AFM Module 2 - Financial Accounting Process PDF

**MODULE 2 -- THE FINANCIAL ACCOUNTING PROCESS - Collecting, Recording and Summarising (Trial Balance)** **[Learning Objectives: ]** 1. The Book-Keeping Process -- Double entry and Ledger accounts 2. The Accounting Process -- Books of Prime Entry, Trial Balances and Preparation of Financial...

**MODULE 2 -- THE FINANCIAL ACCOUNTING PROCESS - Collecting, Recording and Summarising (Trial Balance)** **[Learning Objectives: ]** 1. The Book-Keeping Process -- Double entry and Ledger accounts 2. The Accounting Process -- Books of Prime Entry, Trial Balances and Preparation of Financial Statements. **1. THE BOOK-KEEPING PROCESS** Book-keeping is the process of recording financial business transactions in the **ledger**. The Ledger is a book of accounts. An Account is a **summary** of similar transactions related to a particular element of accounting. Financial transactions are recorded in relevant ledger accounts using the double entry principle. Each element of accounting has a separate account in the ledger. The format of a typical ledger account can be seen below. Due to the shape of the account, it is sometimes referred to as a "T" account. A close-up of a account name Description automatically generated **1.1 The Double Entry Rule of Book-keeping** The double entry principle forms the basic rule of book-keeping and states that **every financial transaction** has **two impacts** that are **equal in value and opposite (Debit or Credit).** In accounting language, these are identified as either a **Debit** **(Dr)** or a **Credit (Cr)**. Each of the five key elements of accounting has rules that are determined by the double entry principle. **Element of Accounting** **Increase** **Decrease** --------------------------- -------------- -------------- Assets Debit Credit Expenses Debit Credit Liabilities Credit Debit Incomes Credit Debit Capital Credit Debit **1.2 Three- Step Approach to Double Entry Records for Transactions** 1. Identify the two elements of accounting that are impacted 2. Check whether these elements are increasing/decreasing 3. Apply the rules of double entry, writing out the Debit (Dr) entry first, followed by the Credit (Cr) entry and enter the transactions into the ledger accounts **Illustration 1** Let's look at some of the common business transactions out there -- refer activity in notebook! **E.g. 1** **Write out the double entry for the following transactions & prepare the ledger accounts:** 1\. Mr X started business by investing \$50,000 of cash to his company. 2\. Took a bank loan of \$6,000. 3\. He spent \$5,000 to buy land and buildings for his store. 4\. \$2,000 was spent to purchase vehicles for delivery. 5\. \$3,000 was spent on buying furniture to set up his store. 6\. Purchased items for resale \$20,000. 7\. \$10,000 was withdrawn from the bank to keep in the cash register. 8\. Made sales of \$30,000 in cash. 9\. Sold goods on credit \$10,000. 10\. Pays electricity expenses of \$4,000 and Salaries of \$3,000. 11\. Deposited \$12,500 from the cash register into the bank. 12\. Purchased further goods from the supplier for \$15,000, this time on credit. **E.g. 2** -- Write out the double entries for the following transactions:  **E.g. 3** Text Description automatically generated **E.g. 4**  Write out double entries for the transactions above and open up ledger accounts for the same. **E.g. 5** **E.g. 6 -** The following balances were extracted from the books of Samir at 31^st^ May 2021. **\$** ------------------------------- --------- Revenue 104,700 Purchases 64,500 Carriage Inwards 1,500 Inventory at 1^st^ June 2020 7,100 Discount received 400 Discount allowed to customers 900 Wages 11,200 General expenses 2,800 Sundry expenses 600 Loan interest 500 Premises 80,000 Fixtures and equipment 13,900 Trade receivables 7,500 Trade payables 7,800 Bank 3,300 Cash 100 Capital 81,000 Prepare: A Trial Balance at 31^st^ May 2021. **E.g. 7 -** Abhinav is a trader. The following information was taken from his records **on 31 December 2020.** **\$** ------------------------------ --------- Capital 54,820 Premises 133,000 Furniture 4,000 Revenue 185,000 Purchases 70,310 Inventory at 1 January 2020 18,600 Cleaning expenses 1,900 Trade receivables 14,000 Trade payables 8,000 Wages 10,300 Electricity 1,200 Advertising 1,300 Delivery cost (to customers) 340 Insurance 390 Loan interest expense 500 Long-term loan 10,000 Cash at bank 1,980 Prepare: a Trial Balance at 31^st^ December 2020. **3. THE ACCOUNTING PROCESS** **The accounting process involves collecting, recording, summarising and analysing financial information of a business. We have already covered the recording (ledger accounts) and summarising (Financial Statements) stages in previous classes. We will now look at the collecting phase of the process.