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KnS – SCHOOL OF BUSINESS STUDIES
RECORDING FINANCIAL TRANSACTIONS – FA1
FROM THE DESK OF: M. JUNAID KHALID

dell
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S.NO TOPICS PAGE NUMBERS
1 Basics of financial accounting 6 -16
2 Accounting & business equation 17 – 22
3 General journal 23 – 32
4 Ledgers and trial balance 33 – 44
5 Preparation of financial statements 45 – 49
6 Capital and revenue expenditures 50 – 53
7 Discounts, rebates and allowances 54 – 59

Source documents & books of prime
8 60 – 67
entry
9 Concept of margin & markup 68 – 71
10 Sales tax 72 – 75
11 Petty cash book 76 – 79
12 Bank reconciliation statement 80 – 91
13 Control account 92 – 103
14 Control account reconciliation 104 - 109
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15 Correction of errors 110 – 123
16 Recording payroll transactions 124 – 135
17 Methods of coding 136 – 143
18 Accounting software/packages 144 – 151
19 Information storage 152 – 157
20 Banking 158 – 165
21 Modes of payment 166 – 171
22 Miscellaneous 172 - 176
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BASICS OF FINANCIAL
ACCOUNTING
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BASICS OF FINANCIAL ACCOUNTING
BUSINESS:
In the literal sense “business” is derived from the word “busy” which means to be engaged in
doing work or “the state of being busy”.
Or
All economic legal activities are connected with production and exchange of goods and
services to earn profit is called “business”.
Or
Investing money, to make more money I.e. introducing the main idea of profit. The primary
objective of business is to earn profit.
Profit is the excess of income over expenditure. When expenditure exceeds income, the
business is running at a loss.
ORGANIZATION/ENTITY:
Organization is a social arrangement of people that is structured and managed to meet
a need or to pursue collective goals. Organization is a place where people work together and
achieve goals objectives for themselves and for others. The basic goal of organization is to make
Profit.
FORMS OF ORGANIZATIONS:
There are three different forms of organization that can be formed to conduct a business, these
are as follows;
a) Sole-traders/proprietorship
b) Partnership
c) Joint stock company
WHY DO ORGANIZATIONS EXIST?

Organizations can achieve results which individuals cannot achieve by themselves. Therefore
the following advantages for organizations are as follows:
a) It helps to overcome individual limitations

b) Focus on specialization
c) Save time
d) Increased knowledge and skills
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FEATURES/CHARACTERISTICS OF ORGANIZATION:
TYPES OF COMPANY
EVALUATION JOINT STOCK
SOLE TRADERS PARTNERSHIP
PARAMETERS LIMITED
ESTABLISHMENT EASY EASY COMPLICATED
FINANCE RAISING LOW MODERATE HIGH
OBLIGATIONS UNLIMITED UNLIMITED LIMITED
AGE OWNER'S LIFE OWNER'S LIFE PERPETUAL LIFE

LEGAL NEED TO BE
NO REQUIREMENTS NO REQUIREMENTS
REQUIREMENTS FOLLOWED
ACCOUNTING
“Accounting is the art of recording, classifying and summarizing transactions, events and
interpreting the results.”
PURPOSE OF ACCOUNTING
The purpose of accounting is to provide financial Information of the entity. Financial
information mainly consists of INCOME STATEMENT AND BALANCE SHEET.
COMPONENTS OF FINANCIAL INFORMATION (FINANCIAL STATEMENT)
The purpose of financial statement is to provide financial information. There are two basic
components of financial statement. These are as follows;
 Income statement (profit and loss account)

 Balance sheet (statement of financial position)
ACCOUNITNG PERIOD:
Accounting period normally consist of 12 moths. Accounting period may end at 31st December,
30th June or at any other date. While calculating the profit/loss current year expenses and
revenues should be recorded.
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INCOME STATEMENT
Purpose if income statement is to provide profit or loss of organization. There are two main
components of Income Statement
 Revenues (Income generated from the sale of goods or services)
 Expenses (Outflow of resources by the organization)
EXAMPLES OF EXPENSES EXAMPLES OF REVENUES

 Rent expense  Commission revenue
 Salary expense  Consultation revenue
 Electricity expense  Interest revenue
 Telephone expense  Fees revenue
 Printing and stationary  Sales revenue
 Depreciation expense  Purchase return/return
 Bad debt expense outward
 General expense  Purchase discount/
 Interest expense discount received
 Transportation expense
 Advertisement expense
 Insurance expense
 Sales discount/discount
allowed
 Sales return/return inward
 purchases
DISCLAIMER: Following questions of income statement are just for basic understanding
the objective of income statement. Proper format will be discussed later.
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QUESTION 1:
Following are the transactions performed by the ABC Company for the period ending 31st
December 2012;
o Sales for the year Rs.500,000
o Purchases for the period Rs.150,000
o Salaries paid Rs.40,000
o Rent paid Rs.35,000
o Advertising cost for the period Rs.45,000
o Commission received Rs.130,000
o Interest received Rs.50,000
Required: Prepare income statement for the year ended 31st December 2012
QUESTION 2:
Following are the transactions performed by the XYZ Company for the period ending 31 st
December 2013;
o Purchases for the period Rs.320,000
o Transportation cost paid Rs.350,000
o Advertising cost for the period Rs.95,000
o Interest received Rs.75,000
NOTE:
a) 40% rent is related to previous accounting period
b) 2/3rd advertisement cost was paid for subsequent accounting period (31 st December
2014)
Required: Prepare income statement for the year ended 31st December 2013
SEPARATE ENTITY CONCEPT/ BUSINESS ENTITY CONCEPT:

Separate entity concept states that owners and its business are separate from each other.
Which means personal transactions should not be recorded in the business transactions.
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QUESTION 3:
Following are the transactions performed by the FARIGH Company for the period ending 30 TH
June 2014;
o Purchases for the period Rs. 20,000
o Advertising cost for the period Rs. 5,000
o Interest received Rs. 5,000
NOTE:
a) 1/3rd of the rent was paid for personal use
b) 30% salaries were paid to staff for personal home care
c) 80% transportation cost was incurred for official use.
Required: Prepare income statement for the year ended 30th June 2015
QUESTION 4:
Following are the transactions performed by the FURSAT Company for the period ending 30 TH
September 2014;
o Insurance paid Rs.40,000
o Advertising cost for the period Rs. 5,000
NOTE:
a) 2/3rd of the rent was paid for personal use
b) 20% salaries were paid to staff for personal home care
c) 60% transportation cost was incurred for official use.
d) 1/4th insurance was paid for next accounting period
Required: Prepare income statement for the year ended 30th September 2014
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CASH BASE ACCOUNTING:
According to cash base accounting system, expenses and revenues should be recorded when
the cash is received or paid and not when the expense or revenue accrue/arise.
ACCRUAL CONCEPT/MATCHING PRINCIPLE/ACCRUAL BASE ACCOUNTING:

Expenses and revenues should be recorded when they are incurred/arise, rather than they are
paid or received. Or
Expenses should be reported in the same accounting period in which the revenues/benefits are
recorded.
QUESTION 5:
Following are the transactions performed by the PAPU Company for the period ending 30THJune
2015;
o Insurance paid Rs.30,000
NOTE:
a) 1/3rd salaries were paid to staff for personal home care
b) 2/5th transportation cost was incurred for official use.
c) 15% of the rent was paid for personal use
d) 30% insurance was paid for next accounting period
e) Rent amounting to Rs.60,000 due but not yet received
f) Advertising cost due but not paid Rs.40,000
Required: Prepare income statement for the year ended 30thJune 2015
Income statement answers:
QUESTIONS ANSWERS
1 410,000 profit
2 109,666 loss
3 483,334 profit
4 566,267 profit
5 543,700 profit
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BALANCE SHEET
The purpose of BALANCE SHEET is to provide the financial status or position of the
organization. There are three main components of balance sheet items
 Assets (Assets are the resources owned and controlled by entity as a result of past event and
future benefit is expected to flow)
 Liabilities (A liability is something which is owed to somebody else)
 Owner’s equity
ASSETS
CURRENT ASSETS FIXED ASSETS
EXAMPLES OF CURRENT ASSETS EXAMPLES OF FIXED ASSETS
 Cash (cash at hand)  Land

 Bank balance (cash at bank)  Building
 Marketable securities  Vehicles/automobiles
 Account receivable  Furniture and fixture
 Notes / bills receivable  Equipments
 Other receivable  Machine
 Merchandise
 Office supplies
 Prepaid/unexpired
 Short term investment
ALLOWANCE FOR DEPRECIATION/ACCUMULATED DEPRECIATION:
Allowance for depreciation is the contra asset account. It is shown in the balance sheet
and is deducted from the value of fixed asset.
ALLOWANCE FOR RECEIVABLE/BAD DEBT:
Allowance for bad debt is the contra asset account. It is shown in the balance sheet and
is deducted from the value of account receivable/trade receivable.
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LIABILITIES
CURRENT LIABILITY LONG TERM LIABILITY

EXAMPLES OF CURRENT LIABILITY EXAMPLES OF LONG-TERM LIABILITY
 Account payable  Long term loans
 Notes or bills payable  Mortgage
 Unearned  Debenture/bonds payable
 Bank overdraft
 Short term loans
 Other payable/Accrued
o Tax payable
o Rent payable
o Insurance payable
o Interest payable
o Salary payable
OWNER’S EQUITY
CAPITAL ADDITIONAL investment

DRAWINGS PROFIT/LOSS
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QUESTION 6:
Following is the pre-closing trial balance of RasheedaKhala and Company for the year ended 31
December 2014.
TITLE OF ACCOUNT AMOUNT

CASH 350,000
DRAWINGS 60,000
MACHINES 550,000
BANK BALANCES 250,000
ACCOUNT RECEIVABLE 250,000
MERCHANDISE 150,000
OFFICE SUPPLIES 10,000
EQUIPMENT 300,000
FURNITURE 200,000
PREPAID WAGES 55,000
PREPAID INSURANCE 25,000
ACCOUNT PAYABLE 135,000
CAPITAL 800,000
NET PROFIT 160,000
ADDITIONAL INVESTMENT 150,000
MORTGAGE PAYABLE 250,000
LONG TERM LOAN 150,000
BANK OVERDRAFT 255,000
UNEARNED COMMISSION 20,000
SALARIES PAYABLE 15,000
ALLOWANCE FOR BAD DEBTS 5,000
ALLOWANCE FOR DEPRECIATION – MACHINE 110,000
ALLOWANCE FOR DEPRECIATION – EQUIPMENTS 90,000
ALLOWANCE FOR DEPRECIATION – FURNITURE 60,000
TOTAL 4,400,000
REQUIRED:
a) Prepare statement of financial position as at 31st December 2014.
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QUESTION 7:
Following is the pre-closing trial balance of FARIDA AUNTY and Company for the year ended 31
December 2017.
TITLE OF ACCOUNT AMOUNT

CASH 50,000
DRAWINGS 60,000
MACHINES 100,000
BANK BALANCES 100,000
CAPITAL 800,000
NET PROFIT 70,000
ADDITIONAL INVESTMENT 30,000
FURNITURE 350,000
PREPAID WAGES 25,000
PREPAID INSURANCE 35,000
ACCOUNT PAYABLE 40000
MERCHANDISE 47,000
EQUIPMENT 400,000
LONG TERM LOAN 36,000
BANK OVERDRAFT 10,000
ALLOWANCE FOR BAD DEBTS 5,000
ALLOWANCE FOR DEPRECIATION – MACHINE 30,000
ALLOWANCE FOR DEPRECIATION – EQUIPMENTS 100,000
ALLOWANCE FOR DEPRECIATION – FURNITURE 50,000
REQUIRED:
a) Prepare statement of financial position as at 31st December 2017.
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ACCOUNTING AND
BUSINESS
EQUATION
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ACCOUNTINGAND BUSINESS EQUATION
Accounting equation shows the status of the whole financial statement. Accounting equation is
as follow;
ACCOUNTING EQUATION
Assets = liabilities + owner’s equity
Assets = liabilities + capital + investment + profit – loss – drawings
Assets – liabilities = capital + investment + profit – loss – drawings
Current assets + fixed assets = current + long-term liabilities + owner’s equity
QUESTION 1:
Current assets = Rs.40,000
Long term liabilities = Rs.20,000
Op.Capital = Rs.900,000
Total Liabilities = Rs.200,000
Total assets = 1500,000
Additional investment = Rs.400,000
Drawings = Rs.100,000
Required: Calculate the amount of the following;
 Fixed assets = ?
 Net profit = ?
 Current liabilities = ?
QUESTION 2:
Fixed assets = Rs.140,000
Op. Capital = Rs.1000,000
 Current assets = ?
 Net profit = ?
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QUESTION 3:
Fixed assets = Rs.300,000
Sales = Rs.600,000
Purchases =Rs.200,000
Salaries expense = Rs.100,000
Rent expense =Rs.50,000

 Current assets = ?
 Op. Capital = ?
 Net profit = ?
QUESTION 4: Show the effect of each transactions in accounting equation.

Mr. ALTAF performed the following activities;
o Invested cash into business Rs.50,000
o Purchased machine for cash Rs.40,000
o Purchase building for cash Rs.60,000
o Sold building for cash Rs.20,000
o Sold machine for cash Rs.4,000
o Purchase equipment on credit Rs.30,000
QUESTION 5: Show the effect of each transactions in accounting equation.

Mr. NAWAZ performed the following activities;
o Owner invested cash Rs.400,000
o Purchase machine on credit Rs.80,000
o Purchased furniture of cash Rs.10,000
o Purchase building on credit Rs.40,000
o Sold furniture for cash Rs.5,000
o Sold machine on credit Rs.2,000
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BUSINESS EQUATION:
Assets = capital + liabilities
Net Assets = Total Assets – Total Liabilities
Closing net assets = opening net assets + capital introduced + profit – drawings
Opening Net assets = opening Assets – opening liabilities
Closing net assets = closing assets – closing liabilities
Profits are also known as retained profits
QUESTION 6:
Balances of Madam Rasheeda Company’s assets and liabilities were as follows:
1-Jan-12 31-Dec-12
Furniture 500,000 600,000
Land 800,000 800,000
Equipment 750,000 450,000
Cash 150,000 175,000
Account payable 45,000 95,000
Salaries Payable 35,000 5,000
Loans payable 450,000 375,000
Required: Find the opening and closing net assets and also find the movement in net assets.
QUESTION 7:
Mr. Farigh invested into business Rs.100, 000. His business has the following assets and
liabilities;
Cash = Rs.100, 000, Furniture =Rs.250, 000, Equipment =Rs.200, 000, Prepaid rent =Rs.50, 000,
Unearned rent=Rs.20, 000, Account payable =Rs.80, 000, Bank loan =Rs.250, 000.
REQUIRED:Find the profit earned by Mr. Farigh during the period with the help of accounting
equation?
QUESTION 8:
FARIDA AUNTY is running a camera shop. On 1 January 2016, she is with Rs5000 inventory and
Rs.3000 in the bank. All of her sales are for cash. She keeps no records of her takings.
At the end of the year she has inventory worth Rs.6600 and Rs.15000 in the bank. She owes
Rs3000 to suppliers. She invested during the business Rs.5000. and drawn out Rs.2000 to buy
herself a motorbike. Motor bike is not used in business. She has been taking drawings of Rs.100
per week. What is her profit at 31 December 2016?
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QUESTION 9:
Net assets at the beginning of 2007 were Rs.101700. The proprietor injected new capital of
Rs.8000 during the year and took drawings of Rs.2000. Net assets at the end of the 2007 were
Rs.18000.
What was the profit/loss earned/suffered by a business in 2007?
QUESTION 10:
Suppose ABC business has the following trial balance which has assets and liabilities as at 1
January 2003:
Furniture and fittings at cost 7000

Provision for depreciation, furniture and fittings 4000
Motor vehicles at cost 12000
Provision for depreciation, motor vehicles 6800
Inventory 4500
Trade receivable 5200
Cash at bank and in hand 1230
Trade payables 3700
Prepayments 450
Accrued rent 2000
Capital ?
Required: Find the amount of capital.
QUESTION 11:
The profit made by a business in 2017 was $35,400. The proprietor injected new capital of
$10,200 during the year and withdrew $500 per month. If the net assets at the end of 2017
were $95,100, what was the proprietor’s capital at the beginning of the year?
QUESTION 12:
The increase in net assets is $173. Drawings are $77. Capital introduced is $45. What is the net
profit for the year?
QUESTION 13:
The increase in net assets is $733. Drawings are $418. Capital introduced is $100. What is the
net profit for the year?
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ANSWERS OF ACCOUNTING AND BUSINESS EQUATIONS:
QUESTIONS ANSWERS
1 FIXED ASSET 1,460,000
NET PROFIT 100,000
CURRENT LIABILITIES 180,000
2 CURRENT ASSET 1,860,000

NET PROFIT 600,000
3 CURRENT ASSET 1,500,000

NET PROFIT 250,000
OP. CAPITAL 900,000
4 TOTAL ASSETS 80,000

TOTAL LIABILITIES 30,000
CL. CAPITAL 50,000
5 TOTAL ASSETS 520,000

TOTAL LIABILITIES 120,000
CL. CAPITAL 400,000
QUESTIONS ANSWERS
6 OP.NET ASSETS 1,670,000
CL.NET ASSETS 1,550,000
DECREASE IN NET ASSETS 120,000
7 NET PROFIT 150,000
8 NET PROFIT 12,800
9 NET LOSS 89,700
10 OP.CAPITAL 13,880
11 OP.CAPITAL 55,500
12 NET PROFIT 205
13 NET PROFIT 1,051
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GENERAL JOURNAL
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GENERAL JOURNALPILLARS OF ACCOUNTING
ASSETS
REVENUES LIABILITIES
PILLARS OF
ACCOUNTING
EXPENSE CAPITAL
INTRODUCTION OF DEBIT AND CREDIT

Left hand side of an account is called Debit. Right hand side of an account is called credit. The
basic principle of double entry bookkeeping is that for every debit entry there must be a
corresponding credit entry.
RULES OF DEBIT AND CREDIT
DEBIT
 INCREASE IN ASSETS AND EXPENSE
 DECREASE IN INCOME, LIABILITY AND OWNER’S EQUITY
CREDIT
 INCREASE IN LIABILITIES, INCOME AND OWNER’S EQUITY
 DECREASE IN ASSETS AND EXPENSES
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GENERAL JOURNAL:
General journal is used to record the transactions (business activities) of the organization.
FORMAT OF GENERAL JOURNAL
Date Particular P/R Debit Credit
1-Jan Cash 100,000

Capital 100,000
(To record the Invested cash into
Business)
3-Jan Equipment 50,000

Cash 50,000
(To record the purchased equipment for cash)
Note: Business transactions can be broken down in the following categories:
 Purchase of asset on cash basis and on credit basis

