Suitable for grade 8 and beginners who just started Accounting
LEARN YOUR
A STEP BY STEP APPROACH Introduction & Accounting equations Price Lists & Purchase Orders Writing up of Subsidiary Journals Posting to the General Ledger Balancing the General Ledger Compiling a Trial Balance
ISBN: 9780994696861 Publisher:Ai Education Publication date: 7/1/2015
Foreword
Annelize iLiffe
This book is specifically written for Grade 8 learners and beginners who just started with Accounting as a subject at school. It will also be most beneficial for teachers teaching Economic Management Sciences (EMS) or Accounting and do not have an Accounting background. Running a tutoring business for almost 20 years for both high school pupils and university students, I became increasingly aware of the great need out there for a publication where the basics are explained in a way to build a solid foundation for the child who wants to further his/her career in Accounting/Finance.The book is based on a story of a girl who started a Sweets Business and the underlying Accounting concepts and skills necessary to succeed in this. Grade 9 will be a continuation of Grade 8, and so forth with the basics just getting more complex. With special thanks to Greg, Jeffrey, Stephan and Samantha who made this possible for me. Without you I could not have done this! Samantha, you have been my greatest inspiration in writing this book, because you were at the age where you could have benefitted the most from it.
Icons used in this e-book
Index
Demonstration
Worksheet
Worksheet solution
Table of Contents
Chapter 1
Accounting Equation
Chapter 2
Price Lists & Purchase Orders
Chapter 3
Monitoring your bank balance
Chapter 4
Subsidiary Journals
Chapter 5
Posting Subsidiary Journals to the General Ledger
Chapter 6
Balancing the General Ledger & Preparing a Trial Balance
Debits
Credits
Definition Debits & Credits
Every single transaction in Accounting is made up of a debit & credit side. A debit is usually shown on the left and a credit on the right hand side of a column or an account.
Accounting Cycle
Definition
Accounting Cycle
The accounting cycle is the name given to the collective process of recording and processing the accounting events of a company. The series of steps begin when a transaction d d h
1. Accounting E quation 2. Entering transactions in Subsidiary Journals 3. Balancing Subsidiary Journals 4. Posting to General Ledger 5. Balancing General Ledger 6. Preparing a Trial Balance
Definition
Accounting Equation
Assets = liabilities + owners' equity. The most fundamental equation of doubleentry bookkeeping system, it expresses the relationship between what is owned and what is owed by an entity.
Accounting Equation
Assets Debits
=
Owner’s Equity Credits
Expenses (Losses) Debits
+
Income (Profits) Credits
Liabilities Credits
Accounting Equation Assets Owner’s Equity Liabilities + = Debits Credits Credits
Accounting Equation Assets Debit
An asset is something you own, like Motor vehicles, Equipment. Assets have debit balances, indicated in green. Assets will appear in your Balance Sheet (Statement of Financial Position)
Accounting Equation Owner’s Equity Credit
Owner’s Equity is the interest of the owner in the business, in other words, Capital. Owner’s Equity accounts have credit balances, indicated in red. Drawings affects owner’s equity negatively and is indicated in green.
Accounting Equation Owner’s Equity Credit Expenses (Losses) Debit
Income (Profits) Credit
An expense is something I have to pay, such as telephone, rates & taxes. Expenses are debits and decreases Owner’s Equity. Expenses have debit balances and are indicated in green. The main source of income is Sales in a business and has a credit balance. It increases Owner’s Equity, therefore his interest in the business is now more. Income accounts have credit balances.
Accounting Equation Owner’s Equity Credit Expenses (Losses) Debit
Income (Profits) Credit
Income and expenses are called Nominal accounts and will appear in the Income Statement (Statement of Profit or Loss) where the Net Profit/Loss of the business is calculated. If the Income exceeds the Expenses for the year (period), a Profit is made and will increase Owner’s Equity. If the Expenses exceed the Income for the year (period), a Loss is made and will decrease Owner’s Equity.
