Chapter 4 - Recording And Summarizing Transactions

CHAPTER 4 Recording and summarising transactions

Contents 1

Recording business transaction

2

Recording Sales

3

Recording purchases

4

The cash book

Contents 5

Cash registers and cash received sheets

6

The general ledger

7

Discounts, rebates and allowances

8

Sales tax

9

Posting cash cash receipts receiptsto tothe thegeneral generalledger Posting ledger

Recording business transactions Text

To record

Source documents

Books of prime entry

Source documents  Invoices  Credit

notes  Petty cash vouchers  Cheques received  Cheque stubs (for cheques paid out)  Wages, salary and employee tax records

Books of prime entry

Discussion Which of books of prime entry is used if: Your business pays a supplier $5,000?  Cash book You send a customer an invoice for $1,320?  Sales day book You receive an invoice from J Sunderland for $1,750  Purchase day book

Discussion You pay Hall & Co $1,000  Cash book Sarti (a customer) returns goods to the value of $100  Sales returns day book You return goods to Elphick & Co to the value of $2,400  Purchase returns day book

Summarising source documents

Full processes

Recording Sales Sales invoices

Sales credit notes

Sales day book

Cheques received

Cash book

Bank account Sales tax control account Receivables ledger

Receivables ledger control account

Sales day book

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The sale to Jones Co for $105 is also recorded on page 14 of the receivables ledger. Invoice number is unique generated by the business's sales system.

Recording Purchases Purchase invoices

Purchase credit invoices

Purchase day book

Cheques paid

Cash book

Bank account Sales tax control account Payables ledger

Payables ledger control account

Purchase day book

v The purchase from Cook Co for $315 is also recorded on page 31 of the payable ledger.

The cash book Cash book

Cash payment book/ Cheque payment day book

Cash receipts day book

Cash contr ol accou nt in G/L

The cash receipts book What you expect to see?

The cash payments book What you expect to see?

Example At the beginning of 10 Jan, Peter Jeffries had $2,100 in the bank. During 10 January 20X8: (a) Cash sale: receipt of $220 (b) Payment from credit customer Khan: $3,100 less discount allowed $100 (R/L ref. 07) (c) Payment from credit customer Likert: $1,480 (R/L ref. 12) (d) Payment from credit customer Lee: $2,400 less discount allowed $70 (R/L ref. 10) (f) Cash received for sale of machine: $370

Example (g) Payment to supplier Price: $1,250 (P/L ref. 27) Discount received $50 (h) Payment to supplier Burn: $2,420 (P/L ref. 16) Discount received $80 (i) Payment of telephone bill: $235 (j) Payment of gas bill: $640 (k) Payment of $3,400 to Fawcett for new plant and machinery

Solution

Solution

Question Which of the following will not be entered in the cash book? (a) Cheque received (b) Payment to receivables ledger customers (c) Supplier's invoice (d) Credit note (e) Debit note (f) Bank charges debited to the bank account (g) Overdraft interest debited to the bank account (h) Payment for a non-current asset purchased on credit (i) Refund received from a supplier (j) Depreciation Answer: CDEJ

The bank statement Weekly/monhtly basis

Bank statement received from bank

Text To reconcile

Investigate differences

Cash book (internally generated)

The petty cash book The book of prime entry which keeps a cumulative record of the small amounts of cash received into and paid out of the cash float  There are usually more payments than receipts, and petty cash must be ‘topped-up' from time to time with cash from the business bank account. 

The general ledger v The general ledger is the accounting record which summarizes the financial affairs of a business. v It contains details of assets, liabilities and capital, income and expenditure and so profit and loss. v It consists of a large number of different ledger accounts, each account having its own purpose or 'name' and an identity or code v Another name for the general ledger is the nominal ledger

The general ledger

The ‘T’ format

The 'T' format accounts: vOn top of the account is its name vLeft hand side called debit side vRight hand side called credit side

Example For example: Profit and Loss accounts

Note: No b/f or c/f for profit and losses accounts

Example t ugh Bro ard w for ance bal

For example: Balance sheet accounts

d rrie Ca ward for ance bal

Note: There are always b/f or c/f for profit and losses accounts for balance sheet accounts

Double entry book-keeping

The Principles 

Every transaction has a two fold effect!!!