 Sale of asset on cash basis and on credit basis
 Purchase of merchandise on cash and on credit basis
 Sale of merchandise on cash and on credit basis
 Compound entry for purchase of assets/merchandise
 Compound entry for sale of assets/merchandise
 Capital related transactions
 Expense related transactions
 Revenue related transactions
 Prepaid related transactions
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 Unearned related transactions
 Purchase return transaction
 Purchase discount transactions
 Sales return transaction
 Sales discount transaction
 Suppliers payment transaction
 Customer’s receiving transactions
1) Purchase of assets on cash basis
1-Jan-17 Purchased equipments for cash Rs.80, 000

2-Jan-17 Purchased furniture for cash Rs.110,000
3-Jan-17 Purchased land and issued a cheque of Rs.105,000
4-Jan-17 Purchased Building for cash Rs.105,000
5-Jan-17 Purchased Machine and issued a cheque of Rs.135,000
2) Purchase of assets on credit basis
1-feb-17 Purchased equipments on credit Rs.80, 000

2-feb-17 Purchased furniture on account Rs.110,000
3-feb-17 Purchased land on credit Rs.105,000
4-feb-17 Purchased Building on account Rs.105,000
5-feb-17 Purchased Building from Danish Rs.105,000
3) Sale of assets on cash basis
3-Apr-16 Sold Equipment for cash Rs.245, 000

4-Apr-16 Sold Furniture for cash Rs.45, 000
5-Apr-16 Sold Building and received a cheque (cheque has been deposited in bank) Rs.45, 000
6-Apr-16 Sold Machine for cash Rs.45, 000
7-Apr-16 Sold Machine and received a cheque (cheque has been deposited in bank) Rs.145, 000
4) Sale of assets on credit basis
7-Apr-16 Sold Equipment on credit Rs.245, 000

8-Apr-16 Sold Furniture on account Rs.45, 000
9-Apr-16 Sold Building on credit Rs.45, 000
10-Apr-16 Sold Machine on account Rs.45, 000
11-Apr-16 Sold Machine on account to Mr. Kamran Rs.445, 000
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5) Purchase of merchandise on cash basis
14-Apr-16 Purchase Merchandise for cash Rs.275, 000

15-Apr-16 Purchase goods and issued a cheque Rs.135, 000
16-Apr-16 Purchase Merchandise for cash Rs.285, 000
17-Apr-16 Purchase goods for cash Rs.45, 000
18-Apr-16 Goods purchased for cash Rs.345, 000
6) Purchase of merchandise on credit basis
6-May-17 Purchased merchandise on account for Rs.390, 000

7-May-17 Purchased merchandise on credit for Rs.19, 000
8-May-17 Purchased merchandise from RaziaKhala and Company Rs.29, 000
9-May-17 Purchased merchandise from supplier Rs.67, 000
10-May-17 Purchased merchandise from supplier and received a invoice of Rs.95, 000
7) Sale of merchandise on cash basis
5-Apr-16 Sold merchandise for cash Rs.98,000

6-Apr-16 Sold merchandise for cash Rs.15, 000 which has been deposited into bank
15-Apr-16 Sold goods for cash Rs.45, 000
16-Apr-16 Sold Merchandise for cash Rs.45, 000
17-Apr-16 Sold Merchandise for cash Rs.345, 000
8) Sale of merchandise on credit basis
7-June-16 Sold merchandise on account for Rs.390, 000

8-June-16 Sold merchandise on credit for Rs.19, 000
9-June-16 Sold merchandise to Farida Aunty and Company Rs.29, 000
10-June-16 Sold merchandise to customer Rs.67, 000
11-June-16 Sold merchandise to customer and issued a invoice of Rs.95, 000
12-June-16 Sold merchandise to Jubaidaapa and Company Rs.39, 000
9) Compound entry for purchase of assets/merchandise
5-Feb-16 Purchase machine and furniture Rs.180, 000 and 210, 000 respectively for cash
Purchase machine, merchandise and furniture Rs.180, 000, 215, 000 and 210, 000
6-Feb-16
respectively for cash
Purchased merchandise for Rs.390, 000 on the same day pays Rs.90, 000 in cash
7-Feb-16
and the balance will be paid later on.
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Purchases for the month Rs.400, 000. 40% was purchased on cash basis and was
8-Feb-16
paid instantly and 60% on credit.
Purchased merchandise for Rs.4500, 000 on the same day pays Rs.1000, 000 in
9-Feb-16
cash and for the balance notes payable was signed.
10) Compound entry for sale of assets/merchandise
Sold machine, merchandise and furniture Rs.180, 000, 215, 000 and 210,
3-May-16
000 respectively for cash
Sold merchandise for Rs.390, 000 on the same day received Rs.90, 000 in
4-May-16
cash and the balance will be received later on.
Sales for the month Rs.400, 000. 40% was sold on cash basis and was paid
5-May-16
instantly by customer and 60% on credit.
Sold merchandise for Rs.4500, 000 on the same day pays Rs.1000, 000 in
6-May-16
cash and for the balance notes Receivable was signed.
Sold goods for Rs.200, 000 on the same day collected cash Rs.90, 000 and
7-May-16
the balance will be received later on.
11) Capital related transactions
1-Oct-16 The owner invested cash into business Rs.500, 000

2-Oct-16 The owner invested furniture into business Rs.450, 000
5-Oct-16 The owner withdrew cash from the business for personal use Rs.90, 000
6-Oct-16 The owner withdrew equipment for personal use Rs.65, 000
7-Oct-16 The owner transferred his personal property into business amounting to Rs.900, 000
The owner transferred his personal bank account into business bank account
8-Oct-16
amounting to Rs.450, 000
9-Oct-16 The owner brought into business cash Rs.300, 000 and equipment Rs.200, 000
10-Oct-16 Withdraw some merchandise costing Rs.75, 000 for his personal use.
11-Oct-16 The owner withdrew from bank Rs.32, 000 for personal use.
The owner withdrew cash Rs.25, 000 and merchandise costing 25, 000 for personal
12-Oct-16
use.
12) Expense related transactions
5-Jan-13 Paid Rs.35, 000 for salaries expense

6-Jan-13 Paid for salaries expense Rs.15,000 by cheque
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7-Jan-13 Paid Rent expense Rs.18, 000
8-Jan-13 Paid Insurance expense Rs.12,000
9-Jan-13 Paid wages expense Rs.13,500 by cheque
13) Revenue related transactions
6-Jan-13 Received interest Rs.15,000 by cheque

7-Jan-13 Received Rent Rs.28, 000
8-Jan-13 Received interest Rs.32,000
9-Jan-13 Received commission Rs.43,500 by cheque
14) Prepaid related transactions
10-Jan-13 Paid rent in advance Rs.1000

11-Jan-13 Paid insurance in advance Rs.5000
12-Jan-13 Paid interest in advance Rs4000
13-Jan-13 Paid wages in advance by cheque Rs.20, 000
15) Unearned related transactions
15-Aug-17 Received rent in advance Rs.60,000

16-Aug-17 Received commission in advance Rs.80,000
17-Aug-17 Received interest in advance Rs.45000
18-Aug-17 Received insurance in advance Rs.30,000
16) Purchase return
5-Apr-17 merchandise returned to Agha traders of Rs.10, 000

6-Apr-17 Merchandise returned to bahsir Sons of Rs.8, 000
7-Apr-17 merchandise returned to Rahim Rs.3, 000
8-Apr-17 Defective goods returned to Rahim Rs.30, 000
17) Purchase discount
9-Apr-17 Discount received from Rahim Rs.5, 000

10-Apr-17 Discount given by Bashir Rs.13, 000
15-Apr-17 Discount given by Bashir Rs.63, 000
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18) Sales return
5-Sep-17 Sold goods returned from Agha traders Rs. 10, 000
6-Sep-17 Merchandise returned from Yasir traders for Rs.15, 000
7-Sep-17 Returned goods from Bashir traders for Rs. 5, 000
8-Sep-17 Yasir Traders returned defective goods Rs.4, 500
9-Sep-17 Agha Traders returned defective goods Rs.8, 500
19) Sales discount
9-Sep-17 Discount allowed to Rahim Rs.15, 000

10-Sep-17 Discount given to Bashir Rs.23, 000
25-Sep-17 Discount allowed to Fahim Rs.25, 000
26-Sep-17 Discount given to Bashir Rs.33, 000
20) Suppliers Payment
11-Apr-17 Paid to Agha traders Rs.220, 000

11–Apr-17 Paid to supplier Rs.200,000
Paid to Bashir Sons Rs.160, 000 by cheque in full settlement of his account
12-Apr-17
Rs.172, 000
13-Apr-17 Paid to Yasir brother Rs.85, 000 in full settlement of his account of Rs.88, 000
Paid to Nadeem corporation Rs.73, 000 by cheque in full settlement of his
14-Apr-17
account Rs.75, 000
15-Apr-17 Paid Invoice of Rs. 100, 000 less 2% discount
16-Apr-17 Paid Invoice of Rs.450, 000 to nadeem Brothers, availed 4% discount.
17-Apr-17 Paid invoice of Rs. 100, 000 subject to credit terms 3/10, n/30
18-Apr-17 Paid invoice of Rs.50, 000 subject to credit terms 2/10, n/30
21) Customer payment/ receiving
11-Sep-17 Received cash from Customers Rs.400,000

Received from Agha traders Rs.220, 000 in full settlement of account Rs.235,
11-sep-17
000
Received from Bashir Sons Rs.160, 000 by cheque in full settlement of the
12-Sep-17
account Rs.172, 000. cheques has been deposited into bank
Received from Yasir brother Rs.85, 000 in full settlement of the account of
13-Sep-17
Rs.88, 000
Received from Nadeem corporation Rs.73, 000 by cheque in full settlement of
14-Sep-17
the account Rs.75, 000
32
Received from Saleem traders of Rs.155, 000 by cheque in full settlement of
15-Sep-17
his account of Rs. 160, 000
16-Sep-17 Received against Invoice of Rs. 100, 000 less 2% discount
Received against Invoice of Rs.450, 000 to nadeem Brothers, availed 4%
17-Sep-17
discount.
18-Sep-17 Received against invoice of Rs. 100, 000 subject to credit terms 3/10, n/30
19-Sep-17 Received against invoice of Rs.50, 000 subject to credit terms 2/10, n/30
22) Miscellaneous:
1-Oct-17 Invested Cash into the business Rs.600,000

2-Oct-17 Purchased merchandise on account Rs.150, 000
3-Oct-17 Purchased merchandise for cash Rs. 70, 000
4-Oct-17 Cash deposited into bank Rs. 80, 000
5-Oct-17 Sold merchandise for cash Rs. 110, 000
6-Oct-17 Sold merchandise on credit Rs.180 000
7-Oct-17 Purchased merchandise on credit Rs.750, 000
8-Oct-17 Purchased merchandise for cash Rs.95, 000 and on credit Rs.155, 000
9-Oct-17 Sold merchandise for cash 115, 000 and on credit Rs. 25, 000
10-Oct-17 Withdrew from bank Rs. 35, 000 for personal use
11-Oct-17 Withdrew from bank Rs.25, 000 for business use
12-Oct-17 Purchased two equipments for cash Rs.25, 000 each
13-Oct-17 Merchandise returned to bahsir Sons of Rs.8, 000
14-Oct-17 merchandise returned to Rahim Rs.3, 000
15-Oct-17 Discount given by Bashir Rs.13, 000
16-Oct-17 Paid to Agha traders Rs.220, 000 in full settlement of his account Rs.235, 000
17-Oct-17
Paid to Bashir Sons Rs.160, 000 by cheque in full settlement of his account
Rs.172, 000
18-Oct-17 Paid Invoice of Rs.450, 000 to nadeem Brothers, availed 4% discount.
19-Oct-17 Paid invoice of Rs. 100, 000 subject to credit terms 3/10, n/30
20-Oct-17 Sold merchandise for cash Rs.60, 000
21-Oct-17 Sold merchandise on account to Agha traders for Rs. 150, 000
22-Oct-17 Sold merchandise on account to Bashir traders for Rs. 195, 000
23-Oct-17 Returned goods from Bashir traders for Rs. 5, 000
24-Oct-17 Yasir Traders returned defective goods Rs.4, 500
25-Oct-17 Discount allowed to Rahim Rs.15, 000
26-Oct-17 Discount given to Bashir Rs.23, 000
27-Oct-17 Paid to supplier Rs,35,000 in full settlement of his supplier Rs. 80,000
28-Oct-17 Cash received from customers Rs.45,000
33
LEDGERS AND
TRIAL BALANCE
34
35
LEDGERS AND TRIAL BALANCE
LEDGERS;
Entries from the general journal are then posted to the general ledgers/ T account/ control
accounts.
QUESTION 1: Post the below mentioned general entries in general ledgers.
DATE PARTICULAR P/R DEBIT CREDIT
1-Jan CASH 150,000
EQUIPMENT 150,000
3-Jan EQUIPMENT 265,000
CASH 265,000
4-Jan CASH 880,000
CAPITAL 880,000
5-Jan PURCHASES 135,000
CASH 135,000
7-Jan CASH 225,000
SALES 225,000
36
8-Jan ACCOUNT RECEIVABLE 475,000
SALES 475,000
9-Jan CASH 555,000
CAPITAL 555,000
12-Jan DRAWINGS 45,000
CASH 45,000
CASH 110,000
18-Jan ACCOUNT PAYABLE 225,000
CASH 225,000
22-Jan CASH 250,000
SALES 220,000
37
QUESTION 2: Post the below mentioned general entries in general ledgers.
1-Jan CASH 990,000
CAPITAL 990,000
CASH 155,000
4-Jan CASH 235,000
SALES 235,000
SALES 550,000
8-Jan NOTES RECEIVABLE 200,000
SALES 200,000
38
9-Jan CASH 200,000
ACCCOUNT RECEIVABLE 200,000
CASH 60,000
CASH 220,000
CASH 160,000
22-Jan CASH 140,000
SALES 415,000
CASH 120,000
39
GENERAL LEDGER WITH TRIAL BALANCE
QUESTION 3:
A business was started on March 1 2001 with the investment for cash Rs.50, 000 and office
equipment worth Rs.50, 000 and the following transactions were completed during the month:
2-Mar Purchased merchandise for cash Rs.25,000 and on account Rs.15000

3-Mar purchase office supplies for cash Rs.2000
12-Mar purchase furniture on account Rs.5000
18-Mar sold merchandise for cash Rs.20,000
20-Mar paid to suppliers Rs.10000
25-Mar sold merchandise on account Rs.5000
30-Mar paid rent for the month Rs.1500
REQUIRED:
 Record the above transaction in general journal

 Post the transaction in general ledger
 Prepare trial balance
GENERAL LEDGER WITH OPENING BALANCES

QUESTION 4:
Following are the opening balances of Mughal Traders:
Cash 60000
Capital 100000
Office furniture 40000
Following are the transaction pertains to Mughal traders for the month of January 2011
4/Jan Purchase merchandise on cash Rs.2000 and on account Rs.3000
10/Jan The owner invested cash into capital Rs.25000
15/Jan Sold merchandise on account Rs.4000
20/Jan Paid rent in advance Rs.1000
25/Jan Purchase office supplies on account Rs.1000 and on cash Rs.3000
28/Jan Paid to supplier Rs.2000
31/Jan Received cash from customer Rs.4000
REQUIRED:
 Record the above transaction in general journal
 Post the transaction in general ledger
 Prepare trial balance
40
QUESTION 5:
The following transactions were completed by JAN & Company a sole trader, following opening
balances are available:
Rupees
Cash 50,000
Furniture 40,000
Account payable 30,000
Account receivable 10,000
Salaries payable 50,000
Rent payable 20,000
During the month of January 2015 following transactions were performed:

1-Jan Commenced business with an investment of cash Rs.50,000 and merchandise worth Rs.40,000
2-Jan Purchased merchandise on account from NAIM Company for Rs.30,000
3-Jan Paid transportation Rs.400
4-Jan Purchased shop furniture for cash Rs.4,000
5-Jan Withdrew merchandise worth Rs.400 and cash Rs.500 for personal use
6-Jan Cash sales for the day Rs.6,000
7-Jan Purchase office supplies for cash Rs800
10-Jan Paid insurance expense in cash Rs.1,000
13-Jan Sold merchandise on account to MUNIM & Company Rs.8,000
16-Jan MUNIM & COMPANY returned defective goods worth Rs.700
19-Jan Paid rent expense in cash Rs.1,000
24-Jan Paid to NAIM cash Rs.15,000
29-Jan Received cash from MUNIM & Company Rs.4,000
30-Jan Paid for salaries expense Rs.1,000 cash
Required:
a) Prepare general journal
b) Prepare general ledger
c) Prepare trial balance
41
QUESTION NO.6: Write down a transactions for each entry recorded in general journal of
SAEIN Company
CASH 265,000
4-Jan CASH 880,000
CAPITAL 880,000
SALES 475,000
CASH 45,000
CASH 110,000
CASH 225,000
22-Jan CASH 250,000
EQUIPMENT 130,000
42
QUESTION NO.7:
Following are the transactions of Mughal Traders, posted in respective ledger accounts:
CASH
BEG.BALANCE 60,000 JAN/4/2011 2,000
JAN/31/2011 4,000 JAN/20/2011 1,000
JAN/25/2011 3,000
JAN/28/2011 2,000
CAPITAL
BEG.BALANCE 100,000
JAN/10/2011 25,000
ACCOUNT PAYABLE
JAN/28/2011 2,000 JAN/4/2011 3,000
JAN/25/2011 1,000
ACCOUNT RECEIVABLE
JAN/15/2011 4,000 JAN/31/2011 4,000
OFFICE FURNITURE
BEG.BALANCE 40,000
PREPAID RENT
JAN/20/2011 1,000
43
PURCHASES
JAN/4/2011 5,000
JAN/10/2011 25,000
SALES
JAN/15/2011 4,000
OFFICE SUPPLIES
JAN/25/2011 4,000
Required:
Record the effects shown in above ledgers (postings) in standard form of general journal with
proper narrations and prepare trial balance.
QUESTION NO.8:
The closing balances on the general ledger accounts below are credit or debit balances, as
indicated. Indicate by circling the correct answer whether the balances represent an asset,
liabilities, expenses or revenues?
CREDIT OR DEBIT
ACCOUNT ASSET LIABILITY EXPENSE REVENUE
BALANCE
SALES CREDIT
SALES RETURN DEBIT
RECEIVABLE CONTROL ACCOUNT DEBIT
DISCOUNT ALLOWED DEBIT
BANK CREDIT
44
45
PREPARATION OF
FINANCIAL
STATEMENTS
46
47
PREPARATION OF FINANCIAL STATEMENTS
PROCESS FOR THE PREPARATION OF FINANCIAL STATEMENT
Following is the process for the preparation of financial statement.
 Transactions
 General journal
 General ledgers
 Trial balance
 Income statement
 Balance sheet
TRANSACTIONS
FINANCIAL
STATEMENT
• INCOME STATEMENT GENERAL
• BALANCE SHEET JOURNAL
GENERAL
TRIAL BALANCE
LEDGERS
48
QUESTION 1:
Following is the pre-closing trial balance of RASHEEDA AUNTY and Company for the year ended
31 December 2016.
TITLE OF ACCOUNT RUPEES