Accounting Equation Liabilities Credit A liability means I owe money to someone, like loans from a bank or creditors. Liabilities have credit balances, indicated in red. Liabilities appear in the Balance Sheet (Statement of Financial Position).
st
On the 1 January 20.12, you decided to start a sweets business, buying and selling sweets. For this venture, you have saved R20,000 to start your business. This money is called Capital. The business receives the money from you and has a debt to pay back to you, the owner. This debt to the owner is called Capital (Owner’s Equity)
Debit
Credit
Assets are increasing, you receive money.
Owner’s equity is increasing with the capital contribution.
Assets Owner’s Equity Debit Credit Bank
R20000.00
Capital
Debit entries are shown in green & credit entries are shown in red.
R20000.00
2. You have decided to start your business from a little cottage and rent it from your uncle for R1000 a month. Pay the rent for the month of January 20.12
Assets Credit Bank Cr
Credit
Debit The owner loses capital when he has to pay expenses and therefore Owner’s Equity is decreasing.
Money in the bank means that you have an asset (debit – green) If you pay money out, that asset is decreasing (credit – red)
Owner’s Equity Debit R1000.00 Rent expense Dr
R1000.00
Questions
Answers
Test yourself
Accounting Equation
st
On the 1 January 20.12, you decided to start a sweets business, buying and selling sweets. For this venture, you have saved R20,000 to start your business.
Bank Loan Equity R30,000 R35,000 R20,000
Required:
Fill in the missing figures/words by choosing the correct one(s) from the list.
You have decided to start your business from a little cottage and rent it from your uncle for R1000 a month. Pay the rent for the month of January 20.12
Assets Liabilities R1000 R2000 Cottage Rent expense
Required:
Fill in the missing figures/words by choosing the correct one(s) from the list.
st
On the 1 January 20.12, you decided to start a sweets business, buying and selling sweets. For this venture, you have saved R20,000 to start your business. This money is called Capital. The business receives the money from you and has a debt to pay back to you, the owner. This debt to the owner is called Capital (Owner’s Equity)
Bank Loan
Equity R30,000 R35,000 R20,000
You have decided to start your business from a little cottage and rent it from your uncle for R1000 a month. Pay the rent for the month of January 20.12.
Assets Liabilities R1000 R2000 Cottage Rent expense
Definition
Price Lists Purchase Orders
Price list is a list giving the prices of items for sale. A purchase order is a written authorization from a buyer to acquire goods or services. The document authorizes a supplier to deliver to the buyer at the price, quality level, delivery date, and certain other terms specified in the agreement. A purchase order is legally binding after the supplier counter-signs it.
In order to start our business, we need to get Suppliers to order our stock from. After careful consideration and the variety offered, we decided on the following Suppliers:
SWEETS FOR AFRICA SWE001
SWE002
SWE004 SWE005
When a company buys stock from a supplier an official purchase order must be sent to that supplier.
SWE003
You received the following price list by email from Sweets for Africa (Pty) Ltd. The contact person is Mary Mayford.
SWEETS FOR AFRICA
The stock codes and prices per kg or per unit must be indicated on a purchase order.
Required: We now need to order sweets for reselling from our Suppliers. These sweets are called stock.
3 kgs
Lollies
SWE001
32.99
Order from Sweets for Africa. The date of the order is 3 January 20.12. We need the stock on the th 10 January.
Order 001
The Sweet Xpress Menu
2 Hamburgers with cheese 2 extra chips 2 Strawberry milkshakes Total
Required:
Fill out the order.
The Sweet Xpress Menu
Order 001 2 Hamburgers with cheese
56.00
2 extra chips
22.00
2 Strawberry milkshakes
44.00
Total
122.00
Check that your order was correctly calculated.
These orders that were received from customers during the day will have to add up to the cash received in the till when cashiers cash up at closing time. Discrepancies need to be accounted for.
Definitions: Bank balance
A bank balance is the amount of funds you have in your bank account. In an accounting system, a bank account with available funds is a debit balance. Therefore, since your money is an asset to you, it is classified as a debit in an accounting system.