** **3.1 BOOKS OF PRIME ENTRY/BOOKS OF ORIGINAL ENTRY** Books of Prime Entry are the first place in which transactions are recorded in the process of accounting [before entries can be posted to the ledger accounts] (using double entry).  Note that all the Books of Prime Entry are simple records and they usually do not follow double entry principles. The exception is the Cash Book. Entries are made into the Books of Prime Entry using information taken off the source documents for each transaction. The source documents are proof of the transaction that took place. There are six Books of Prime Entry. Each book is used to record specific transactions. Table Description automatically generated **WHAT ARE SOURCE DOCUMENTS?** Information cannot be recorded in the Books of Prime Entry without Source Documents. **Source Documents are proof that a transaction has taken place.** There are various source documents for different types of transactions, but they all show essentially the same information: when the transaction took place, details of the transaction, and the associated transaction value. Therefore, these documents are critical to a business for recording information in the accounts and for verifiability purposes. **Book of Prime Entry** **Source Document** --------------------------- ----------------------------------------------------- Sales Journal Invoice sent to credit customer (Receivable) Purchases Journal Invoice received from credit supplier (Payable) Sales Returns Journal Credit note sent to customer (Receivable) Purchases Returns Journal Credit note received from credit supplier (Payable) Cash Book All documents for cash/bank transactions General Journal All documents for general journal transactions **QUESTIONS FOR EXTRA PRACTICE** **E.g. 8 -- Record the transactions of Mylee's new business in its first month of operation in 2021 using double entry. Assume all receipts and payments are on a cheque basis, unless otherwise stated. Draw up the ledger accounts to summarise the transactions.** Sep 1 Mylee paid \$10,000 of capital into the business' bank account to set up Sep 1 Mylee took a bank loan worth \$2,500. Cash in hand was received. Sep 2 \$1,200 was paid for shop rent Sep 5 Purchased goods for resale worth \$2,000. Sep 8 Sold goods to customers for \$500 Sep 15 Sold goods to Tayo on credit for \$3,500. Sep 20 Purchased goods for resale from Tommy at a cost of \$3,000. **E.g. 9- On 1 July 2020, Nikita started a business. The following are her transactions for the first two weeks of trading:** 1 July -- Nikita paid capital of \$50,000 into the business bank account. 2 July -- Bought premises \$25,000 and paid by cheque 3 July -- Drew \$5,000 cash from business bank account to keep in the business cash register 4 July -- Bought equipment \$4,000 for use in the business (Asset) paying by cheque. 6 July -- Bought goods for \$1,500 on credit from Eesa Traders 7 July -- Paid advertising expenses, \$60 by cash 9 July -- Sold goods \$200 and received cash 12 July -- Sold goods \$310 on credit to Shiju Ltd 14 July -- Paid \$1,000 by cheque to Eesa Traders Enter the above transactions in Nikita's business ledger accounts. Balance off all the accounts appropriately and extract a Trial Balance. **MODULE 2 - MCQs** 1. **In which book of prime entry will Lee record credit notes he has issued to customers for goods returned back to his business?** A. Purchases day book B. Purchases returns day book C. Sales returns day book D. Sales day book 2. **Which of the following documents should be received upon a return of goods to a supplier?** A. Debit note B. Remittance advice C. Purchase invoice D. Credit note 3. **Which of the following are books of prime entry?** A. 1, 2 and 3 only B. 1, 2 and 4 only C. 3 and 4 only 4. **In which book of prime entry will a business record credit notes in respect of goods which have been** **sent back to suppliers?** A. The sales returns day book B. The cash book C. The purchase returns day book D. The purchase day book 5. **Which of the following would be recorded in the sales journal?** A. Cash received B. Sales invoices C. Credit notes received D. Trade discounts 6. **How are the details of the purchases journal posted to the ledger?** **The purchases journal records goods purchased on credit \$80.** A. Debit purchases, Credit cash B. Debit Creditors, Credit purchases C. Debit cash, Credit purchases D. Debit purchases, Credit Creditors 7.  8. 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