CASH 595,000
BANK BALANCE 430,000
ALLOWANCE FOR BAD DEBT 35,000
MERCHANDISE ENDING 240,000
ADVERTISEMENT EXPENSE 35,000
DEPRECIATION EXPENSE 60,000
INTEREST EXPENSE 60,000
BAD DEBT EXPENSE 10,000
UTILITIES EXPENSE 65,000
COST OF GOODS SOLD 800,000
INSURANCE EXPENSE 40,000
INCOME TAX 5,000
SALES RETURN 25,000
SALES DISCOUNT 15,000
EQUIPMENT 500,000
ALLOWANCE FOR DEPRECIATION –EQUIPMENT 50,000
FURNITURE 175,000
ALLOWANCE FOR DEPRECIATION –FURNITURE 25,000
AUTOMOBILES 1,300,000
ALLOWANCE FOR DEPRECIATION –AUTOMOBILES 100,000
CAPITAL- RASHEEDA AUNTY 1,200,000
NOTES PAYABLE 250,000
BONDS PAYABLE 415,000
SALES REVENUE 1,635,000
REQUIRED:
a) Prepare the statement of profit and loss account for the year ended 31 st December 2016
b) Prepare statement of financial position as at 31st December 2016.
49
QUESTION 2:
Following is the pre-closing trial balance of FARIDA AUNTY and Company for the year ended 31
December 2017.
TITLE OF ACCOUNT RUPEES

CASH 600,000
BANK BALANCE 370,000
ALLOWANCE FOR BAD DEBT 40,000
MERCHANDISE ENDING 450,000
INCOME TAX 35,000
DEPRECIATION EXPENSE 140,000
BAD DEBT EXPENSE 10,000
UTILITIES EXPENSE 65,000
COST OF GOODS SOLD 800,000
INTEREST EXPENSE 50,000
INSURANCE EXPENSE 45,000
SALES RETURN 25,000
SALES DISCOUNT 15,000
MACHINE 600,000
ALLOWANCE FOR DEPRECIATION –MACHINE 30,000
BUILDING 800,000
ALLOWANCE FOR DEPRECIATION –BUILDING 80,000
AUTOMOBILES 1,000,000
ALLOWANCE FOR DEPRECIATION –AUTOMOBILES 100,000
CAPITAL- FARIDA AUNTY 1,200,000
NOTES PAYABLE 250,000
BONDS PAYABLE 600,000
SALES REVENUE 1,635,000
REQUIRED:
a) Prepare the statement of profit and loss account for the year ended 31 st December 2017
b) Prepare statement of financial position as at 31st December 2017.
50
CAPITAL AND
REVENUE
EXPENDITURE
51
52
CAPITAL AND REVENUE EXPENDITURE
CAPITAL AND REVENUE EXPENDITURE:
A capital expenditure is an amount spent to acquire or improve a long-term asset such as

equipment or buildings. Usually the cost is recorded in an account classified as Property, Plant and
Equipment. The cost (except for the cost of land) will then be charged to depreciation
expense over the useful life of the asset.
Revenue expenditure is an amount that is expensed immediately—thereby being matched

with revenues of the current accounting period. Routine repairs are revenue expenditures
because they are charged directly to an account such as Repairs and Maintenance Expense.
Even significant repairs that do not extend the life of the asset or do not improve the asset (the
repairs merely return the asset back to its previous condition) are revenue expenditures.
NOTE: Capital expenditure is expenditure which forms part of the cost of non-current assets.
Revenue expenditure incurred for the purpose of the trade or to maintain non-current assets.
TYPES OF REVENUE EXPENDITURES:

Revenue expenditure may result in one of the two following ways:
 Expensed in the income statement when incurred
 Result in the current asset as at the end of the accounting period because the goods
or services have not yet been consumed or used.
CAPITAL AND REVENUE INCOME:

Capital income is the proceeds from the sale of non-trading assets (i.e. proceeds from the sale
of non-current assets, including long term investments). Gain or losses from the sale of non-
current assets is called capital income.
Revenue income is the income derived from the following sources:

a) The sale of trading assets, such as goods held in inventory
b) The provision of services
c) Interest and dividends received from investments held by the business
53
QUESTION 1:
State whether each of the following items should be classified as Capital or revenue
expenditure or income for the purpose of preparing the financial statement of the business.
a) The purchase of property (e.g. an office building)
b) Solicitor’s fees in connection with the purchase of such a property
c) The costs of adding extra storage capacity to a computer used by the business.
d) Computer repairs and maintenance costs
e) Salaries to staff
f) Commission to sales person
g) Purchase of furniture
h) Replacement of an engine (improved the efficiency of machine)
i) Profit on the sale of an office building
j) Revenue from sales by credit card
k) The cost of new plant
l) Customs duty charged on the plant when imported into the country
m) The “carriage costs” of transporting the new plant from the supplier’s factory to the
premises of the business purchasing the plant
n) The cost of installing the new plant in the premises of the business
o) The wages of the machine operators
54
DISCOUNTS,
REBATES AND
ALLOWANCES
55
56
DISCOUNTS, REBATES AND ALLOWANCES
DISCOUNT:
Discount is a reduction in the price of goods below the amount at which those goods would
normally be sold to other customer or purchased from suppliers. There are two main types of
discounts.
DISCOUNTS
CASH DISCOUNTS / SETTLEMENT

TRADE DISCOUNTS DISCOUNTS
TRADE DISCOUNT:
A trade discount is a reduction to the published price of a product. For example, a high-volume
wholesaler might be entitled to a 40% trade discount, while a medium-volume wholesaler is
given a 30% trade discount. A retail customer will receive no trade discount and will have to pay
the published or list price. The use of trade discounts allows for having just one published price
for each product. It is basically a trading policy.
Trade discounts are also based on customer loyalty and vendor relationships over time.
CASH DISCOUNT:
A cash discount is a deduction allowed by the seller of goods or by the provider of services in
order to motivate the customer to pay within a specified time. The seller or provider often
refers to the cash discount as a sales discount. The buyer often refers to the same discount as a
purchase discount. The cash discount is also known as an early payment discount.
There are several reasons why a seller might make this offer:
o To obtain earlier use of cash, which may be necessary if the seller is short of cash; or
o To offer a discount for an immediate cash payment in order to entirely avoid the effort
of billing the customer (follow up).
o Receive an amount of cash now as you can earn more interest on it.
o Insecure regarding the customer’s financial position
57
Companies usually present their cash discounts in a manner such as 2/10, n/30, which means
the customer, takes a 2 percent discount if paying within ten days; otherwise, and the entire
amount in due in 30 days. Using the $140,000 accounts receivable amount from earlier, if the
washing machine customer is given terms of 2/10, net 30, and the discount for early payment is
$2,800 ($140,000 x .02).
QUESTION 1:
Abdul Gafoor Company has three suppliers:
a) Madam Rasheeda is in the same business as Abdul Gafoor Company offers 5% trade
discount.
b) Madam Farida offers a trade discounts of 7% on amounts in excess of $100 (i.e. the
trade discount does not apply to the first $100)
c) Madam Durganda offers a 10% cash discount for immediate payment or a 5% cash
discount for all items paid for within 30 days of purchase.
In January 2007, Abdul Gafoor Company makes purchases of goods worth the following
amounts before discounts have been deducted.
i. From Madam Rasheeda: $400
ii. From Madam Farida: $700
iii. From Madam Durganda: $350 cash
$700 to be paid on 31/1/2007 for goods purchased
on 14/1/2007
Required:
Calculate how much Abdul Gafoor Company has received as discounts in January. How much
were trade and cash discounts?
QUESTION 2:
Abdul Sattar purchases goods with a list price of $22,000. The supplier offers a 10% trade
discount, and a 2.5% cash discount for payment within 20 days.
Required:
a) Calculate the amount Abdul sattar will have to pay if it delays longer than 20 days
before paying.
b) Calculate the amount the company will pay if it pays within 20 days.
QUESTION 3:
15th January 2017: MR FARIGH Purchases goods with an invoice price of Rs.450,000, with a
trade discount of 12% and a credit term of 5/10, n/30.
24th January 2017: Company paid the amount to supplier
Required: Record the above transactions in the general journal
58
QUESTION 4:
15thMarch 2017: MR AWARA Purchases goods with a list price of Rs.630,000, with a trade
discount of 8% and a credit term of 3/10, 2/20, n/30.
Required: Record the above transactions in the general journal under the following
situations;
Situation 1:MR. AWARA paid the amount on 30th March 2017
Situation 2:MR. AWARA paid the amount on 30th April 2017
QUESTION 5:
MR FARIGH Purchases goods with a list price of Rs.795,000, with a trade discount of 9%
and a credit term of 4/10, n/30. Company paid the amount and availed the discount
Required: Record the above transactions in the general journal.
QUESTION 6:
MR BABLOO Purchases goods with a list price of Rs.995,000, with a trade discount of 10%
and a cash discount of 6% if company pays within 10 days.
MR. BABLOO has paid the amount.
QUESTION 7:
MR PAPU Purchases goods with a list price of Rs.176,000, with a trade discount of 13% and
a cash discount of 7% if company pays within 10 days.
REBATES:
Return of a portion of a purchase price by a seller to a buyer, usually on purchase of a specified
quantity, or value, of goods within a specified period. Unlike discount (which is deducted in
advance of payment), rebate is given after the payment of full invoice amount.
For example: where the gas company will lower its overall tariff for customers who use over a
certain number of units per year. The rebate will be given in one of the following forms:
a) A reduction in the bills for the following year
b) A Cheque for the calculated rebate amount.
ALLOWANCES:
Where extra benefits are given to customer is called allowances. If a certain number of units are
ordered at one time, then a few extra units are given free of charge.
59
60
SOURCE DOCUMENTS AND
BOOK OF PRIME ENTRY
61
62
SOURCE DOCUMENTS AND BOOKS OF PRIME ENTRY
SOURCE DOCUMENTS
In any organization different documents are used to initiate the transactions and to record the
transactions in the accounts. Documents which are used to record transaction in books of
accounts are known as “Source documents”. Following are the some documents used in the
organizations.
1. Purchase requisitions
2. Quotations
3. Purchase orders
4. Sales orders
5. Goods dispatch note
6. Invoice
7. Goods received note
8. Debit note
9. Credit note
10. Receipts (evidence for payment)
Purchase requisition: It is an internally generated document, it is prepared when there is a

need to purchase anything, it is send to purchase department
Quotations:After authorizing the purchase from higher authority, company contact with the
approved suppliers. Approved suppliers send quotations/bids
Purchase orders:It is an internally generated document; it is prepared when the order is made
to supplier
Sales orders:It is an externally generated document; it is prepared by sales department to order

their store department to get the goods ready for dispatch.
Goods dispatch note (GDN):It is an externally generated document; it is prepared by store

department when the goods are ready to sent
Invoice: It is an externally generated document; it is prepared by accounts department. It is a

demand for payment within the respective time period
Goods received note (GRN): It is an internally generated document; it is prepared when the
goods are received
63
Debit note: It is prepared by customer, it’s a formal request by a customer to issue credit note
Credit note: It is a document sent by a supplier when goods are returned by customer or
customer is overcharged. It is also called “negative invoice”
BOOKS OF PRIME ENTRY

All transactions are initially recorded in books of prime entry then these transactions are
further processed towards the financial statement. Books of prime entry are as follows;
a) Sales day book
b) Purchase day book
c) Sales return day book
d) Purchase return day book
e) General journal
f) Cash book
g) Petty cash book
 Sales day book: Sales day book includes the transactions in which sales are made on
credit.
 Purchase day book: Purchase day book includes the transactions in which purchases
are made on credit.
 Sales return day book: For any reason if goods are returned by a customer, such
credit notes are recorded in sales return day book.
 Purchase return day book: If goods are returned to supplier then this credit note is
recorded in purchase return day book.
 Cash book: Cash book records the receipts and payments of the company. Cash book
deals with both the cash in hand and the cash at bank. Left side of cash book represents
the receipt side and right side of the cash book shows the payment side. In the end of
the cash book it also shows the balance.
 Petty cash book: Petty cash books are kept to record the small or minor payments are
made. While maintaining the cash book, Imprest system is used which means fixed
amount is maintained in the petty cash account and subsequently in the end of the
month, amount expensed are again replenished.
 General journal: It includes the transactions which are not recorded in any books of
prime entry. Furthermore adjusting entries are passed in the general journal in the end
of accounting period.
64
QUESTION1: Following transactions pertains to Nawaz shareef& Co. State which books of
prime entry the following transactions would be entered into.
a) Nawaz paid to supplier Rs.450000
b) Nawaz send the invoice to a customer of Rs.400
c) Accounts manager Mr.Shahbaz asked for Rs.200 in order to buy some envelopes
d) Invoice received by Nawaz &Co. from supplier Rs.5000
e) Payment is made to the supplier Rs.5000
f) One of the customer returned the goods to the value Rs.300
g) Some merchandise were found defective, hence these were returned to supplier,
costing Rs.350
h) Payment received from a customer Rs.540
QUESTION 2:
State which books of prime entry the following transactions would be entered into:
a) Your business pays to Mr. Arif a supplier Rs.450
b) You send Mr.Altaf a customer an invoice for Rs.660
c) You receive an invoice from Mr.kamran for Rs.290
d) You paid Mr. Kamran Rs.100
e) One of the customer Mr. Bilawal returned goods to the value Rs.250
f) You returned goods to Mr.Zardari amounted to Rs. 460
QUESTION NO.3
Following are the given selected transactions of ABID STORES during September 2015:
September:
1. Purchased merchandise on account from Zahoor Rs.1,000
2. Purchased merchandise on account from ADNAN Rs.1,500
3. Purchased a typewriter for cash Rs.2,000
4. Returned goods to ADNAN Rs.400
5. Merchandise returned to ZAHOOR Rs.100
6. Sold goods to Mr. Rashid Rs.4000
7. Merchandise returned to ADNAN Rs.150
8. Sold goods to Kamran Rs.800
9. Goods purchased from ADNAN Rs.5000
10. Purchased furniture on account from RAHIM Rs.5000
11. Goods returned from Rashid Rs.1500
12. Purchased goods for ZAHOOR Rs.4500
13. Purchased office equipment on account from RAHIM Rs.1600
65
Required:
Record the above transactions in:
a) Purchase and sales day book
b) Purchase return and sales return day book
c) Prepare necessary T account
d) Prepare subsidiary ledger
QUESTION NO 4:
Following are the selected transactions taken from the records of Kainat General Stores for the
month of April 2012
April 10: Milk powder of Rs.200 was returned by Bushra.
April 12: Shampoo of Rs.1000 was returned to Adil stores.
April 15: Biscuits of Rs.1500 were returned to union traders.
April 20: A pouch of oil of Rs.150 was returned by Mohsin.
April 22: Cereal boxes of Rs.500 were returned toYousuf.
April 28: Washing powder of Rs.140 was returned by Ahmed.
April 29:You send Mr.Altaf a customer an invoice for Rs.660
April 30:You receive an invoice from Mr.kamranfor Rs.290
REQUIRED:
a) Prepare sales return and allowance journal page 3
b) Prepare purchase return and allowance journal page 4.
c) Prepare necessary general ledger account in skeleton form
SALES DAY BOOK AND ANALYSIS

The sales day book is a list of all invoices sent out to credit customers each day.
RECEIVABLE TOTAL BOOT SHOES

DATE INVOICE NAME OF CUSTOMER
LEDGER REF AMOUNT SALES SALES
1/JAN 247 ASIF 15 5000 3000 2000
SALES RETURN DAY BOOK:

Merchandise returned by the customers is known as sales return and allowance on credit.
66
PURCHASE DAY BOOK
The purchase day book is a list of all invoices received from credit suppliers each day.
PAYABLE TOTAL
DATE INVOICE NAME OF SUPPLIER
LEDGER REF AMOUNT
1/JAN 247 ASIF 15 5000
NOTE: purchases and purchase return may be shown in the same purchase journal with the
bracketed figure. Same is the case with sales day book and sales return day book.
CASH BOOK:
The cash book is a book of prime entry, used to keep a cumulative record of money received
and money paid out by the business via its bank account.
There are two main sides in the cash book:
 Receipt side
 Payment side
QUESTION NO.5
At the beginning of 1st September Atif Company had $900 in the bank and $400 at hand. During
September 2012, following receipt and payments are noted:
1 September: Cash sale receipt of $80
2 September: Payment from credit customer Abid $400 less discount allowed $20
3 September: Payment from credit customer $720
4 September: Payment from credit customer $1000 less discount allowed $40. Amount
deposited into bank
5 September: Cash sale: receipt of $150
6 September: sold goods to customer $450 and deposited into bank
7 September payment made to supplier $ 120
8 September: Cash received from sale of machine $200
9 September: Payment to supplier $130 less discount received $10
10 September: paid cheque to supplier $330 less discount received $20
11 September: Payment to telephone bill $400
12 September: Sold goods for cash $500
13 September: Payment of gas bills $280
14 September: Payment of $1500 for new plant and machinery
15 September: Sold equipment for $8000
16 September: Received cheque from customer $5000 and deposited into bank
Required: Prepare cash book
67
68
CONCEPT OF
MARGIN AND
MARKUP
69
70
CONCEPT OF PROFIT MARGIN AND MARKUP
QUESTION 1:
QUESTION 7:
Sales price is Rs.140,000
Sales price is Rs.15,000 QUESTION 13:
Profit margin is 15%
Profit markup is 15%
Calculate profit. Profit is Rs.16,000
Calculate cost.
QUESTION 2: Calculate sales.
QUESTION 8:
Sales price is Rs.340,000
Sales price is Rs.65,000 QUESTION 14:
Calculate profit. Profit is Rs.56,000
Calculate cost.
Calculate cost.
QUESTION 3: QUESTION 9:
Sales price is Rs.90,000 Cost price is Rs.105,000 QUESTION 15:

Profit margin is 20% Profit markup is 25%
Profit is Rs.76,000
Calculate cost. Calculate sales.
Calculate cost.

Profit margin is 15% Profit markup is 20%
Profit is Rs.296,000
Calculate cost. Calculate profit.
Calculate sales.

Profit markup is 10% Profit margin is 30%
Profit is Rs.296,000
Calculate profit. Calculate profit.
Calculate cost.