This is a summary of our bank balance to date:
Bank balance available as at
Money received in your bank will increase your bank (assets are increasing). Money paid out of your bank account will decrease your bank (assets are decreasing). The above illustration assumes that your bank balance is favourable at all times (that you have money in the bank).
Monitoring your bank balance on a daily basis is extremely important. You have to ensure you have enough finance to cover your financial commitments; and monitoring your bank balance will assist you in making sound financial decisions for the business, such as applying for a bank overdraft or loan.
Activity 1
R20,000.00 R11389.89 R15389.89
Required:
What is the available bank balance of the Sweet Xpress according to the Bank Statement as at 5/1/20.12?
Activity 3
What is the bank balance after the wages was paid but before the payment of security and advertising on the 5/1/20.12?
R750.00 R300.00 R10139.89 R14439.89
Definition
Subsidiary Journals (Books of first entry)
Subsidiary Journals are chronological records of frequently occurring transactions such as sales, purchases and cash receipts/payments.
Definition
Cash Receipts Journal
The Cash Receipts journal is a separate journal only used to record cash collections.
st
On the 1 January 20.12, you decided to start a sweets business, buying and selling sweets. For this venture, you have saved R20,000 to start your business.
Cash Receipts Journal of The Sweet Xpress January 20.12.
1
Capital contribution
20000.00
20000.00
A Source Document is a document in the business that you use to complete this journal. When you received money from the owner, you issued a receipt, so the duplicate is what you use to enter in the CRJ.
The Cash Receipts Journal (CRJ) is called a subsidiary Journal or Book of first entry and is used to group entries of a similar nature together, in this case all transactions where you receive money.
CRJ 1
20000.00
Capital
The Analysis of Receipts column in the CRJ is seen as the ‘cash drawer’ in the business, and is used only for analysis purposes. At the end of the day the money is banked and bank will be debited.
Duplicate receipt Definition
A receipt is a written acknowledgment that a specified article or payment has been received. A receipt records the sale of goods or provision of a service. When I sell an item for cash and give the original receipt to the customer, I keep an exact copy for my records to record the cash sale in my Cash Receipts Journal
2. You have decided to start your business from an old train and rent it from your uncle for R1000 a month. Pay the rent for the month of January 20.12.
The Cash Payments Journal (CPJ) is called a subsidiary Journal or Book of first entry and is used to group entries of a similar nature together, in this case all transactions where you pay money out (significant amounts only, small amounts are usually paid out via the Petty Cash Journal).
Cash Payments Journal of The Sweet Xpress for January 20.12 CPJ 1
2
Rent of premises
1000.00
A Source Document is a document in the business that you use to complete this journal. When you pay money for rent, you issue a cheque, so the cheque counterfoil is what you use to enter in the CPJ.
1000.00
Cheque counterfoil Definition
The purpose of cheque counterfoils, otherwise known as a cheque or cheque stubs, is to serve as a receipt or reminder of what a cheque was written out for. Both cheque and stub, or counterfoil, carry the same corresponding serial number. The cheque counterfoils are used to write up the Cash Payments Journal.
st
On the 1 January 20.12, you decided to start a sweets business, buying and selling sweets. For this venture, you have saved R20,000 to start your business.
Required:
Enter the transaction in your CRJ. Doc no is REC2001
Cash Receipts Journal of The Sweet Xpress for January 20.12 CRJ 1
2. You have decided to start your business from an old train and rent it from your uncle for R1000 a month. Pay the rent for January 20.12 Required:
Enter the transaction in your CPJ. Doc no is CH0001
Cash Payments Journal of The Sweet Xpress for January 20.12 CPJ 1
st
On the 1 January 20.12, you decided to start a sweets business, buying and selling sweets. For this venture, you have saved R20,000 to start your business.
Cash Receipts Journal of The Sweet Xpress for January 20.12 CRJ 1
REC2001
2. You have decided to start your business from an old train and rent it from your uncle for R1000 a month. Pay the rent for the month of January 20.12
Cash Payments Journal of The Sweet Xpress for January 20.12 CPJ 1
CH0001
Cash Payments Journal of the Sweet Xpress for January 20.12
CH0001 EFT1001 EFT1002 EFT1003 CH0002 CH0003 CH0004 CH0005 6380.11 1610.11 750.00 1000.00
The debits (green figures) have to equal the credits (red figures).
