Rs.) Total Invoic VAT Amount Date e No. L.F (Rs.) Rs. Example:  Prime Entry Books Example 04 The transactions shown below are relevant to Gamage Company credit purchases made in December of 2023. VAT Rate is 10% 01/12 Purchased from Vinitha Company Rs.9000/- (Invoice No. 500) 08/12 Purchased from Seetha Company Rs.25,600/- (Invoice No. 501) 16/12 Purchased from Sabeetha Company Rs.16,400/- (Invoice No. 502) 24/12 Bought from Dilhani Company Rs.12,000/- (Invoice No. 516) 30/12 Bought from Hiru Company Rs.19,000/- (Invoice No. 520) Example:  Prime Entry Books Purchase Return Journal/ Returns Outward Journal Goods purchased on credit may be returned to the suppliers for the following reasons. - The expiry date has passed - The goods received are different to the order - Goods supplied being damaged - Delay in receiving goods The book of prime entry for recording goods returns is the Returns Outwards Journal or Returns Outwards Day Book. Purchase Return Journal Supplier Amount (Rs.) Total Invoic Example: VAT Amount Date e No. L.F (Rs.) Rs.  Prime Entry Books Example 05 The Returns Outwards for January 2024 in Saviru's Business are shown below with details. The 10% VAT rate applies. 2024/01/05 Goods Returned to Vineetha Company Rs.3,000/ (Debit Note No. 04) 2024/01/10 Goods Returned to Sabeetha Company Rs.1,600/ (Debit Note No. 05) Example:  Prime Entry Books Sales Journal The book of prime entry used to record the sales of goods on credit is the Sales Journal or Sales Day Book. The source document relevant to the sales Journal is the Invoice (Sales invoice). Then sales are made on credit, while a percentage from the marked price may be reduced it is known as a Trade discount. The transactions relevant to the Sales Journal in a VAT-registered organization will be posted to the Ledger as follows. Sales Journal Amount (Rs.) Total Invoice VAT Amount Date No. Customer L.F (Rs.) Rs. Example:  Prime Entry Books Example 06 Following are the transactions of Kamal & Brothers. Prepare their Sales jounal: 2024/03/04 Invoice No. 240 Sold to Deepika Rs. 30,000/- 2024/03/08 Invoice No. 241 Sold to Isuri Rs. 45,000/- 2024/03/10 Invoice No. 242 Sold to Sanduni Rs. 28,000/- The sales amounts do not include VAT. The rate of VAT is 10%. Example:  Prime Entry Books Sales Return Journal Goods sold on credit may be returned by the customers for the following reasons: - As the date of expiry has passed - Goods supplied is different to what was ordered - Being damaged goods The book of prime entry used to record the returns inwards is the Returns Inwards Journal or Returns Inwards Book. The source document used as the basis to record returns is the Credit Note. Sales Return Journal Amount (Rs.) Total Invoice VAT Amount Date No. Customer L.F (Rs.) Rs. Example:  Prime Entry Books Example 06 The return inwards that follows relates to Kamal & Brothers, which were mentioned in the example above. 2024.03.15 Goods returned by Sanduni Rs. 28,000 (Credit Note No. 20) 2024.03.25 Goods returned by Deepika Rs. 10,000 (Credit Note No. 22) The sales amounts do not include VAT. The rate of VAT is 10%. Example:  Prime Entry Books General Journal The Journal where entries that are not entered in the Books of prime entry are made is introduced as the General Journal or Main Journal. The source document used to make entries in the General Journal is the Journal Voucher. The format of the General Journal could take the following form; General Journal Journal Date Details Debit Credit Voucher L.F. (Rs.) (Rs.) No. Account to be debited XX Example: Account to be Credited XX ………………….. (Narration) Summery Always bear in mind that your own resolution to succeed is more important than any one thing. Abraham Lincoln THANK YOU