Profit markup is 15% Profit margin is 15%
Cost price is Rs.175,000
Calculate profit. Calculate sales.
Calculate sales.
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72
SALES TAX
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74
SALES TAX
Sales tax is an indirect tax levied on the sale of goods and services. It is usually administered by
the local tax authorities.
Sales tax is a cumulative tax, collected at various stages of a product’s life. Finally it is borne by
the final consumer.
INPUT AND OUTPUT SALES TAX
Registered business charge output sales tax on sales and suffers input sales tax on purchases.
I.e. sales tax charged (or collected) on goods and services sold by a business are referred to as
output sales tax. Sales tax paid (or suffered) on goods and services bought by a business are
referred to as input sales tax.
ACCOUNTING FOR SALES TAX
Sales tax charged on sales is collected on behalf of the tax authorities; hence it’s not the
revenue of the company. Therefore tax charged is accounted for as sales tax liability.
For example, if a business sells goods for Rs.600 plus sales tax Rs.90, i.e. for Rs690 total price,
the sales account should only record the Rs.600 excluding sales tax.
DEBIT: CASH OR TRADE RECEIVABLES 690

CREDIT: SALES 600
CREDIT: SALES TAX PAYABLE (OUTPUT SALES TAX) 90
For example, if a business purchases goods on credit for Rs.400 plus sales tax Rs.60, the
transaction would be recorded as follows.
DEBIT: PURCHASES 400

DEBIT: SALES TAX PAYABLES (INPUT SALES TAX) 60
CREDIT: TRADE PAYABLES 460
GROSS AND NET PRICE FOR SELLER:
Gross price paid by purchaser = net price received by seller + sales tax
144 = 120 + 24
ILLUSTRATION:
The closing balance at the end of an accounting period for MALANG COMPANY, sales tax
control account is $12,573 CR.
i. This means that $12,573 is owed by ___________ to __________ (complete the blanks)
ii. Does the balance represent an asset or liability for MALANG COMPANY?
Asset / liability (circle the correct answer)
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QUESTION 1: QUESTION 7: government where VAT @
Gross price of product A is Price of product A (Incl. of 17%. Prepare sales tax
Rs.50,000 tax) is Rs.30,000 account.
Vat @ 16% Vat @ 17%
Calculate sales tax. Calculate net price. QUESTION 13:
Goods purchased with a
QUESTION 2: QUESTION 8: net price of Rs.655,000
Price of product Z (incl. of Gross Price of product X is and sold at gross price of
tax) is Rs.60,000 Rs.38,000 Rs.800,000. Calculate the
Vat @ 17.5% Vat @ 17.5% amount payable to/
Calculate sales tax. Calculate net price. receivable from
government where VAT @
QUESTION 3: QUESTION 9: 16%.Prepare sales tax
Price of product B (Excl. of Sales tax of product X is account.
tax) is Rs.90,000 Rs. 8,000
Vat @ 16.5% Vat @ 17% QUESTION 14:
Calculate sales tax. Calculate net price. Goods purchased with a
net price of Rs.755,000
QUESTION 4: QUESTION 10: and sold at gross price of
Net Price of product B is Sales tax of product Y is Rs. Rs.450,000. Calculate the
Rs.190,000 82,000 amount payable to/
Vat @ 15% Vat @ 15% receivable from
Calculate sales tax. Calculate gross price. government where VAT @
17%. Prepare sales tax
QUESTION 5: QUESTION 11: account.
Net Price of product B is Sales tax of product A is
Rs.690,000 Rs. 182,000 QUESTION 15:
Vat @ 16% Vat @ 15% Goods purchased and paid
Calculate gross price. Calculate net price. a sales tax of Rs.5000 and
sold at gross price of
QUESTION 6: QUESTION 12: Rs.50,000. Calculate the
Price of product A (Excl. of Goods purchased with a amount payable to/
tax) is Rs.690,000 gross price of Rs.55,000 receivable from
Vat @ 15% and sold at net price of government where VAT
Calculate gross price. Rs.80,000. Calculate the @17%. Prepare sales tax
amount payable to/ account.
receivable from
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Answers:
QUESTIONS ANSWERS
1 6,896
2 8,936
3 14,850
4 28,500
5 800,400
6 793,500
7 25,641
8 32,340
9 47,058
10 628,666
11 213,333
12 INPUT 7991, OUTPUT 13600, PAYABLE 5609
14 INPUT 128350, OUTPUT 76500, RECEIVABLE 51850
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PETTY CASH BOOK
78
PETTY CASH BOOK
Petty cash book is one of the books of prime entry in which small payments are recorded.
Important points:
o Petty cash vouchers are prepared by petty cashier
o It is prepared against the receipts
o The payment can be made to employees or suppliers
o Petty cash vouchers are maintained which contains the following details;
 Nature of expenses
 Date
 Amount
 Signature of receiving person
o Petty cash book follows the imprest system
o Specific amount is maintained at the start of every month called float amount/ imprest
amount
o In order to maintain the float amount certain amount is replenished/ top up at the start
of every month
o IOU is considered as cash
QUESTION 1:
United traders established petty cash fund imprested system by issuing cheque of R$. 5,000 on
January 1 2013. The following payments were made during the month from the fund:
1 January: Paid for entertainment R$. 600 including 17% sales tax
5 January: Payment for stationary R$. 450
7 January: payment for tea & coffee Rs.600
9 January: Payment for purchase of stationery Rs.750 excluding 17% sales tax
10 January: Paid for postages R$. 560 excluding sales tax at 17%
15 January: Paid for cartage R$. 220
25 January: Paid for transport R$. 230 including tax R$.34
26 January: paid for cartages Rs.550
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30 January: Paid for miscellaneous expense R$. 130
31 January: Paid to watchman R$. 134
Required:
a) Record the above transactions in petty cash book and enter the amount reimbursed on
February 1 2013.
b) Give entries in general journal for:
i. Establishment of fund on January 1 2013
ii. Payments made out of the petty cash
iii. Replenishment of the fund on February 1 2013
QUESTION 2:
ABC Company maintains the petty cash system. Float amount of petty cash fund is Rs.15,000.
Petty cash vouchers totaled Rs.4,500. What amount should be replenished?
QUESTION 3:
ABC Company maintains the petty cash system. Float amount of petty cash fund is Rs.20,000.
Cash left at the end of the day was Rs.3,000 and shows IOU Rs.1300. What amount should be
replenished?
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BANK RECONCILIATION
STATEMENT
81
82
BANK RECONCILIATION STATEMENT
Bank reconciliation is a comparison between the bank’s record (bank statement) and
company’s record (cash book) for bank balance (cash at bank).
REASONS FOR BANK RECONCILIATION:

There are three main reasons for bank reconciliation:
A. Errors
B. Bank charges or bank interest directly debited or credit to bank account
C. Timing differences
WHAT IS BANK STATEMENT?

Bank statement is sent by a bank to its customer. It is usually sent on a monthly basis. However
it may be sent on weekly or even daily basis depending on the volume of transactions. It
contains the following:
 Balance on account at the beginning of the period,
 Receipts into the account, and
 Payments from the account during the period; and
 The balance on account at the end of the period
TREATMENT OF DEBIT AND CREDIT IN “BANK STATEMENT” AND“CASH BOOK”:
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FORMAT OF BANK RECONCILIATION
ERRORS, DIRECT DEBITS/CREDITS AND TIMING DIFFERENCES:
CASH BANK
BOOK STATEMENT
UN ADJUSTED BALANCES xxx xxx
UN PRESENTED CHEQUES/ ISSUED CHEQUES NOT PRESENTED

FOR PAYMENTS/ OUTSTANDING CHEQUES LESS
CHEQUES DEPOSITED BUT NOT CLEARED/ UNCLEARED

CHEQUES/ CHEQUES DEPOSITED BUT NOT CREDITED/ ADD
OUTSTANDING LODGEMENTS/ DEPOSIT IN TRANSIT
BANK CHARGES DEDUCTED/DEBITED BY BANK/

NTEREST/SERVICE COMMISSION DEDUCTED BY BANK LESS
DISHONOURED CHEQUES/N.S.F/RETURNED CHEQUES LESS
DIRECT DEBIT/ STANDING ORDER PAID BY BANK LESS
INTEREST RECEIVED BY BANK/INTEREST CREDITED BY BANK ADD
DIRECT CREDIT/OUTSTANDING ORDER RECEIVED BY BANK ADD
DIRECT DEPOSIT BY A CUSTOMER ADD
ADJUSTED BALANCE xxx xxx
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QUESTION 1:
Comparison of cash book and bank statement of Mehmooda aunty revealed the following
information:
Balance as per cash book Rs.12, 000
Balance as per bank statement Rs.37, 000
1. Cheques deposited but not shown in bank statement Rs.15, 000
2. Cheque issued but not presented at bank Rs.32, 000
3. Direct deposit by a customer in a bank Rs.8, 000
4. Dishonored cheque Rs.1, 500
5. Bank service charges Rs.500
6. Profit given by bank Rs.2, 000
Required:
i. Reconcile the balances as per cash book and bank statement.
ii. Prepare adjusting entries.
QUESTION 2:
On comparisons of cash book (bank column) and the bank statement of Aslam bhai traders for
the month of July 2012, revealed the following:
1. Balance as per bank statement on July 31st 2012 was Rs.57, 000
2. Balance as per cash book on July 31st 2012 was Rs.43, 000
3. Cheques issued during July 2012 but not presented Rs.15, 000
4. Bank charges not entered in cash book Rs.500
5. Locker rent debited by bank not recorded in cash book Rs.3, 500
6. Profit credited Rs.1, 500 and tax debited Rs.150 by bank not recorded in cash book.
7. Cheques deposited on July 30, 2012 not shown in bank statement Rs.5, 000
8. Direct deposit by a customer Rs.6, 650
Required:
Prepare bank reconciliation statement as on July 31, 2012
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QUESTION 3:
Following information is collected from the books of “Hot weather Company”.
1. The balances of April 30, 2013 as per bank statement is Rs. 75, 000 the cash book shows
a balance of Rs. 99, 000
2. Un cleared cheques of Rs.30, 000
3. Cheques issued Rs.20, 000 issued but not presented in the bank for payment
4. Cheque No.3456 for Rs.58, 000 issued for advertisement expense was recorded in cash
book as Rs.85, 000
5. A customer’s cheque for Rs.30, 000 was returned with the bank statement marked N.S.F
6. Online payment made to Usman and Company for Rs.10, 900 but not recorded in the
cash book
7. Withholding tax on cash withdrawl Rs.100 shown in the bank statement.
Required:
I. Calculate the adjusted cash book balance.
II. Corrected bank reconciliation statement on April 30, 2013.
QUESTION 4:
On comparisons of cash book (bank column) and the bank statement of Gabloobhai traders for
the month of July 2012, revealed the following:
BALANCES
CASH BOOK 10,200
BANK STATEMENT 4,115
DEPOSIT IN TRANSIT 12,000

OUTSTANDING LODGEMENTS 5,500
BANK CREDITED Rs.500 markup and debited Rs. 85, bank charges not shown in the cash book.
Required:
I. What is correct cash book balance?
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QUESTION 5:
At 30th September 2006, the balance on the bank ledger account of RASHEEDA COMPANY was $
805.15 debit. A bank statement on 30th September 2006 showed RASHEEDA COMPANY to be in
credit by $ 1,112.30.
On investigation of the difference between the two sums, it was established that:
a) The cash receipts day book total recorded in the ledger account had been under cast by
$ 90
b) Cheques paid in not yet credited by the bank amounted to $ 208.20
c) Cheques drawn not yet presented to the bank amounted to $425.35
Required:
a) Show the correction to the bank ledger account
b) Prepare the statement reconciling the balance per bank statement to the balance per
the ledger account.
QUESTION 6:
On 31st January 2008 a business bank ledger showed a credit balance of $ 150 which did not
agree with the bank statement balance. In performing the reconciliation the following points
come to light.
Not recorded in the relevant cash day books $
Bank charges 36
Transfer from deposit account to current account 500
Not recorded on the bank statement

Un presented cheques 116
Outstanding lodgments 630
It was discovered that the bank had debited the business account with a cheque for $ 400 in
error. What was the original balance on the bank statement?
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QUESTION 7:
The cash book and bank statement of the business of Ghori khan reveal the following
information:
a) Cash at bank as per bank statement Rs.9820 overdraft as on December 10, 2012
b) Cash at bank as per cash book Rs.29650 as on December 10, 2012
c) Cheques were issued for the various payments of Rs.112400 but the cheques of
Rs.96400 were presented for payments.
d) Cheques of Rs.40250 were not cleared
e) Interest charged by bank Rs352 and bank services charges Rs.168 were not recorded in
the cash book
f) A customer’s cheque of Rs. 14700 was returned dishonored.
Required:
i. Calculate the adjusted balance of bank statement and cash book
QUESTION 8:
Comparison of cash book and bank statement of Naeem and Company for the month of March
2013 revealed the following:
a) Cash book shows the debit balance Rs.2050
b) Bank statement shows the debit balance of Rs.3500
c) A deposit of rs.5400 was made on March 31 was not yet shown in the bank statement
d) Un presented cheques totaled Rs.800
e) Cheques issued for Rs.420 was erroneously charged by the bank as Rs.520
f) Bank service charges of Rs.30 were not recorded by the company
g) A cheque for purchase of office supplies was drawn for Rs.230 but was recorded by the
company as Rs.320
h) A cheque of Rs.110 for travelling expense was not recorded by the company
i) A cheque of Asif and company for Rs.800 was returned by the bank marked N.S.F
Required:
Calculate the adjusted balance of bank statement and cash book
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QUESTION 9:
Bank statement shows the debit balance of Rs.8000. following transactions are not yet updated
in bank statement:
a) Cheques issued to suppliers but cheque for Rs. 15000 was not yet presented for
payment.
b) Cheques deposited in bank but not yet cleared amounting to Rs. 50000
c) Amount Rs.13000 was deposited into bank account but it is not yet recorded by bank.
Required:
What is the adjusted bank statement balance?
QUESTION 10:
M/S Ali sher’s Cash book showed a debit balance of Rs. 204,520, while the bank statement
showed a credit balance of Rs.163, 650 at 31 January 2014.
The following items were discovered causing the difference in cash book and bank balance.
i. Bank charges not entered in cash book Rs.520
ii. Chequesissued but not presented Rs.25,000
iii. Bank informed M/S Ali sher that bank overdraft facility has been sanctioned up to a limit
of Rs.15,000
iv. Note collected by bank, but remain unrecorded in the firm’s book Rs.46,000
v. Cheques deposited but not shown in the bank statement Rs.61,350
vi. Interest credited by bank, not recorded in cash book Rs.3,000
vii. N.S.F Cheques returned by the bank Rs.53,000
REQUIRED:
a. Prepare a bank reconciliation statement.
QUESTION 11:
The cash book of XYZ showed a balance in hand of $900. The bank statement showed a credit
balance of $1100. Cheques paid in but not yet credited to the bank statement were $250. The
UN presented cheques amounted to?
a) $450
b) $50
c) $250
d) $200
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QUESTION 12:
You have been asked to prepare the monthly bank reconciliation as at 30 th November 2013 for
your company Mentor trading Ltd. the company’s bank statement shows a credit balance of
$1698.50 and the cash book as overdrawn balance of $460.50.
During investigation you discover the following
a) Overdraft interest of $24.60 in the bank statement, has not been posted to the cash
book
b) Cheques issued amounting to $1600.40 have not yet appeared on the bank statement
c) A cheque received for $1906.00 was posted in the cash book for $1609.00
d) Bank charges of $25.00 were incorrectly posted to the wrong side of the cash book
e) A cheque for $120.60 was paid in, but has, not yet been credited on the bank statement
f) An intercompany bank transfer in favor of mentor trading for $456.80 was made direct
to the bank but not recorded in the cash book.
Required:
i. Calculate the adjusted balance of cash book and bank statement.
ii. What are the main reasons for the difference in balances?
QUESTION 13:
Following is the data of classic private Ltd. For the month of June 2015;
a) Balance as per the bank statement as on June 2015 was Rs.20,000 (debit)
b) On June 30 2015 a cheque amounting to Rs.1000 was deposited in the bank, journal
entry of which was made in cash book the same day. It appears in the bank statement
on July 5, 2015 at Rs.990
c) Cheques issued to parties but not presented for payment till June 30, 2015 are of
Rs.525, Rs.835 and Rs.900
d) Cheques amounting to Rs.9170deposited for collection, were not credited by the bank
till June 30, 2015
e) Interest in investment collected by the bank on June 30, 2015 Rs.955 not entered in
cash book
f) Bank charges amounting to Rs.90 for the month of June 2015 appeared in the bank
statement, which were not entered in the cash book
g) Cheques amounting to Rs.945 deposited with the bank for collection during the month
were dishonored
h) The bank has mistakenly debited the account of classic private ltd. By Rs.1000. the same
was reversed by bank on July 5, 2015
i) Balance as per cash book on 30 June 2015 was Rs.11,010 (credit)
Required: Prepare Bank reconciliation statement as at June 30 2015.
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ACCOUNT STATEMENT
SHAHZADA AND COMPANY
ACCOUNT NUMBER 1008-59373-534
FOR THE PERIOD 1 JULY 2015 TO 31 JULY 2015
DATE PARTICULARS DEBIT CREDIT BALANCE

1-Jul-15 OPENING BALANCE 21,340.0
1-Jul-15 PROFIT 621.0 21,961.0
1-Jul-15 WITHHOLDING TAX 62.0 21,899.0
9-Jul-15 CUSTOMER DEPOSIT 10,000.0 31,899.0
31-Jul-15 CLOSING BALANCE 31,899.0
SHAHZADA AND COMPANY

CASH BOOK
FOR THE PERIOD 1 JULY 2015 TO 31 JULY 2015
DATE PARTICULARS P/R BANK DATE PARTICULARS P/R BANK
ACCOUNT
1-Jul-15 BALANCE B/D 21,340.0 21-Jul-15 PAYABLE 9,000.0
9-Jul-15 CUSTOMER DEPOSIT 10,000.0
29-Jul-15 ACCOUNT RECEIVABLE 20,000.0
51,340.0 9,000.0
BALANCE C/D 42,340.0
51,340.0 51,340.0
1-Aug-15 BALANCE B/D 42,340.0
REQUIRED:
a) Prepare bank reconciliation statement for the month of July 2015

b) Pass adjusting entries
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CONTROL
ACCOUNT
93
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CONTROL ACCOUNT
INTERNAL CHECK:
Internal check is an accounting system that verifies and checks the accuracy of accounting
work. Simply we can say that the work of one employee can easily be checked by another.
It is sometimes also called “internal control”.
TYPES OF INTERNAL CHECK:

Following are the types of internal check:
 Trial balance
 Bank reconciliation
 Segregation of duties
 Authorization
 Reconciliation of control account (e.g. payable control account with purchase account)
Control account and ledgers may be prepared for various account balances such as wages,
salaries, interest expense, insurance expense, account receivables, account payables and etc.
but in this chapter we are more concern with two major control account;
 Account receivable
 Account payable
RECEIVABLES/TRADE RECEIVABLES:
Receivables can be broken down into trade receivables and non-trade receivables.
A trade receivable is a balance arising in the course of normal trading operations, when a
customer buys goods without paying cash for them straight away and who therefore owes
money to the business.
A non-trade receivable may arise from different types of transactions. For examples:
 Rent receivable
 Commission receivable
 Loan receivable
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THE AGE ANALYSIS OF RECEIVABLES:
The age analysis of debts is useful to a credit controller wishing to decide on which debt to
chase up.
An age analysis of receivables breaks down the customer balances on the receivables ledger
into different periods of outstanding debt.
This analysis splits up the total balance on the account of each customer across different
columns according to the dates of the transactions which make up the total balances.
Accounts may be classified in these categories:
Up to 30 days, 31 – 60 days, 61 – 90 days, over 90 days.
Note: An age analysis of receivables can be prepared manually or by computer.

Computerization does make the job a lot easier. This helps to decide what action to take about
older debts. The reasons for delay in debt recovery may be as follows:
 Perhaps some older invoices are still in dispute.