3020.00
CPJ 1
Cash Payments Journal of the Sweet Xpress for January 20.12
? ? ? ? ? Required:
Balance the Cash Payments Journal. Do this in your book or digital worksheets where you previously entered your transactions. Ensure that the debit and credit balances agree.
CPJ 1
Definition
General Ledger Chart of Accounts
A general ledger is the master set of accounts that summarize all transactions occurring within an entity. The chart of accounts is a listing of all accounts used in the general ledger of an organization.
You are using the sequence in your subsidiary journals to post to the General ledger, starting from the left column and posting the totals only. Your sundry accounts column is posted to each individual account in sequence.
Cash Receipts Journal of The Sweet Xpress for January 20.12 2 1
REC2001 BS9001 REC2002 -REC2005
1 6
20000.00
Loan
50000.00
1420.00
N/ S
3
B/ S
20000.00
50000.00
1420.00 1420.00
5 4
N/ S
710.00
N/S = Nominal Section B/S = Balance Sheet Section
B/ B/ S S
B/ S
CRJ 1
Capital
6
Step 1
GENERAL LEDGER Balance sheet section DEBIT
Capital
The reason for doing a General Ledger, is to have all your accounts with cumulative balances to date in logical sequence. For instance, it would be an impossible task to go through all the Cash Receipts Journals to see what your sales to date were for the current financial year. If you go to the sales account in the General Ledger, that figure would be available in an instant, as the General Ledger figures are cumulative.
B1
CRJ 1
CREDIT
Step 2
DEBIT
All transactions are posted at the end of the month. The contra account, also called the buddy account, that was debited is Bank.
GENERAL LEDGER Balance sheet section Capital B1 CREDIT
B1
The reason for doing a General Ledger, is to have all your accounts with cumulative balances to date in logical sequence. For instance, it would be an impossible task to go through all the Cash Receipts Journals to see what your sales to date were for the current financial year. If you go to the sales account in the General Ledger, that figure would be available in an instant, as the General Ledger figures are cumulative.
Step 3
DEBIT
GENERAL LEDGER Balance sheet section Capital B1
CREDIT
All transactions are posted at the end of the month. The contra account, also called the buddy account, that was debited is Bank. The folio is the book of first entry, in this case CRJ1 and will appear in the Capital account in the General Ledger.
B1
Step 4
DEBIT
GENERAL LEDGER Balance sheet section Capital B1
All transactions are posted at the end of the month. The contra account, also called the buddy account, that was debited is Bank. The folio is the book of first entry, in this case CRJ1 and will appear in the Capital account in the General Ledger. The folio in the Cash Receipts Journal is B1.
CREDIT
CRJ 1
B1
DEBIT
GENERAL LEDGER Balance sheet section Bank B6
Required:
Post the bank column total in the CRJ to the bank account in the General Ledger
CREDIT
DEBIT
GENERAL LEDGER Nominal Section Sales N1
Required:
Post the sales column total in the CRJ to the sales account in the General Ledger
CREDIT
DEBIT
GENERAL LEDGER Balance sheet section Bank B6
CREDIT
DEBIT
GENERAL LEDGER Balance sheet section Capital B1 CREDIT
If there is only one entry, leave as is.
DEBIT
GENERAL LEDGER Balance sheet section Furniture & Equipment B5
If there is only one entry, leave as is.
CREDIT
This is the balance on the account for the next month.
Date
DEBIT
20.12 Jan 31
Details Total Cash Receipts
Fol
GENERAL LEDGER Balance sheet section Bank B6 CREDIT
CRJ1
Amount
71420.00
Date
Details
20.12 Total Cash Jan 31 Payments Balance
71420.00 Feb 1
Balance
b/d
65039.89
Fol
Amount
CPJ1
6380.11
c/d
65039.89 71420.00
DEBIT
Date 20.12 Jan 31
Details
Bank
GENERAL LEDGER Balance sheet section Trading stock B10 Fol
CPJ1
Amount
Date 20.12 1610.11 Jan 31
Details Cost of Sales
Steps to balance the account: 1. Leave enough lines open, and draw the total lines on the same lines on both the debit and credit sides.
