WEEK 3

INSTRUCTIONS FOR STUDENTS WEEK 3

Introduction:
Read story (Handout #3 – page 9). The moral of the story is to depict the importance of getting
an overview of anything before diving in. That is what this chapter seeks to do! To give you an
overview of what is involved in accounting.

Learning Activities:
1. Please read, for understanding, all the CONTENT information in this module for WEEK 3
(below). You can also read Text Reference: CHAPTER THREE – The accounting
system Pages 12-19.

CONTENT (Week 3)
The accounting cycle – traditionally a business operates on a 12-month cycle, this may be
January to December of may be May of one year to April of the following year. During the 12-
month period, the business receives many documents of a financial nature that are entered in
the books of account – Books of Original
Entry. At the end of each month the books are “balanced off” – using the Double entry system in
the ledgers and the arithmetical accuracy of the books are checked using a Trial Balance, from
which financial statements are prepared – Income statement and the closing of the financial
position using the Balance Sheet.

Source Documents – are documents where original financial information is found. All
businesses use these documents:

Invoice – a document prepared by the seller when they sell goods or services on credit.
Credit Note – document prepared by the supplier when goods have been returned by the
purchaser due to heir being damaged or faulty. The amount owed by the customer will be
reduces by the amount of the credit note, which is sometimes printed in red.
Debit Note - a debit note is prepared by the purchases if the seller agrees to goods being
returned by the purchaser to the seller. The debit note shows that the purchaser expects the
seller to bear the charge.
Bank paying-in-slips – forms used for paying money into the bank account.
Cheque and cheque counterfoil – cheques are used for payment and it is important that the
counterfoil if filled in correctly for the records.
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Receipt - A document acknowledging receipt of money from a customer. Counterfoils or copies
are also kept.
Receipt BACS (Bankers Automated Clearing Service) receipt – This service enables the
transfer on money between banks and other financial organizations. The advice note is used
to record the receipt.
Petty Cash voucher – a form used by anyone requesting payment for a small item of
expenditure incurred on behalf of the business.
Correspondence – occasionally a correspondence from a customer may be used as a source
document to record a financial transaction but it is out of the ordinary.
Books of Original Entry – the books of original entry are the books in which the transactions
are first entered.
There are separate books for different types of transactions as follows:

Sales day book (also called sales Journal) - book used for listing sales invoices.
Purchase daybook (Purchase journal) – contains list of purchase invoices received from
suppliers.
Returns Outwards book (Purchase returns day book or journal) – to record goods returned
to suppliers.
Returns Inwards book (Sales returns day book or journal) - to list returns made by
customers.
The Journal – used to record items that are much less common and not recorded in any other
book of original entry.
Cash Book – used to enter cash and bank receipts and payments. This provides a record of
the business bank account and the amount of cash “in hand”.
Petty Cash Book – a cash book used to make small (petty) payments.

Double Entry System of Book-keeping – Business transactions deal with money or money’s
worth and each transaction always affects two accounts. Usually a book of original entry and a
ledger.

The Ledgers – there are three types of ledgers: Sales Ledgers, Purchase Ledgers and General
Ledgers. The Sales ledgers shows records of customers personal accounts, The Purchase
Ledgers shows records of suppliers personal accounts, and the General Ledger contains the
remaining double entry accounts such as expenses, income, assets, and capital.

Classification of Accounts – Accounts are classified as either Personal Accounts or

Impersonal Accounts. See picture below.
 Balancing off and Trial Balance – businesses usually “balance off” their accounts at the end of
each month and prepare what is called a trial balance. It checks that transactions have been
entered correctly, especially arithmetically.
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Financial Statements – At the end of the financial year the financial statements are prepare to
include the Trading and Profit and Loss account (income statement) which shows gross and net
profits or losses during the period. The Statement of Financial position (Balance Sheet) is also
drawn up which shows the business’ financial position at a particular point in time.