 Some customers are known to be in financial difficulties.
The ultimate responsibility of collection the debt on time lies on credit control department.
IRRECOVERABLE DEBTS
Some trade receivables may need to be written off as irrecoverable debts. Additionally, an
allowance for receivables may be created. Rather than affecting individual customer balances,
an allowance for receivables recognizes the fact that ordinarily a certain proportion of all debts
may not be collected. Following might be the reasons for writing off debts;
• The customer has gone bankrupt.
• The customer is out of business.
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• Dishonesty may be involved.
• Customers in another country might be prevented from paying by the unexpected
introduction of foreign exchange control restrictions by their country’s government during
the credit period.
For one reason or another, therefore, a business might decide to give up expecting payment
and to write the debt off.
An irrecoverable debt is a specific debt which is not expected to be repaid. Write off of any
irrecoverable debt will need authorization from senior official.
ACCOUNTING ENTRY FOR IRRECOVERABLE DEBTS:

DEBIT: RECEIVABLE EXPENSE/BAD DEBT EXPENSE/ IRRECOVERABLE DEBT
CREDIT: TOTAL RECEIVABLE ACCOUNT
QUESTION 1:
At 1st October 20X6 business had total outstanding debts of $8,600. During the year to 30
September 20X7:
a) Credit sales amounted to $44,000
b) Payments from various receivables amounted to $49,000
c) Two debts, for $180 and $420 (both including sales tax) were declared irrecoverable.
These are to be written off.
REQUIRED:
Prepare entries and control account of receivable.
IRRECOVERABLE DEBT AND SALES TAX:

A business may be able to claim relief from sales tax on the following irrecoverable debts:
o At least six month old (from the day of supply)

o Written off in the accounts of the business
These conditions will vary according to legislations.
Sales tax payable Debit 17.5

Irrecoverable debt Debit 100
Receivable Credit 117.5
ALLOWANCE FOR BAD DEBT:

When a business expects irrecoverable debts amongst its current receivable, but does not yet
know which specific debt will be irrecoverable, it is estimated on past experience it can make
an allowance for receivables.
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ACCOUNTING ENTRY:
DEBIT: RECEIVABLES EXPENSE
CREDIT: ALLOWANCE FOR RECEIVABLE
QUESTION 2:
REQUIRED:
a) Calculate the amount of bad debt expense reported in the profit and loss account?
b) PASS necessary entry for the provision of doubtful debt.
RECEIVABLE CONTROL ACCOUNT

OPENING BALANCE CASH RECEIVED
SALES DIISCOUNT ALLOWED
DISHONURED CHEQUE RETURN INWARDS
IRRECOVERABLE DEBTS
ACCOUNT PAYABLE
(CONTRA)
CLOSING BALANCE
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QUESTION 3:
Account receivable balance at 1st June 2014 was R$ 1200,000.
Sales during the year R$600,000
Discount received R$40,000
Dishonored cheque R$45,000
Discount allowed R$90,000
Return outwards R$60,000
Cash received from customer R$50,000
Debts written off as irrecoverable R$25,000
Required:
Calculate outstanding receivable balance at 31stJuly 2015.
QUESTION 4:
Contra with payables R$40,000
Required:
QUESTION 5:
Outstanding receivable balance at 1st January 2011 was R$ 500,000.
Return inwards R$40,000
Required:
Calculate outstanding receivable balance at 31st December 2011.
QUESTION 6:
Outstanding receivable balance at 1st January 2013 was R$ 800,000.
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Return inwards R$20,000
Required:
Calculate outstanding receivable balance at 31st December 2013.
QUESTION 7:
Required:
QUESTION 8:
Required:
QUESTION 9:
100
Account receivable at 31 December 2014 R$2000,000
Required:
Calculate outstanding receivable balance at 1stJanuary 2014.
QUESTION 10:
Account receivable balance at 1st January 2014 was R$ 500,000.
Required:
Calculate the sales for the period 2014.
QUESTION 11:
Cash sales R$400,000
Required:
Calculate the total sales for the period 2014.
QUESTION 12:
Cash sales R$400,000
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Credit sales R$400,000
Required: Calculate the amount of cash received from customer.
QUESTION 13:
Account payable balance at 1st January 2014 was R$ 1200,000.
Cash paid to supplier R$300,000
Return inward R$100,000
Account payable at 31 December 2014 R$2500,000
Required:
Calculate the amount of purchases during the period.
QUESTION 14:
Purchases R$ 500,000
Required:
Calculate the amount of cash paid to supplier.
QUESTION 15:
Cash purchases R$300,000
Cash paid to supplier R$300,000
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Required:
Calculate the amount of total purchases during the period.
QUESTION 16:
Abdul Gafoorbhai’s control account receivable opening balance Rs.7120. During the period
following transactions were performed:
o Sales made to customers on account amounted to rupees 52,500
o Cheques amounted to rupees were marked N.S.F Rs.1000
o Collection received from customers Rs. 52450
o Discount give to various customers during the period amounted to Rs.1250
o Goods amounted Rs.800 returned by customers
o Rs.300 were written off as irrecoverable
Required:Prepare Account receivable control account.
REASONS FOR CONTROL ACCOUNT:

Following are the various reasons of maintaining control account:
 Check accuracy of entries made in the personal account
 Assist in the location of errors
 A internal check where there is separation of bookkeeping duties
 A balance can be extracted quickly for producing trial balance and balance sheet
PERSONAL ACCOUNT:
Individual ledgers are also prepared for each customer these are also known as list of balances,
personal account and memorandum account. The purpose of maintain these personal
accounts are as follows:
o to deal with customers queries
o to prepare statements
o to monitor customer credit limit
o to match cash received with invoices
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104
CONTROL
ACCOUNT
RECONCILIATION
105
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CONTROL ACCOUNT RECONCILIATION
QUESTION 1:
During October ABC Company sells goods on credit to most of its customers. In order to control
its receivables collection the company maintains a receivable control account. In preparing the
accounts for the year to 30 October 2003 the accountant discover that the total of all the
personal accounts in the receivables ledger amounts to Rs.12802, whereas the balance on the
receivable account is Rs.12550. Upon investigation following errors were discovered.
a) Sales for the week ending 27 March 2003 amounting to Rs850 had been omitted from
the control account
b) A customer’s account balance of Rs.300 had not been included in the list of balances
c) Cash received of Rs.750 had been entered in a personal account as Rs.570
d) Discount allowed totaling Rs.100 had not been entered in the control account
e) A personal account balance had been under cast by Rs.200
f) A contra item of Rs.400 with the payable ledger had not been entered in the control
account
g) An irrecoverable debt of Rs.500 had not been entered in the control account
h) Cash received of Rs.250 had been debited to a personal account
i) Discount received of Rs50 had been debited to Abdul Gafoor’s receivable ledger account
j) Return inwards valued at Rs200 had not been included in the control account
k) Cash received of Rs.80 had been credited to a personal account as Rs.8
l) A cheque for Rs.300 received from a customer had been dishonored by the bank, but no
adjustment had been made in the control account
REQUIRED:
i. Prepare corrected receivable control account, bringing down the amended balance as at
1 November 2003
ii. Prepare a statement showing the adjustments that are necessary to the list of personal
account balances so that it reconciles with the amended receivables control account
balance
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QUESTION 2:
A business has a memorandum receivable ledger and a receivable control account, which is a
part of the double entry. The balance on the receivable control is $15,091. However the list of
receivables ledger balances totals $15,320.
The following errors are discovered:

a) A receivable paid $10 in cash. This has been correctly recorded in the receivable ledger,
but no entries have been made in the receivable control account.
b) One of the receivables had a credit balance of $60. However this has been included as a
debit balance in the receivable ledger total.
c) Return inwards of $35 have recorded in the receivable ledger, but not in the receivable
control account.
d) One page of the sales day has been under cast by $100.
e) When a sales invoice for $95 was entered in the receivable ledger, the figures were
transposed and shown as $59.
f) An error has been in totaling the list of receivable ledger balances, which has been
overcast by $90.
Required:
i. Reconciling the control account balances with the sum of the balances extracted from
the (memorandum) receivable ledger.
QUESTION 3:
On 30 June 2006 a schedule of debtors extracted from Coleman’s sales ledger totaled $15400
but the balance on the Sales Ledger Control was $15816.
The following errors were found later:
A. A debtor’s balance of $345 had been omitted from the list of debtors.
B. A discount allowed of $60 had been correctly recorded in the cash book but entered in
the customer’s account as $6.
C. The sales return day book had been under cast by $250.
D. A credit note of $150 issued to a customer was completely omitted from the books.
E. The discount allowed column in cash book was over cast by $125.
Required:
Reconcile the control account and individual account.
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QUESTION 4:
- The balance on the sales ledger control account at 31 December is Rs 18,800
-The balance on the sales ledger account at 31 December is Rs 15,500
On checking the accounts, you discover the following errors:

1. A sales invoice for Rs 2,500 has been completely omitted from the books.
2. A debtor’s account has been overstated by Rs 1,500
3. A balance of Rs 4,800 has been omitted from the list of debtors ledger balance at
31 December
Required:
a) Prepare amended sales ledger control account
b) Prepare statement to amend total of sales ledger balance
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CORRECTION OF
ERRORS
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CORRECTION OF ERRORS
TYPES OF ERRORS:
There are five main types of errors. Some errors may be corrected through the journal entries
while others required the use of suspense account. Following are the five major types of errors;
 Error of Transposition
 Error of Omission
 Error of principle
 Error of commission
 Compensating error – misposting, reversal, original entry
ERROR OF TRANSPOSITION: When two digits are accidently replaced with each other while
recording. Such mistake is called error of transposition for e.g. cash received was Rs950 but
accidently it was recorded as Rs905. This error is occurred at one side of either balance debit or
credit.
ERROR OF OMISSION: When whole transaction is omitted to record in the books. In spite of
this matter the debit and credit side of the trial balance will be balanced. Such error is called
error of omission. Omission may be partial and complete.
ERROR OF PRINCIPLE: Where any such entry is passed which is against the rules or principles
of accounting for example any revenue nature expenditure is charged to capital expense.
Where the owner withdrew cash for personal use and accountant recorded as sales return
(reduced cash sales) this is also known as error of principle.
ERROR OF COMMISSION: Where electricity expense was paid and it was charged to the rent
expense or the total of sales day book is wrongly casted, because of which account receivable
and sales are recorded in general ledger with wrong amount. These errors are called error of
commission.
COMPENSATING ERROR: When two transposition errors that equate the trial balance is
called the compensating error. For example due to the transposition error debit side is lower
with the amount Rs.400. likewise the credit side is also lower by Rs.400 due to the transposition
errors
Compensating errors are errors which are, coincidentally, equal and opposite of one another.
Two types of compensating error are:
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i. Error of reversal. In this case debit and credit entries have been reversed.
ii. Error of transposition. This is where numbers in the amount are transposed, eg.54
becomes 45. If the incorrect amount is posted on both sides, this will not be detected.
Errors of reversal:
An error of reversal occurs when the debit and credit postings are reversed.
This will not cause an imbalance if both entries are reversed. For instance, a posting which
should have been Debit Bank; Credit Sales is posted as Debit Sales; Credit Bank. The trial
balance will still balance.
Errors of original entry:

An error of original entry means that the transactions were incorrectly recorded in a day book,
leading to incorrect ledger postings.
Cash received of $3500 is entered in the cash received day book as $3000. This account is then
debited to bank account and credited to receivable account in the ledger with $3000. As both
the debit and credit entries are incorrect.
NOTE: Following errors may be detected from the trial balances, while other errors may not be
detected from trial balance. However it may be detected through other ways for example bank
reconciliation or control account reconciliation
 Errors of transposition (one side)
 Errors of omission (if the omission is one sided)
 Errors of commission (if one-sided, or two debit entries are made)
QUESTION 1: Listed below are the errors. Pass the general entries for correction of error.
a) A business receives an invoice for Rs.250 from a supplier which was omitted from the
books entirely
b) Repairs worth Rs.150 were incorrectly debited to the non-current assets (machinery)
account instead of the repairs account.
c) The bookkeeper of a business reduces cash sales by Rs.280 because he was not sure
what the Rs.280 represented. In fact it was a withdrawal on account of profit.
d) Telephone expenses of Rs.540 were incorrectly debited to the electricity account.
e) A page in the sales day book has been added up to Rs.28, 425 instead of 28, 825.
REQUIRED:
a) Identify the type of errors
b) Prepare correcting entries
c) State the impact of (a), (b) and (c) on profit and loss account and statement of financial
position before and after correction of errors
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QUESTION 2:
Following errors were found before closing the books of Abdul Karim brothers:
a) Purchase of stationary for Rs.1200 has been recorded as purchases.
b) Construction as addition of office building for Rs.30,000 was wrongly debit to repair
expense account
c) Defective goods returned by a customer for Rs.2, 000 were charged / debited to sales
account.
d) Depreciation expense on machinery was overcharged by Rs.1, 000.
e) Rs.600 was paid for repair of Abdul karim’s home T.V set and debit to general expense
account.
Required: Prepare Correcting entries.
QUESTION 3:
The following errors were discovered before closing the books of ZubaidaApa.
i. Office supplies amounting to Rs.1, 500 were debited for purchase account
ii. Construction as addition of office building for Rs.50, 000 was wrongly debited to repair
expense account
iii. Withdrawal by proprietor of Rs.8, 000 had been debited to salaries expense account
iv. Purchase of office furniture on account for Rs.6, 500 was recorded and posted as
Rs.5, 600.
v. Sales of office equipment Rs.2, 000 was credited to sales account.
Required: Prepare Correcting entries.
QUESTION 4:
Following errors were found before the closing of books:
i. Purchase of office furniture for Rs.12, 000 cash was recorded in office equipment
account
ii. Wages amounting to Rs.1, 500 were debited to repair expense account.
iii. Purchase or merchandise for Rs.40, 000 on account were recorded and posted as
Rs.4,000
iv. Sale of old furniture for Rs.3, 500 cash was charged to sales account.
Required: Prepare entries in general journal to rectify the above errors
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SUSPENSE ACCOUNTS
Suspense account is used to correct some errors, are also opened when it is not known
immediately where to post an amount. When the mystery is solved, the suspense account is
closed and the amount correctly posted using a journal entry.
It is a temporary account which can be opened for a number of reasons. These reasons are
as follows:
o A trial balance is drawn up which does not balance (i.e. total debits do not equal
total credits)
o Where a bookkeeper of a business knows where to post the credit side of
transaction, but does not know where to post the debit side (or vice versa). For
example a cash payment might be made and must obviously be credited to cash. But
not know for which the payment is made, so will not know which account to debit.
In both cases a temporary suspense account is opened up until the problem is solved.
Where accountants find one of the above reasons and an error has occurred which results in an
imbalance between total debits and credits.
For example: Suppose an accountant draws up a trial balance and finds that, total debits exceed
total credits by $207.
For the time being he opens suspense account and enters a credit of $207 in it. Subsequently it
was discovered that accidently accountant failed to make a credit of $207 to sales. Now the
correction will be as follows:
Suspense account (Dr) 207
Sales account (Cr) 207
QUESTION 5:
A business extracts a trial balance and finds that credits exceed debits by $4,420.
Subsequently the following errors are discovered:
a) The bookkeeper made a transposition error in recording sales. Instead of entering
$37,453, he entered $37,543. However receivable were posted correctly.
b) The monthly salaries of $ 5,250 were correctly entered in the cash book but the other
half of the double entry was not made.
c) A customer paid $460. This was correctly recorded in the cash book but was debited to
the sales ledger control account.
Required: Pass correcting entries and also prepare suspense account.
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QUESTION 6:
A trial balance does not balance and the bookkeeper posts the difference to a suspense
account. He then finds the following errors which clear the suspense account when they
corrected.
i. Opening inventory had been understated by $ 10,000
ii. A credit note for $200 had been posted to sales return but not to the receivables control
account.
Required:
a) What was the balance on the suspense account before these errors were corrected?
QUESTION 7:
At the end of the year James Bond & Company, an imbalance in the list of account balances was
revealed which resulted in the creation of a suspense account with a credit balance of $1040.
Investigation revealed the following errors.
i. A sale of goods on credit for $1,000 had been omitted from the sales account
ii. Delivery and installation costs of $240 on a new item of plant had been recorded as a
revenue expense
iii. Cash discount of $150 on paying a supplier ( Zardari), actually having an invoice of $1000
had been recorded, even though the payment was made outside the time limit.
iv. Prepaid of rent at the end of the period of $240 had been ignored.
v. A purchase of raw materials of $350 had been recorded in the purchases account as
$850.
vi. The sales credit note for $230 which had been entered correctly in the account of the
receivable concerned, but included/credited with purchase returns in the general
ledger.
REQUIRED:
a) Prepare journal entries to correct each of the above errors.
b) Open the suspense account and show the corrections
c) Prior to the discovery of the errors, company’s net profit for the year at $18,500.
Calculate the revised net profit figures after the correction of the errors.
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QUESTION 8:
TRIAL BALANCE:
As at the end of 30 March 2007, Madam Durganda, has the following balances on its ledger
accounts.
ACCOUNT BALANCES
BANK LOAN 12,000
CASH 11,700
CAPITAL 13,000
RATES 1,880
TRADE PAYABLES 11,200
PURCHASES 12,400
SALES 14,600
SUNDRY PAYABLES 1,620
RECEIVABLES 12,000
BANK LOAN INTEREST 1,400
OTHER EXPENSES 11,020
VEHICLES 2,020
TOTAL 104,840
On March 31 the business made the following transactions.

a) Bought materials for $1000, half for cash and half on credit.
b) Made $1040 sales, $800 of which were of credit
c) Paid wages to shop assistants of $260 in cash.
Required:
You are required to draw up a trial balance showing the balances as at the end of 31 march
2007.
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QUESTION 9:
TRIAL BALANCE AND SUSPENSE ACCOUNT:
The following is the initial trial balance for a RaziaKhala for the year ended 30 June 2009:
BALANCES DEBIT CREDIT
ADMINISTRATIVE EXPENSES 7,250
CASH AT BANK 3,280
CAPITAL 60,000
DELIVERY EXPENSE 1,210
PAYABLES 1,530
RECEIVABLES 20,200
DISCOUNTS ALLOWED 16,840
DISCOUNTS RECEIVED 1,860
DRAWINGS 14,600
MACHINERY 35,040
VEHICLES 12,420
PURCHASES 105,040
SALES 186,070
WAGES 33,910
SUSPENSE ACCOUNT 330
TOTAL 249,790 249,790
Since drawings up the initial trial balance a number of errors have been discovered:
I. Administrative expenses of $340 paid by cheque have been omitted from the accounts
completely.
II. Purchases of $180 were entered on the wrong side of the account although the entry to
the bank account was correctly made.
III. Discounts allowed of $690 were credited to receivables and debited to both the
discounts allowed account and the discount received account
Required:
a) Pass correcting entries
b) Redraft trial balance.
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QUESTION 10:
Give entries in general journal to correct each of the following errors, and also prepare
suspense account. Trial balance of the company shows the suspense account debit balance of
Rs.22, 500:
i. Return of defective goods by a customer amounting to Rs. 1, 000 was charged / debited
to sales account.
ii. Purchase of office equipment for Rs. 10,000 was recorded and posted as Rs.1, 000.
iii. An amount of Rs.2, 000 paid to Raees& Co. was incorrectly debited to the amount of
Raees& Brothers.
iv. Company accountant identified that while recording the transaction, he has mistakenly
credited the sales Rs.10, 000 twice.
v. Return of goods by a customer Rs.2, 500 was appropriately charged to receivable
account, but sales return was not recorded.
vi. Payment of rent expense Rs.5, 000 was credited as rent income.
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MCQS PRACTISE QUESTIONS FOR CONTROL ACCOUNT RECONCILIATION:
QUESTION 1:
In the receivables ledger of X Company, the account of Y Company has a credit balance of
$5000. Which of the following is a plausible explanation for this?
A. Y Company has been sent out an invoice for $5000