CREDIT
Fol
CRJ1
Amount 710.00
DEBIT
Date 20.12 Jan 31
GENERAL LEDGER Balance sheet section Trading Stock
Details
Fol
Bank
CPJ1
Amount
Date 20.12 1610.11 Jan 31
Details Cost of Sales
Steps to balance the account:
1. Leave enough lines open, and draw the total lines on the same lines on both the debit and credit sides.
2. Enter the total of the biggest side on both the debit and credit sides within the total lines.
CREDIT
Fol
CRJ1
Amount 710.00
DEBIT
Date 20.12 Jan 31
GENERAL LEDGER Balance sheet section Trading stock B10 CREDIT
Details
Fol
Bank
CPJ1
Amount
Date 20.12 1610.11 Jan 31
Details Cost of Sales
Fol
CRJ1
710.00
Balance
c/d
900.11
1610.11
Steps to balance the account:
1. Leave enough lines open, and draw the total lines on the same lines on both the debit and credit sides. 2. Enter the total of the biggest side on both the debit and credit sides within the total lines. 3. Keep this total in your calculator and deduct the smallest side from this total. This is your balance c/d – this total is balancing the 2 sides to be equal.
Amount
1610.11
This is the balance on the account for the next month
DEBIT
Date 20.12 Jan 31
GENERAL LEDGER Balance sheet section Trading stock B10 CREDIT
Details
Fol
Bank
CPJ1
Amount
Date 20.12 1610.11 Jan 31
Details Cost of Sales
Fol
Amount
CRJ1
710.00
Balance
c/d
900.11
1610.11 Feb 1
Balance
b/d
1610.11
900.11
Steps to balance the account:
1. Leave enough lines open, and draw the total lines on the same lines on both the debit and credit sides. 2. Enter the total of the biggest side on both the debit and credit sides within the total lines. 3. Keep this total in your calculator and deduct the smallest side from this total. This is your balance c/d – this total is balancing the 2 sides to be equal. 4. This balance c/d above the lines becomes the balance b/d below the line – it is the amount by which the debit side exceeds the credit side and it is the balance on the account.
ST
TRIAL BALANCE FOR SWEET XPRESS AS AT 31 JANUARY 20.12 Balance sheet section Capital
DEBIT Preparing the Trial balance
CREDIT
20000.00
from the General Ledger accounts. Debit balances in the General Ledger will be entered as debit balances in the Trial Balance. The same would apply to credit balances.
ST
TRIAL BALANCE FOR SWEET XPRESS AS AT 31 JANUARY 20.12
DEBIT
Balance sheet section
CREDIT 20000.00
Furniture & Equipment
B5
30934.00
ST
TRIAL BALANCE FOR SWEET XPRESS AS AT 31 JANUARY 20.12
DEBIT
Balance sheet section
Bank
B6
65039.89
The balance b/d will be the balance on the account and will be entered in the Trial Balance
CREDIT
DEBIT
Creditors Control
B13
30934.00
102354.00
Simply add the debit balances and enter it as a total and do the same with the credit balances.
DEBITS =CREDITS
CREDIT
102354.00
Questions
Answers
Test yourself
Preparing a Trial Balance
ST
TRIAL BALANCE FOR SWEET XPRESS AS AT 31 JANUARY 20.12
DEBIT
Balance sheet section Capital
B1
20000.00
Furniture & Equipment Trading stock
B5
30934.00
Bank
B6
Long-term loan Creditors Control
B12
Required:
900.11
B10
B13
There are errors on this Trial Balance. Correct the mistakes and prepare a new Trial Balance. Ensure that the debit and credit totals agree.
CREDIT
65039.89 50000.00 30934.00