B. Y Company supplied goods to X Company and these have been correctly recorded by X
Company
C. Y Company has paid X Company $5000 twice in error
D. Y Company has a overdue balance of $5000 owing to X Company
QUESTION 2:
Which of the following errors would be possible reason for a trial balance failing to agree?
A. Sales $500 entered correctly, but entered as $1500 in the receivable ledger control
account
B. A purchase of $550 on credit not being recorded
C. Cash wages being recorded as a debit: cash $250, credit: wages$250
D. A non-current asset purchase $750 being recorded as debit: machinery repairs $750,
credit: cash $750
QUESTION 3:
A suspense account shows a credit balance of $130. This could be due to:
A. Omitting a sale of $130 from the receivable ledger
B. Recording a purchase of $130 twice in the purchase account
C. Failing to write off an irrecoverable debt of $130
D. Recording an electricity bill paid of $65 by debiting the bank account and crediting the
electricity account
QUESTION 4:
The following entries appeared in the receivables ledger control account for June. Balance b/ f
1st June $7500, sales $20000, receipts from customers $8000, discount allowed $400,
irrecoverable debts written off $500. What was the balance at 30th June?
A. $3600
B. $19400
C. $19600
D. $18600
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QUESTION 5:
If a purchase return of $48 has been wrongly posted to the debit of the sales returns account,
but has been correctly entered in the supplier’s account, the total of the trial balance would
show?
A. The credit side to be $48 more than the debit side

B. The debit side to be $48 more than the credit side
C. The credit side to be $96 more than the debit side
D. The debit side to be $96 more than the credit side
QUESTION 6:
The trade receivables control account has a balance of $4,214. The total on the list of individual
customer balances is $4,890
Which of the following would explain the difference?
a) A customer owing $676 has been omitted from the list of customer balances
b) A contra with the payables ledger for $676 has been accounted for in the list of
customer balances but not accounted for in the control account.
c) The sales day book is understated by $676
d) An irrecoverable debt of $676 has been written off a customer’s individual account but
has not yet been written off the control account
QUESTION 7:
At the end of the month Adam smith’s payables ledger balances total $3,105. This total does
not agree with the closing balance on his trade payables control account. The following errors
were found:
1) A purchase invoice for $350 was entered on the wrong side of a supplier’s account in
the payable ledger
2) A contra entry of $169 was entered in the control account but not in the receivables and
payables ledgers.
What should be the total of the balances on his payable ledger after correcting the errors?
A. $3,455
B. $3,636
C. $3,805
D. $3,974
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QUESTION 8:
The total balance in a company’s receivable ledger is $800 more than the debit balance on its
receivables control account. Which one of the following errors could by itself account for the
discrepancy?
A. The sales day book has been under cast by $800

B. Settlement discounts totaling $800 had been omitted from the general ledger
C. One receivables ledger account with a credit balance of $800 has been treated as a
debit balance
D. The cash received day book has been under cast by $800
QUESTION 9:
Discount received of $150 have been debited to discount allowed.
How will this affect the trial balance?
A. Debits will be $300 more than credits

B. Credits will be $300 more than the debits
C. Debits will be $150 more than credits
D. The trial balance will not be affected
QUESTION 10:
Azam has prepared the following reconciliation of the balance on the receivables ledger control
account in her general ledger to the total of the list of balances on customer’s personal
accounts:
Balance on general control account 35,776
Less: balance omitted from list of balances 452
35,324
Add: sales day book under cast 900
Total of list of balances 36,224
What is the correct balance of receivables to be reported on the statement of financial

position?
A. $35,324
B. $35,776
C. $36,224
D. $36,676
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RECORDING PAYROLL
TRANSACTIONS
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RECORDING PAYROLL TRANSACTIONS
The payroll function in an organization is important:
 The employer’s obligations to pay wages are carried out.
 The employer’s obligations as a tax collector are undertaken efficiently.
People pay tax on what they earn, as income tax. This tax is collected by employer when
employee is paid. The same is true for national insurance, and benefit contribution.
Income tax is the system whereby the employer collects tax on behalf of the government as the
employee is paid.
EMPLOYER’S LEGAL RESPONSIBILITIES TO COLLECT INCOME TAX:

Employer’s has the following duties related to income tax in payroll system:
o Operate the income tax system for all covered by it.
o Maintain the necessary records.
o Pay the income tax and benefits contribution collected from employees to the tax
authorities every month/ years.
o Let the tax officer inspect the records
o Submit end of years returns (income tax returns)
o Provide employees with pay slips with the details of tax deducted and benefit
contribution deducted and to give them an annual statement showing deductions
o Maintain for three years, at a minimum, after the end of a tax year.
PAYROLL PROCESSING:
The main requirements of a payroll processing and accounting system are as follows:
1) Accuracy
2) Timeliness
3) Security
Accuracy: Accuracy is very important:
o So that people get paid what they are owed.
o The government receives what it is legally entitled to
o The employer’s cost information is appropriate (labor cost)
Note: Wages paid and tax collected information should be accurate to the nearest penny.
Timeliness: Timeliness is important due to the following factors;

o Employees should not suffer stress caused by being short of cash
o Employees morale should not suffer because of the fear that the employer has not got
the money to pay their wages
o So that the government requirements for prompt payment are satisfied
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Security: Security is important element in payroll system processing due to the following
reasons:
o Payroll data relating to employees is kept confidential and is only disclosed to those
authorized by the employee, or to those who have a legal right to see it.
o Cash and cheques are not stolen, and the payroll system is safe from fraud.
IMPORTANCE OF PAYROLL FUNCTION:

a) Employees depend on the timeliness and accuracy of the processing
b) The government has a direct interest in the collection of taxes and benefit
contributions through the payroll system
c) The wages and salaries bill is a large component of an entity’s total costs
PERSONNEL DEPARTMENT:
Personnel department is generally responsible for recruiting, engaging and setting wages and
salary level of employees, but is not involved in day to day payroll process.
Following data is held by payroll department:
a) Personnel record card: this includes the various personal details and summary
employment history of the employees
b) Record of attendance card: Attendance card of employees are kept by personnel
department to keep record of a sick leaves, holidays.
PAYROLL FUNCTIONS:
Payroll function comprises of the following task:
a) Calculation of gross pay
b) Calculation of tax, national insurance, and other deductions
c) Preparing pay slips
d) Distributing pay slips
e) Preparing payroll summary
GROSS PAY AND BASIC PAY:

NET PAY = GROSS PAY – DEDUCTIONS
Gross pay includes:
o Basic pay
o Overtime pay
o Commission
o Bonuses
o Profit oriented bonuses
o Sick pay
o Holiday pay
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o Medical allowance
o Travelling allowances
Deductions include:
o Income tax
o Benefits contributions (for welfare of society)
o Gratuity funds
o Pension schemes
BASIC PAY:
Basic pay is the rate for the job, and is what you expect to receive for a normal period’s work
irrespective of overtime and so forth.
There are number of ways of calculating basic pay and these are described below:
o Fixed rate per period
o Hourly rate
o Piece work
o Piece work hour
FIXED RATE PER PERIOD:

Where the employee received a fixed particular amount for a particular period is known as
“fixed rate per period”. Generally basic pay is decided on annual basis and is paid by employer
on monthly basis i.e. salaries are apportioned.
QUESTION 1:
Your contract of employment states that you are to receive an annual salary of $9000. You join
on 1st January 2002. You are told that the first three months of your employment are a
probationary period, and that from 1st April 2002 your annual salary will increase by 10%. You
are informed on 20 May 2002 that everyone in the company is to receive a pay rise: yours work
out at $600 per year in addition to the 10% rise you have already received, effective from 1 July
2002.
REQUIRED:
a) What will be your basic pay for each of the following months
i. January 2002
ii. May 2002
iii. July 2002
b) At 31st December 2002, how much basic pay would you have received since 1 st January
2002?
c) Assuming no further rises, how much basic pay could you expect to receive in the 12
months to 31st March 2003
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HOURLY RATE
Some workers are paid on hourly basis i.e. the more hours they work the more they are
rewarded with basic pay. For example if an employee work for 40 hours and is paid at the rate
of $5 per hour then the total salary received by employee is $200.
QUESTION 2:
Ten of the employees signed an agreement to work on hourly basis at the rate of Rs. 450 per
hour. Employees worked during the month of March for the following hours:
Week 1 40 hours
Week 2 38 hours
Week 3 42 hours
Week 4 36 hours
Required: Calculate the total basic salaries of employees for the month March.
PIECEWORK SYSTEM
An alternative to hourly pay is piecework where employees are paid according to the number
of good units of production. Generally in piecework system minimum wage rate is offered so
that the employees do not suffer loss of earnings when production is low due to other factors.
In a piecework scheme, wages are calculated by the following formula.
Wages = units produced x rate of pay per unit
QUESTION 3:
An employee is paid $2 of each unit produced. Weekly production by employees is as follows:

WEEK PRODUCTION
1 40
2 50
3 60
4 70
REQUIRED: Employee is rewarded with a guaranteed wage rate of Rs.500 per month. Calculate
the total amount received by employee?
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QUESTION 4:
A business has a piecework system for remuneration of its employees. The system works as
follows;
 Rs.3.20 per unit up to 40 units per week.
 Rs.3.50 per unit between 41 and 50 units per week
 Rs.3.80 per unit over 51 units per week
There is a guaranteed weekly wage of Rs.120 per week.
One employee has produced the following amounts for the last two weeks;
Week 1 35units
Week 2 44units
What is the employee’s gross wage for week 1 and week 2?
PIECEWORK HOURS:
It is a system in which employees are specifically paid for hours worked to produce units. In
this system hours worked and units produced both are considered.
QUESTION 5:
An employee is paid $3 per piecework hour produced. In a 40 hour week the employee
produces the following output.
Piecework time allowed

Per unit
15 units of product X 0.5 hours
20 units of product Y 2.0 hours
What is the employee’s pay for the week?
BENEFITS OTHER THAN BASIC PAY:

Other benefits which are paid to the employees are as follows:
 Overtime
 Commission
 Bonuses
OVERTIME:
Overtime comprises hours worked over a standard working week. The overtime rate can be
based on the hourly rate, or can be fixed by mutual agreement. Generally higher rate per hour
is given to employee for overtime hours worked. Overtime rate may be given as follows:
o Basic rate of $4 per hour. The overtime premium is time and a half (i.e. $6)
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o Basic rate of $4 per hour. The overtime premium is double times (i.e. $8)
o Basic rate of $4 per hour. The overtime premium is quarter times (i.e. $5)
QUESTION 6:
Madam Razia works in a library. She is paid on an hourly basis. Her basic rate for the 35 hours
she normally works a week is $6 per hour. The first five hours overtime are paid at time and a
quarter. Any more overtime hours worked are paid at time and a half.
In the week ended 3rd August 2002 she worked a total of 47 hours.
REQUIRED:
a) For the week ended 3 August 2002 calculate Madam Razia’s basic pay and the overtime
payments she receives.
QUESTION 7:
Madam Durganda is an hourly paid employee. Her basic rate is $5 per hour for daytime shifts,
$7.50 per hour for night time shifts, $7.50 per hour for overtime (i.e. hours in excess of 40
hours a week) except weekends when the rate is always $10 per hour.
How much would she earn, assuming an 8 hours a day.
a) For a 40 hour week of day time shifts with no overtime?
b) For a 40 hour week if one day is worked on Saturday?
c) For a 40 hour week of nightshifts and an additional four hours overtime?
BONUSES:
A bonus is an extra payment mad to an employee (or a group of employees) as a reward for
results achieved.
Generally bonuses are offered to motivate employees to work harder and to achieve some
target. Normally bonuses are offered to sales and production department employees.
COMMISSION:
Commission is payment made to an employee (or agent) based on the value of something
(usually sales) the employee has generated. Commission is generally based on sales, and in
majority cases commission is calculated after excluding sales tax amount.
Examples of commission are as follows:
o Commission can be straight percentage on sales. Example 10% of sale
o Commission can be on a sliding scale example up to Rs.5000 sales 5 % and above Rs
5000 sales 10% commission
o Commission can be increase with the total volume of sales example: sales up to 100,000
5 % commission and over and above 100,000, 10% commission.
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QUESTION 8:
The shampoo company sells cartons of shampoos for $100 each. The company employs two
sales staff. Each is paid commission, but on a different basis.
a) Madam Rasheeda receives no commission on the first hundred cartons of shampoo she
sells a week, 10% commission on cartons sold in excess of 100 but below 200, 15% on
cartons sold in excess of 200 but below 300 and 20% on cartons sold in excess 300. She
receives her commission at the end of the month the sale is made. She receives basic
annual salary $9000 per year.
b) Madam farida receives a basic salary of $4500 per year and a straight 7.5% commission
on all he sells.
During the month Madam Rasheeda sold 120 cartons in the first week, 340 in the second week,
30 in the third week and 95 in the fourth week. In the same month Madam Farida sold 500
cartons.
Required:
Calculate the basic salary and commission of both employees for the month of august.
PAYROLL DEDUCTIONS:
Income tax and benefit contributions are normally deducted from an employee’s gross pay
before the net pay is handover.
INCOME TAX – TAX DEDUCTED AT SOURCE:

Tax deducted at source covers all the employees of an organization. Employers deduct tax from
employees at source and pay it over on their behalf to the tax authorities.
BENEFIT CONTRIBUTIONS:
Benefit contributions are paid or deducted for welfare benefits such as:
o Unemployment benefits
o Sickness benefits
o The state pension schemes
o The state health service in some countries
Gross pay – income tax – employees contribution = employee’s net pay
Gross pay + Employer’s benefit contribution = Employer’s payroll cost
PENSION SCHEME:
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Pension contributions to company pension schemes can come from two sources:
 The employer only (non-contributory pension scheme)
 The employer and employee (contributory pension scheme)
QUESTION 9:
Abc Company runs a company pension scheme for all its employees, contributing a sum equal
to 10% of each employee’s gross salary into the scheme. Each employee has to contribute 5%
of his or her gross salary to the scheme.
 MR.X earns $25,000 per annum
 MR.Y earns $21,000 per annum
Required:
In a month how much will:
a) Mr. X and Mr. Y earn gross?
b) Mr. X and Mr. Y contribute, out of salary, to the company pension scheme?
c) Abc Company contributes to the company pension scheme on Mr. X and Mr. Y?
QUESTION 10:
An employee is paid at an hourly rate of Rs.7 for a 35 hour week with any overtime hours paid
at time and a half. During week 22 the employee worked for 41 hours.
The Income tax to be deducted was Rs. 55, the employee’s benefit contributions for the week
were Rs.28, and the employer’s benefit contributions were Rs.29.
What is the employee’s net pay?
QUESTION 11:
An employee is paid at an hourly rate of Rs.7 for a 35 hour week with any overtime hours paid
at time and a half. During week 22 the employee worked for 41 hours.
The Income tax to be deducted was Rs. 55, the employee’s benefit contributions for the week
were Rs.28, and the employer’s benefit contributions were Rs.31.
What is the labor cost to the employer for this employee for the week?
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PERFORMA OF WAGES AND SALARIES CONTROL ACCOUNT:
WAGES CONTROL ACCOUNT
CASH -- NET WAGES GROSS WAGES
INCOME TAX PAYABLE EMPLOYER'S BENEFIT CONTRIBUTION
BENEFIT CONTRIBUTION -- EMPLOYER EMPLOYER'S PENSION CONTRIBUTION
BENEFIT CONTRIBUTION -- EMPLOYEE OTHER STAFF COSTS
PENSION FUND LIABILITY -- EMPLOYER
PENSION FUND LIABILITY -- EMPLOYEE
NOTE 1: Do remember that organization wages expense includes the following formula:
Employer’s /staff cost = gross wages + employer’s benefit contribution + employer’s pension contribution
NOTE 2: Employer’s and employee’s contribution fund and pension fund is the liability for the
organization towards the government.
NOTE 3: Employee’s benefit contribution and pension fund is deducted from its gross wages
and is a liability to the government.
QUESTION 12:
Madam Farida ltd Company pays its worker every month, the payroll details are as follows:
GROSS WAGES 31,200
EMPLOYER'S BENEFIT CONTRIBUTION 2,000
NET WAGES PAID TO WORKERS 25,000
DEDUCTIONS FOR INCOME TAX MADE FROM WORKER'S WAGES 4,000
DEDUCTION FOR EMPLOYEES BENEFIT CONTRIBUTIONS 1,000
EMPLOYEES CONTRIBUTION TO THE PENSION FUND 1,200
EMPLOYERS CONTRIBUTION TO THE PENSION FUND 1,500
Assume there was $50,000 in the bank at the beginning of the month.
Required: Pass payroll entries and prepare wages control account and staff control account.
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QUESTION 13:
ZubaidaApa has the following payroll details for the month:
GROSS WAGES:
ADMINISTRATIVE STAFF 102,531
SALES AND MARKETING 226,704
PRDUCTION STAFF 1,067,895
EMPLOYER'S BENEFIT CONTRIBUTION 104,782
EMPLOYEES BENEFIT CONTRIBUTIONS 83,829
INCOME TAX DEDUCTIONS 351,826
NET WAGES PAID TO WORKERS 903,893
PENSION FUNDS:
EMPLOYEES CONTRIBUTION 37,860
EMPLOYERS CONTRIBUTION 41,728
LOAN REPAYMENT BY EMPLOYEE 19,722
Required: Pass payroll entries and prepare wages control account and staff control account.
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METHODS OF
CODING
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METHODS OF CODING
CODING
 In many organizations, income and expenditure items are coded before they are included in
the accounting records. Code means giving something a code.
 A code is a system of words, letters, figures or symbols used to represent others.
 For elements of cost and income to be correctly analyzed, classified and recorded they must
initially be correctly coded for entry into the accounting records.
 When data is entered into an accounting system, each item is coded with a specific code
from a list of accounts.
Codes can be alphabetical and/or numerical. It depends upon the needs of the organization.
ADVANTAGES OF A CODING SYSTEM

Following are the advantages of coding systems;
a. A code is usually briefer than a description saving clerical time in a manual system and
storage space in a computerized system.
b. Coding facilitates data processing. Once the code are assigned the computer system easily
recognize the account by verifying the first digit “2” which means is related to expense
account. Because computer cannot understand that rent is an expense.
c. A code is more precise than a description and therefore reduces ambiguity. For example
“50 HRLLG” WHICH MEANS “50cm high resolution LED monitor LG”
Coding also serves time in copying out data because codes are shorter than “longhand”
description. For the same reason, and also to save storage space, computer system makes use
of coded data.
In accounting systems, the most obvious examples of codes are as follows:
o Customer account numbers
o Supplier account numbers
o General ledger account numbers
o Employee reference numbers
o Inventory item codes
CODING IN GENERAL LEDGER:

A general ledger will consist of a large number of coded accounts. For example, part of a
general ledger might be as follows:
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BLOCK (OR GROUP CLASSIFICATION) CODES / SIGNIFICANT DIGIT CODE
These are an improvement on simple sequence codes, in that a first digit often indicates the
classification of an item.
Block codes use characters (numbers and/or letters) to assign or organize something into
special unique groups or categories. The block is actually a range (block) of characters that
uniquely identify something. Block codes usually have a fixed length.
For example 4NNNNNN nails

5NNNNNN Screws
6NNNNNN Bolts
“N” stands for other digits.
Block Assigned Type of Account

1000-1999 Assets
2000-2999 Liabilities
3000-3999 Owner's Equity
4000-4999 Revenues
5000-5999 Costs of Goods Sold
6000-6999 Expenses
7000-7999 Other Revenue
8000-8999 Other Expenses
Looking at our sample table it shows that;
 The blocks or ranges identify the different major types of accounts -assets, liabilities,
owner's equity, revenue, and costs/expenses.
o The first block of numbers 1000-1999 is a range of numbers used to create and
identify the different types of asset accounts.
o The second block of numbers 2000-2999 is a range of numbers used to create
and identify the different types of liability accounts.
o The third block of numbers 3000-3999 is a range of numbers used to create and
identify the different types of owner's equity accounts.
 If you know the first digit of an account, you can tell what type of an account it is. If the
first digit is a 1, the account is an asset, if it’s a 2, the account is a liability, and so on.
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Assets (1000-1999)
1000-Cash in Banks
1001-Petty Cash Fund
1002-Accounts Receivable
1003-Inventory
1005-Materials and Supplies
Liabilities (2000-2999)
2000-Accounts Payable
2001-Notes Payable
2005-Sales Taxes-Payable
Expenses (6000-6999)
6000-Salaries and Wages
6001-Contract Labor
6002-Payroll Taxes
6003-Utilities
6004-Telephone
COMPUTERIZED ACCOUNTING SYSTEM

Computerized accounting system will allow much quicker and more accurate entries to the
accounting system. In computerized system following accounts are maintained.
 General or main ledger --for ALCER
 Receivable ledger --for each customer
 Payable ledger --for each supplier
 Cash books
ADVANTAGES OF COMPUTERIZED ACCOUNTING SYSTEM
Computerized accounting systems should offer the following advantages over manual systems:
 Faster provision of information.
 Provision of information that would not be easily available without a computerized
accounting system.
 Once the system is set up, cheaper information
 More accurate information because arithmetic and certain other errors will be eliminated.
Of course sometimes things go wrong and systems break down or incorrect information is
produced. In particular, if incorrect data is entered, incorrect information will be produced
(garbage-in, garbage-out, GIGO).
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PROCESS OF COMPUTERIZED ACCOUNTING SYSTEM
Computerized accounting system can be represented as:
Accounting using a computerized system involves inputting data, processing it according to

accounting rules contained in the software, and producing output (the accounts, or other
management report). Simple process is Input, Process and Output.
For example:
Input: Orders are input over the internet
Processing: Prices are accessed on a product file and the order value worked out.
The customers’ account in the receivables ledger (now held on a computer file) is debited.
Inventory records (now on a computer file) are updated.
Output: An invoice is printed for the customer.

Dispatch information is displayed on a screen in the warehouse to show the goods that have to be sent.
DATA ENTRY ERRORS:

In order for data to be processed through a computerized accounting system, it must be
entered onto the system by a data entry clerk. Accuracy of data entry is vital but there are
various way in which errors and omissions can be made, for example:
 Source document can be damaged or destroyed

 Incorrect details in the source documents e.g. wrong code, date, price
 Transcription errors e.g. entering 45 as 54
 Poorly skilled staff
 Poor handwriting can make forms difficult to read
 Malicious intent
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REDUCING DATA ENTRY ERROR:
Various methods can be employed to reduce the incidences of errors at the data input stage:
 Properly trained and experienced staff
 Automatic data entry such as scanning
 Verification by entering the data twice and checking for inconsistencies
 Well-designed forms that are easy to read
 Validation techniques (it ensures that it is reasonable and possible e.g. debit and credit
amount, but not that it is necessarily correct.)
Examples:
o Essential fields cannot be left blank
o Data has correct number of characters (minimum and maximum)
o Data value is within predetermined range e.g. month within 1 to 12
BATCH PROCESSING:
Batch processing is where similar transactions are gathered into batches, and then each batch is
sorted and processed by the computer
Transactions are accumulated into batches and then all processed together. It may be
processed at regular interval such as daily, weekly or monthly.
For example in payroll processing, payroll sheets (Details of salary of all employees) of one
department is considered as one batch. Transactions will be collected up over a period of time,
and will then be dealt with together in a batch.
Control totals are used to make that there have been no errors when the batch is input. For
example: A batch of 30 sales invoices has manually calculated, when batch is input, the
computer adds up the total value of invoices input. It should be equal
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ACCOUNTING
SOFTWARE/PACKAGES
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ACCOUNTING SOFTWARES/PACKAGES:
Computer software used in accounting may be divided into two types:
o Dedicated accounting packages/software
o General software, the uses of which include accounting and many other.
Dedicated accounting packages:

Some applications are devoted specifically to an accounting task, for example a payroll package,
a non-current asset register or an inventory control package.
General software:
Other applications have many uses in business, including their use for accounting purposes,
examples spread sheets.
Note: Principles used in the computerized accounting is same as it is used in manual

accounting.
ADVANTAGES OF ACCOUNTING PACKAGES/SOFTWARES:

a) The packages can be used by non-specialists.
b) A large amount of data can be processed very quickly
c) Computerized systems are more accurate than manual systems
d) A computer is capable of handling and processing large volume of data
e) Once the data has been input, further computer process the information and analyze
the data and generate the report.
DISADVANTAGES OF ACCOUNTING PACKAGES/SOFTWARES:
a) The initial time and cost for installation and training of employees
b) The necessity to develop a system of coding
c) Lack of audit trail. It is not always easy to see where a mistake has been made
d) Possible resistance on the part of staff to the introduction of the system
CODING:
Computers are used more efficiently If vital information is expressed in the form of codes
00 sales
01 non-current asset
05 expenses
15 purchases
22 receivable ledger control account
41 payable ledger control account
42 interests
43 inventories
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ACCOUNTING PACKAGES:
When user begins to work with an accounting package he will usually be asked to key in a
password. The user then will be presented with menu of options such as “enter new data”, or
“print report”.
ACCOUNTING MODULES:
An accounting package will consist of several modules. A simple accounting package might
consist of only one module called stand alone module.
Some packages consist of several modules called suite. An accounting package, therefore might
have separate modules for:
o Invoicing
o Inventory
o Receivable ledger
o Payable ledger
o General ledger
o Payroll
o Cash book
o Job costing
o Non-current asset register
o Report generator
INTEGRATED SOFTWARE:
Each module may be integrated with the others, so that data entered in one module will be
passed automatically.
For example if there is an input into the invoicing module authorizing the dispatch of an invoice
to a customer, there might be automatic links:
a) To the receivable ledger, to update the file by posting the invoice to the customer’s
account
b) To inventory module, to update the inventory file by;
i. Reducing the quantity and value of inventory in hand
ii. Recording the inventory movement
c) To the general ledger, to update the file by posting the sale to sales account
d) To the job costing module, to record the sales value of the job on the job cost file
e) To the report generator
ADVANTAGES OF INTEGRATED SOFTWARE:
 It automatically updates the all the ledgers, when one entry is made in any ledgers
 Users can specify reports, and the software will automatically extract the required data
from all the relevant files
 Simplify the work load of the users
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DISADVANTAGES OF INTEGRATED SOFTWARE:
o Usually it requires more computer memory than separate (stand-alone) systems. As
more space will be required to store the data
o Because one program is expected to perform everything. Hence the user may find that
integrated package has fewer facilitates than a set of specialized modules. “jack of all
trades master of none”
ACCOUNTING FOR RECIEVABLE (MODULE)

A computerized receivable ledger will be expected to keep the receivable ledger up to date, and
also it should be able to produce certain output (e.g. statements analysis reports, responses to
file interrogations etc.) The output may be produced, daily, weekly, monthly, quarterly or
periodically.
Note 1: Input, process and output takes place in each accounting module
Note 2: In each module there are two types of data standing (doesn’t change) and variable
data (data will change as ledger is updated)
The receivable ledger file will consist of individual records for each customer account. The
following fields in the receivable standing data are as follows:
o Customer account number
o Customer name
o Address
o Credit limit
o Account sales analysis code
o Account type (balance forward and open item) (discussed later)
Other variable data that update the receivable ledger is as follows:
 Transaction data
 Transaction description (e.g. sale, credit note etc.)
 Transaction code (e.g. to identify payment period allowed)
 Debits
 Credits
 Balance
Customer data is often recorded in the master file
Data/transactions due to which the ledgers are updated are often recorded in transaction file
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INPUT TO A RECEIVABLE LEDGER SYSTEM:
a) Amendments in standing data:
i. Amendments to customer details, e.g. change of address or credit limit
ii. Insertion of new customers
iii. Deletion of old non-active customers
b) Transaction data:
i. Sales transactions, for invoices available from specialized invoicing
module
ii. Customer payments
iii. Credit notes
iv. Adjustments (debit or credit items)
PROCESS TO A RECEIVABLE LEDGER SYSTEM:

The primary action involved in updating the receivable ledger is modifying the amount
outstanding on the customer’s account.
o When processing starts = brought forward balances (b/f)
o When processing ends = carried forward balances (c/f)
o Between these two balances further adjustments are posted. Example: payment
received by customer, invoices, return and etc.
o This method of updating customer accounts is called the balance forward method
o Another method of updating the customer accounts is that system offers the users to
identify the specific credit invoices and individual payments against specific invoices.
The customer outstanding balance is the sum of the unpaid open items.
OUTPUT FROM A RECEIVABLE LEDGER SYSTEM:

o A list of all transactions posted each day. (day book listings)
o Invoices (example Naheedsupermart)
o Statements for customers at the end of the month
o Aged receivable list i.e. aged analysis generally produced at the end of the month
o Sales analysis reports
o Customer reminder letters are automatically produced where payment is not received
within due date.
o Response to enquiries of customer, perhaps output on VDU screen rather than as
printed copy for fast response to customer’s enquiries
QUESTION???
What sort of data would you expect to be held on a payables ledger file?
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INPUT TO A PAYABLES LEDGER SYSTEM:
o Details of purchases recorded on invoices

o Details of returns to suppliers for which credit notes are received
o Details of payment to suppliers
o Adjustments
PROCESS TO A PAYABLE LEDGER SYSTEM:
The primary action involved in updating the payable ledger is modifying the amount
outstanding on the supplier’s account.
o When processing starts = brought forward balances (b/f)
o When processing ends = carried forward balances (c/f)
o Between these two balances further adjustments are posted. Example: payment made
to suppliers, invoices, return and etc.
o This method of updating supplier accounts is called the balance forward method
Another method of updating the supplier accounts is that system offers the users to identify
the specific credit invoices and individual payments against specific invoices. The supplier
outstanding balance is the sum of the unsettled open items.
OUTPUT FROM A PAYABLE LEDGER SYSTEM:
o List of transactions posted

o An analysis of expenditure for general ledger purposes.
o List of supplier balances together with reconciliation between total balances brought
forward, the transaction for the month and the total balance carried forward.
o Copies of supplier’s accounts. This may show the account payable reconciliation. If
complete details of all unsettled items are given, the ledger is known as open-ended
ledger.
o Other special reports may be produced for:
 Costing purposes
 Updating records about non-current assets
 Comparison with budget
 Aged payables list
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GENERAL LEDGER:
The general ledger (nominal ledger) is an accounting record which summarizes the financial
affairs of a business. It contains details of assets, liabilities, capital, expenditure and income and
so for profit or loss. It consists of large number of different accounts, each account having its
own purpose or “name” and “code”.
INPUT TO THE GENERAL LEDGER:

Input in general ledger depends on integrated accounting system:
1) Integrated system:
Where the data is put into the receivable ledger module, the relevant general ledger accounts
are updated. There is nothing more for the system user to do.
2) No integrated system:
Where system is not integrated then the output from the receivable ledger modules has to be
input into the general ledger. This is done by using journal entries.
DEBIT: Receivable (40001)

CREDIT: Sales (60002)
Where, 40001 is the general ledger code for receivable and 60002 code for sales.
Following input data is required in both cases:
o Date
o Description
o Amount
o Account codes (distinction codes)
OUTPUT FROM THE GENERAL LEDGER:
The main output from general ledger accounts is:
 The trial balance
 Financial statements
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INFORMATION
STORAGE
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INFROMATION STORAGE:
Business transactions give rise to large amount of paperwork, which must be properly handled
in order to ensure both security and the availability of information.
WHY INFORMATION IS NEEDED TO MANAGEMENT?

There is a constant demand for information within the organization; information of the
following kinds may be requested.
o Records of past and current transactions: Past information is retained for later analysis.
Example: Last month rent expense. However the current records are kept to know the
pending assignments.
o Information about past trend and current operations: This information is used to plan
and to make decisions. For example rates of raw materials purchased in the last month.
o Routine transaction information: On the basis of this information current decisions and
operations are done. For example: the information on a customer order dictates how
many items? What sort of inventory? What delivery and payment arrangement should
be made?
o Information about performance: Compare with plans, budgets and forecast for the
purpose of control (correcting errors and shortcomings)
EXTERNAL PARTIES REQUIRE INFORMATION:

 Those involved in business transactions: Such as customers, suppliers or contractors.
Example inquiry about products.
 Shareholder, creditors, investors
 Local authorities: Tax department, and other government bodies.
TYPES OF INFORMATION EXCHANGED:

 Inquires and complaints (from clients, customers, colleagues or third parties)
 Information supplied by employee to the organization in for of job application, CV and
interview for organization records
 Information supplied to employees by organization (instructions, warnings)
INFORMATION GATHERING SOURCES

 INCOMING CORRESPONDENCE: Letters, e-mails, memos, reports and other
documents directed from outside the organization and department to those within it.
 OUTGOING CORRESPONDENCE: Similar messages generated by the department and
flowing outwards. Copies of these needs to be stored.
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 FINANCIAL REORDS: Invoices and other documents received or prepared in the
course of transactions and reporting. These information is required for the purpose of
planning and controlling and to comply with legal requirements
RETENTION POLICY:
Information retained by the organization is classified in four main categories:
 Master files/reference files/permanent files (these files are never thrown away or
scrapped. They will be updated from time to time. Information on the file might change
but file itself will continue to exist. Example: List and details of current approved
suppliers and customers.)
 Temporary/transitory files (this file is eventually scrapped. Many transaction files
except cash book are held for very short time until the transactions records have been
processed and then are thrown away. Example: Expenses details during the period)
 Active files (this file information is frequently used. Example: sales invoice files of
current year customers to dispatch orders on time)
 Semi-active files (this files contain the information that are still active but are on their
way to become inactive. Example: contracts nearest to completion)
 Non-active files (this files contains the information that is no longer needed on a daily
basis. Example: files that contain information relating to the customers and suppliers
who are no longer current and purchase invoices relating to previous financial years.)
TREATMENT WITH THE UNNECESSARY INFORMATION:

When information contains within the files is no longer needed, it is generally dealt with one of
the following way:
 Microfilmed for longer storage
 Retained in original form and stored elsewhere (archived)
 Securely destroyed
RETENTION PERIODS:
legal establishment documents permanently
annual accounts Permanently
simple legal contracts 6 years
important sealed contracts 12 years
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DATA PROTECTION:
Information stored about individuals is regulated by data protection legislation. (manually or
automatically.)
In businesses, the department most likely to be affected by these regulations is personnel or
human resource department.
FAILURE TO PROTECTION MAY CAUSE:

 Access to personal information by unauthorized parties
 Third party may harm or mislead
 Personal information may be used for the purpose other than those for which it was
requested and disclosed.
Personal data: It is the information about the living individual.
Data controller: they are the organization or individuals who control the content of files of
personal data.
RIGHTS OF DATA SUBJECT (INDIVIDUALS)

o Data subject may seek compensation through courts for damage
o Data subject may obtain access to personal data of which he or she is subject
o Data subject is entitled to know the purpose for which the data is collected and
processed.
PRINCIPLES OF DATA PROTECTION:

o INFORMATION MUST NOT BE OBTAINED BY DECEPTION
o PERSONAL DATA MUST BE OBTAINED FOR ONE OR MORE SPECIFIED LAWFUL PURPOSES
o PERSONAL DATA SHALL BE UPDATED AND ACCURATE
o PERSONAL DATA SHALL NOT BE KEPT LONGER THAN IS NECESSARY
o APPROPIATE SECURITY MEASURES SHALL BE TAKEN AGAINST THE UNAUTHORIZED
ACCESS TO, OR ALTERATION, DISCLOSURE OR DISTRUCTION OF PERSONAL DATA AND
AGAINST ACCIDENTAL LOSS.
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BANKING
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BANKING
Clearing is the mechanism for obtaining payment for cheques. The process of clearing should be
completed as regard with each cheque within three working days.
If the paying bank dishonors a cheque, delivered to the branch through the clearing system, it
marks on the cheque the reason for its refusal to pay and returns it by post direct to the
receiving bank branch from which it came.
Cheque clearing is the process of moving a cheque from the bank in which it was deposited to
the bank on which it was drawn, and the movement of the money in the opposite direction.
This process is called the clearing cycle and normally results in a credit to the account at the
bank of deposit, and an equivalent debit to the account at the bank on which it was drawn.
BANKING SERVICES:
Following are the three main services provided by the bank to its customers:
o Retail banking
o Investment banking
o Access to banking services
RETAIL BANKING:
Initially current and saving account services were provided by the banks, but now wide range of
services are provided by banks, these are as follows:
a) Credit cards
b) Investments
c) Share/stock dealings
d) Loans
e) Home insurance
f) Travel insurance
g) Foreign currency
h) Pet insurance
INVESTMENT BANKING:
When businesses and corporation need money to raise capital they refer to the investment
banks.
ACCESS TO BANKING SERVICES:

Now the customers no need to visit branches, there are other means too, from which the
customers can contact to banks for example: telephone and internet.
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THE BANKER/CUSTOMER RELATIONSHIP:
A bankeris someone who:
o Put money and chequereceived on customer’s behalf into his account. (deposit)
o Take out all cheques and orders paid from the account by the customer. (withdrawal)
o Keep accounts, such as current accounts, which can be used for paying in or taking out
on the customer’s behalf
A customer is the one:
o Who opens an account in the bank: or
o A person becomes a customer as soon as the bank accepts his transactions and
undertakes to provide services.
Note: Bank owes various legal duties to customers and can be sued if they do not carry out these duties
adequately.
CONTRACTUAL RELATIONSHIPS:
There are four main types of contractual relationship which may exist between bank and
customers, these are as follows:
1) Receivable/payables
2) Bailor/bailee
3) Principal/agent
4) Mortgagor/mortgagee
 RECEIVABLE/PAYABLE RELATIONSHIP:
Customers deposit money in a bank. At some point bank will have to pay back the money to
the customer. So the customer is the account payablefor the bank whilst the bank is the
account receivable of the customer.
 BAILOR/BALIEE RELATIONSHIP
This relationship exist when banks offers a safe deposit service to customers, which allows
customers to use of safe. The bank has following responsibility towards the customer property:
a) To take reasonable care to safeguard it against damage and loss
b) To redeliver it to customer or some other personauthorized by him and not to deliver it
any other person.
This is called the law of bailment.
The customer is called the Bailor. The bank is known as Bailee.
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 PRINCIPAL/AGENT RELATIONSHIP:
An agency relationship is one where one person (the agent) acts for another (the principal)
usually for the purpose of doing business between the principal and a third party.
Agency concept is necessary, because principal may not have all expertise to deal in every
mater. Therefore the agent on behalf of the principal performs such task.
Bank acts as an agent of customer. For example: bank arranges insurance for the customer, the
bank is acting as an insurance broker and is the agent of its customer.
 MORTGAGOR/MORTGAGEE RELATIONSHIP:
Most of the time bank provide loan to its customer against security often known as
mortgageover the customer’s property. It is usually done to secure the amount.
In this case the customer will receive the amount of loan (receivable) from bank, which means
the bank will pay the amount of loan to customer (payable).
SUMMARY:
S.NO RELATIONSHIP TRANSACTION CUSTOMER BANK
CUSTOMER
1 RECEIVABLE/PAYABLES DEPOSIT CASH AT RECEIVABLE PAYABLE
BANK
CUSTOMER USES
2 BAILOR/BAILEE BANK’S LOCKER BAILOR BAILEE
FACILITY
BANK ARRANGES
3 PRINCIPAL/AGENT INSURANCE FOR PRINCIPAL AGENT
CUSTOMER
BANK LENDS
MONEY TO MORTGAGOR MORTGAGEE
4 MORTGAGOR/MORTGAGEE CUSTOMER (RECEIVABLE OF (PAYABLE OF
AGAINST LOAN AMOUNT) LOAN AMOUNT)
MORTGAGE
FIDUCIARY RELATIONSHIP:
Irrespective of the above contractual relationship there is a deemed relationship that bank will
act in (good faith). Which means the bank may force its customer to do what he is not willing to
do, the bank will not do such act. It is called the fiduciary relationship (special relationship).
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RIGHTS OF BANKERS:
Following are the rights available to bankers:
a) Making charges or commission
b) Using customer’s money
c) Demanding repayment of overdrawn balances
d) Possessing a lien/right over securities
DUTIES OF CUSTOMERS:
Following are the duties of customers:
a) Ensuring that fraud is not facilitated when drawing cheque – do not sign blank cheques.
b) Clear the penalties and repayment of overdrawn amount.
DUTIES OF BANKERS/ RIGHTS OF CUSTOMERS:

Following are the duties of bankers and rights of customers:
a) Bank must honor a customer’s cheque
b) Bank must credit the amount of receipt in customer’s account
c) Bank must repay the amount when demanded during office hours
d) Bank must comply with customer’s instructions
e) Bank must provide their customers with statement and accounts detail at reasonable
time period
f) Bank must maintain confidentiality requirement unless the information is required by
law to be disclosed
g) Bank must inform its customers, when it is apparent that cheques bearing a forgery of
the customer’s signature.
h) Bank must exercise reasonable care and skills to protect customer’s property
i) Bank must give notice before the closure of customer’s account.
j) Customer has no duty to maintain any record. It is the duty of the bank to maintain the
record and all transactions.
PROCEDURE FOR BANKING CASH:

While depositing cash into bank generally “paying-in slip” is used. Following are the precautions
that must be considered while preparing the paying-in slip.
1) Cash must be properly counted and sorted
2) Notes and coins must be listed by denomination on the paying-in slip
Float money: Organizations do not deposit all money in the bank, they keep some money with
them at the day end so that he next day there is some cash available to give change to
customer, and such amount is called the float money.
164
CONTENTS OF PAYING-IN SLIP:
The details required on the paying-in slip when cheques are banked include:
 Name of drawer (or endorser)
 Amount of cheque
 Total value of cheque banked
 Number of cheques banked
Note:
o The person who signs the cheque and fill the details is called the drawer
o The person who receives the amount is called payee
o The bank on which the cheque is drawn is called drawee
RETURNED OR DISHONOURED CHEQUES:

After a cheque is received and banked. There is a possibility that bank may return/dishonor
cheque due to the following reasons:
a) Insufficient funds
b) Stolen cheques
c) Wrongly completed or out of date cheques
INSUFFICIENT FUNDS:
There may not be enough money in the customer’s account to cover the cheque amount. When
the cheque is dishonored the cheque will be returned to you “refer to drawer”.
STOLEN CHEQUES:
Where the bank identifies that the cheque is stolen and the signature of the drawer is forged.
The marked that cheque as “signature differ” and returned the cheque.
WRONGLY COMPLETED OR OUT OF DATE CHEQUES:

The bank may also return the cheque if the cheque is not filled properly or there is some errors.
Common errors are as follows:
a) Amount written in words and figure is different
b) Cheque is more than six month old
c) If the cheque is for future date.
165
166
MODES OF PAYMENT
167
168
MODES OF PAYMENT:
There are various ways a company can receive money. The main ones are:
o Cash
o Cheque
o Credit or debit card (plastic cards)
Credit/ cash sales:

TYPES OF SALE TYPICAL BUSINESS TYPICAL EXAMPLES
CUSTOMER
CASH SALE RETAILERS GENERAL PUBLIC, SUPERMARKETS,
FACE TO FACE AS CHEMISTS
FINAL CONSUMER
CREDIT SALE TRADING BUSINESS OTHER TRADING OR MANUFACTURERS
RETAIL BUSINESS OF STEEL, GAS,
EQUIPMENT
CASH: PHYSICAL SECURITY CONSIDERATIONS:

Holding cash creates problems and careful security procedures are required. Cash comprises
the notes and coin which make up the legal tender of a country.
PROBLEMS:
o Forgery (forgery of large denomination notes e.g. 5000 rupee note, special marker pens
and ultra-violet light detection can be used to check bank notes)
o Theft
THEFT:
Theft by staff: this risk can be reduced by being care full about the people the business
employs, their reference should be checked properly and they should be monitored closely.
 Cash register security:

The cash register should be secure, with keys needed to operate it. Employees should be
trained to keep their keys safe. Another measure to protect cash register is to breakdown sales
staff member duties.
 Safes:
If possible cash should be removed from the till regularly (so that there is only a relatively small
amount in the till) and stored in a safer place. The ideal place would be a safe.The keys should
have access to restricted employees.
169
 Protective glasses:
Some businesses use protective glass (called a “bandit screen”) between the customer and the
cashier to protect against theft and to ensure security of the cashiers.
 Strong box:
Many retail outlet use strong box at each cash register. When cashier receive a long bank note,
he or she will not place it on cash register.
 Security guards and collections:
Many organizations will employ their own in house security staff to protect their cash register
and to move cash in as safer location on daily basis.
External security firms service ma y also be hired in this regard
 Frequent banking:
In general, cash should be taken to the bank on a regular and frequent basis. This reduces the
amount of money on the business premises.
Care must be taken that the same person should not go to bank for deposit at the same time
for security purpose.
CHEQUES:
A cheuque is an unconditional order in writing addressed by a person to a bank, signed by the
person giving it, requiring the bank to pay on demand a sum certain in money to or to the order
of a specified person or bearer.
A cheque may be sent through the post, as if goes astray payment can be stopped.
PRECAUTIONS FOR CHEQUE RECEIVING:
STEP 1: Examine the face of the cheque to ensure all the details are correct.
o Date (including the year)
o Payee name
o Amount in both words and figures
STEP 2: Make sure that the cheque is signed by the drawer.
TYPES OF CARD SYSTEM:

There are two main types of cards, generally known as plastic cards these are as follows:
o Credit cards
o Debit cards
CREDIT CARD PAYMENTS:

Credit cards are usually primarily used by individuals. Company generally own credit cards
which are generally allocated to members of staff.
170
Credit card transaction may be performed manually and many retailers now use an electronic
system known as EFTPOS (electronic funds transfer point of sale).
MANUAL SYSTEM:
In credit card transaction there are three parties involved. These are as follows:
a) Supplier
b) Card issuer (bank)
c) Card holder (Customer)
S.NO TRANSACTION COMMENTS
1 PURCHASE OF GOODS FROM A CARD HOLDER PURCAHSE GOODS WITHOUT
SUPPLIER BY CARD HOLDER PAYING FOR IT IMMEDIATELY
2 PAYMENT OF SUPPLIER BY CARD SUPPLIER RECOVERS FROM THE CARD ISSUER THE
ISSUER PRICE OF GOODS LESS COMMISSION
3 PAYMENT OF CARD ISSUER BY CARD ISSUER SENDS STATEMENT TO CARD
CARD HOLDER HOLDER. CARD HOLDER MAY EITHER SETTLE
INTEREST FREE WITHIN 28 DAYS
Note:
 Membership fee is charged by card issuer
 Interest is charged by card issuer is the time period is crossed
PRECAUTIONS WHILE ACCEPTING CREDIT CARD
Following precautions must be taken before accepting credit card:
o Rub your thumb over the signature panel
o Compare the customer signature on the card with that on the voucher
o Check whether the card is stolen against the warning lists regularly issued by the card
issuing companies
o Check that the card is valid by the date
o Check that the transaction does not exceed the business floor limit
o Final check – quick check of signature, figure, date
Floor limit is set by the card issuer to shop or business against which the shop keeper cannot
accept the transaction above the limit. If the transaction is above the limit then shop keeper
will call the card issuer for authorization code.
CREDIT CARD TRANSACTION SUMMARY:

Where the manual credit card transaction is performed the retailers prepare a summary
voucher (containing summaries of all transactions). It contains all the relevant information
about the business/ retailers, including an account number.
171
Such printed voucher has two carbon copies with one original or “top Copy” and two copies
with carbon paper in between. The bottom copy is the processing Copy; on the back of it is a
place to list the voucher.
DEBIT CARD PAYMENTS:

Debit cards are designed for customers who like to pay through card but want to avoid credit.
a) The customer signs a voucher at the point of sale
b) This is then processed through manual credit card system or EFTPOS
c) The amount is deducted directly from the customer’s bank account
ELECTRONIC FUNDS TRANSFER POINT OF SALE (EFTPOS):

EFTPOS makes possible the automatic transfer of funds from a customer’s bank account to a
retail organization at the point in time when customer purchases goods from it.
Most types of credit and debit card can be processed through the EFTPOS terminal. The
terminal can read the magnetic strip on the back of cards automatically.
Following are the advantages of EFTPOS:
a) No need to take the voucher to the bank for payment receiving
b) No need to take approval for floor limit, when retailer carries out transaction on the
terminal it will automatically be authorized through bank on telephone
c) At the same time transaction will also be accepted by the card company for processing
and subsequent payment to retailer’s account
d) Two receipts are issued by terminal point, top of the receipt for the customer and
bottom for the retailer. This includes the details of transactions.
172
MISCELLANEOUS
173
174
MISCELLANEOUS
REMITTANCE ADVICE:
Trade customers usually send a remittance advice with their payment. It indicates the invoices
against which the customer has made the payment.
PROCEDURE TO COMPARE RECEIPT WITH REMITTANCE ADVICE:
STEP 1: Total the amount shown in remittance advice
STEP 2: Compare the total with the amount receipt (cheuque)
STEP 3: If there is a disagreement between the remittance advice the amount received and
calculate the difference.
STEP 4: Send the cheque to the bank and then record the receipt
STEP 5: Send the marked up remittance advice to the receivable ledger department.
Receivable ledger department will deal with the customer and resolve any query
FUNCTIONS of POST:
o Store full price information on all stocks
o Record the value of the sale of each item
o Calculate the total value of the sale if more than one item is sold
o Calculate the amount of change to be given to a customer
o Issue a till receipt showing the entire transaction
o Sum up the transactions of the day at closing time
Note: Electronic cash register helps to control over calculating and giving change to
customers.
Giving little change = loss of goodwill
Giving more change = loss of money by business
TILL RECEIPTS:
A receipt is a document given by the seller to the buyer when goods change hands in exchange
for payment. It may be a till receipt, a written receipt or some other form of receipt. It’s
basically an evidence of payment.
Cash registers or tills are used mainly in retail shops where the money is handed over directly
by the customer when the transaction takes place.
Most shops have electronic cash registers also known as POST, often registering the details of
items sold using bar code readers, which operates as follows:
175
INFORMATION CONTAINED IN THE TILL RECEIPT:
Each till receipt will show the following information:
 Name of selling company and business
 Date and time of transaction
 Price of each good/ unit
 Total value of goods purchased
 Sales tax number
 Amount given by customer (tendered)
 Amount of change given to the customer
 Name of assistant and/or cashier
 Till number
WRITTEN RECEIPT
Where an electronic cash register is not used then a written or typed receipt may be required.
Same information is entered in it; other details may also be entered in it.
RETENTION OF DOCUMENTS (RECEIPTS):

The retailers need to produce relevant copies of the receipts. It is therefore essential that all
copy receipts are kept in safe in date order and preferably for a minimum period of 6 months.
EVIDENCE OF PAYMENT OTHER THAN IN CASH:

If customer pays for the goods in the form of debit and credit card then the customer receives
the signed credit card voucher and signed debit card voucher is issued to a customer.
BANK GIRO CREDITS (CREDIT TRANSFERS)

A bank giro credit is used by business to make payments. A business can pay a supplier using
giro credits.
a) By filling in a bank giro credit transfer form and handling this together with the payment
(cheque or cash) over the counter at a bank.
b) Usually preprinted forms are used in which customer simply fills in the date and the
amount of the payment, signs it and pays it in at a bank branch.
c) Sometimes suppliers send an invoice with a detachable preprinted bank giro credit
transfer paying-in-slip.
BANKER’S DRAFT (PAYABLE ORDER):

A supplier might sometimes ask a customer to pay by banker’s draft. It is like cheques but
banker’s draft cannot be stopped, cancelled or returned after it has been issued. It is usually
issued for higher amount. Here the payment is guaranteed and secured for recipient.
176
STANDING ORDERS:
Standing order payments might be used by a business to make regular payments of fixed
amount changes may be made by notifying the bank in writing.
a) Rental payments to the landlord of a building occupied by business
b) Paying insurance premium to an insurance company
Paying company ask in writing its bank to set up a standing order arrangement (standing order
mandates). Following details must be given to bank:
i. Company would like to make a regular payment from its account through standing order
ii. Fixed amount of each payment
iii. Frequency of each payment and due date
iv. Banking details of the supplier
DIRECT DEBITS:
Direct debits are same as standing order and are used for regular payments. The difference
between these two as follows:
a) Payment is initiated by the person who receives the payments and inform the paying
bank of the amount of each payment
b) Payments can be for a variable amount each time and at irregular interval as well as for
fixed amount at regular intervals
Note:
 Such direct debit instructions are sent to the suppliers and not bank.
 Examples for such payments may be electricity bills, gas bills, water bills.
 These payments are usually recorded in bank statement first and then picked out
from bank statement and recorded in the cash book
BANK MANDATE FORMS:

Bank mandate form is the requisition to bank to open a bank account. Some specific details are
given for opening a bank account. Following details are usually given;
 Name of applicant
 Contact
 Address
 NIC number
177

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KnS – SCHOOL OF BUSINESS STUDIES

RECORDING FINANCIAL TRANSACTIONS – FA1

FROM THE DESK OF: M. JUNAID KHALID

1 Basics of financial accounting 6 -16

2 Accounting & business equation 17 – 22

4 Ledgers and trial balance 33 – 44

5 Preparation of financial statements 45 – 49

6 Capital and revenue expenditures 50 – 53

7 Discounts, rebates and allowances 54 – 59

11 Petty cash book 76 – 79

12 Bank reconciliation statement 80 – 91

13 Control account 92 – 103

14 Control account reconciliation 104 - 109

16 Recording payroll transactions 124 – 135

17 Methods of coding 136 – 143

18 Accounting software/packages 144 – 151

19 Information storage 152 – 157

20 Banking 158 – 165

21 Modes of payment 166 – 171

22 Miscellaneous 172 - 176

WHY DO ORGANIZATIONS EXIST?

a) It helps to overcome individual limitations

FINANCE RAISING LOW MODERATE HIGH

OBLIGATIONS UNLIMITED UNLIMITED LIMITED

AGE OWNER'S LIFE OWNER'S LIFE PERPETUAL LIFE

COMPONENTS OF FINANCIAL INFORMATION (FINANCIAL STATEMENT)

 Income statement (profit and loss account)

EXAMPLES OF EXPENSES EXAMPLES OF REVENUES

SEPARATE ENTITY CONCEPT/ BUSINESS ENTITY CONCEPT:

ACCRUAL CONCEPT/MATCHING PRINCIPLE/ACCRUAL BASE ACCOUNTING:

Income statement answers:

CURRENT ASSETS FIXED ASSETS

EXAMPLES OF CURRENT ASSETS EXAMPLES OF FIXED ASSETS

 Cash (cash at hand)  Land

ALLOWANCE FOR DEPRECIATION/ACCUMULATED DEPRECIATION:

ALLOWANCE FOR RECEIVABLE/BAD DEBT:

CURRENT LIABILITY LONG TERM LIABILITY

CAPITAL ADDITIONAL investment

TITLE OF ACCOUNT AMOUNT

a) Prepare statement of financial position as at 31st December 2014.

TITLE OF ACCOUNT AMOUNT

a) Prepare statement of financial position as at 31st December 2017.

Assets = liabilities + owner’s equity

Assets = liabilities + capital + investment + profit – loss – drawings

Assets – liabilities = capital + investment + profit – loss – drawings

Current assets + fixed assets = current + long-term liabilities + owner’s equity

Required: Calculate the amount of the following;

QUESTION 4: Show the effect of each transactions in accounting equation.

QUESTION 5: Show the effect of each transactions in accounting equation.

Furniture and fittings at cost 7000

2 CURRENT ASSET 1,860,000

3 CURRENT ASSET 1,500,000

4 TOTAL ASSETS 80,000

5 TOTAL ASSETS 520,000

7 NET PROFIT 150,000

8 NET PROFIT 12,800

9 NET LOSS 89,700

12 NET PROFIT 205

13 NET PROFIT 1,051

INTRODUCTION OF DEBIT AND CREDIT

RULES OF DEBIT AND CREDIT

Date Particular P/R Debit Credit

1-Jan Cash 100,000

3-Jan Equipment 50,000