Example – Cash transactions In the cash book of a business, the following transactions have been recorded. (a) A cash sale (ie a receipt) of $2 (b) Payment of a rent bill totalling $150 (c) Buying some goods for cash at $100 (d) Buying some shelves for cash at $200 How would these four transactions be posted to the ledger accounts? For that matter, which ledger accounts should they be posted to? Don't forget that each transaction will be posted twice, in accordance with the rule of double entry.



How much cash is left?

Example – Credit transactions Recorded in the sales day book and the purchase day book are the following transactions. (a) The business sells goods on credit to a customer Mr A for $2,000. (b) The business buys goods on credit from a supplier B for $100. How and where are these transactions posted in the ledger accounts?

More transactions Identify the debit and credit entries in the following transactions. (a) Bought a machine on credit from A, cost $8,000 DEBIT Machine account (non-current asset) $8,000 CREDIT Payables (A) $8,000 (b) Bought goods on credit from B, cost $500 DEBIT Purchases account $500 CREDIT Payables (B) $500 (c) Sold goods on credit to C, value $1,200 DEBIT Receivables (C) $1,200 CREDIT Sales $1,200

More transactions (d) Paid D (a supplier) $300 DEBIT Payables (D) $300 CREDIT Cash $300 (e) Collected $180 from E, a customer DEBIT Cash $180 CREDIT Receivables (E) $180 (f) Paid wages $4,000 DEBIT Wages expense $4,000 CREDIT Cash $4,000

More transactions (g) Received rent bill of $700 from landlord G DEBIT Rent expense $700 CREDIT Payables (G) $700 (h) Paid rent of $700 to landlord G DEBIT Payables (G) $700 CREDIT Cash $700 (i) Paid insurance premium $90 DEBIT Insurance expense $90 CREDIT Cash $90

Posting from the day books

Posting cash receipts

Impersonal vs. personal 

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Impersonal accounts: Accounts in the general ledger Personal accounts:  Include details of transactions which have already been summarized in ledger accounts.  Do not form part of the double entry system  Memorandum accounts only. Control accounts:  Used chiefly for receivables and payables.  Should agree with the total of the individual balances

Accounting for sales tax If a business sells goods for $600 + $105 sales tax, ie for $705 gross price, the sales account should only record the $600 excluding sales tax. DEBIT Cash or AR $705 CREDIT Sales $600 CREDIT Sales tax account (output)

$105

Accounting for sales tax If a business purchases goods on credit for $400 + tax $70 Tax is recoverable DEBIT Purchases $400 DEBIT Sales tax account (input tax) $70 CREDIT Trade AP $470 Tax is not recoverable DEBIT Purchases $470 CREDIT Trade accounts payable

$470

When is sales tax accounted Sales tax is accounted for when it first arises: 

when

recording credit purchases/sales in credit transactions and

when recording cash received or paid in cash transactions

Sales tax account Sales tax account B/f: Purchase day book

xxx

(input sales tax)

Bank

Sales day book

xxx

(out put sales tax invoiced)

xxx

(input sales tax on cash purchase)

C/f:

xxx

xxx

Bank

xxx

(out put sales tax on cash sales)

Calculating sales tax Question 1 One product has net price of $10,000 and sales tax at 10% is to be added. How much sales tax is? 

Answer:

Sales tax = 10,000*10% = 1,000

Calculating sales tax 

Question 2

The gross price of Product A is $15,000. What is the sales tax at 10% charged on each product? 

Answer:

Net sale

= 15,000/(1+10%) = 13,636

Sales tax = 13,636*10% = 1,363

Calculating sales tax Question 3 A company sells goods for $127,350 including sales tax at 17 ½% in a quarter. It buys goods for $101,290 including sales tax. What amount will it pay to or receive from the tax authorities for the quarter (round to the nearest $)?

Calculating sales tax 

Answer:

Question 1 Which of the following business documents is the source of information for purchases made on credit? A Invoice B Goods received note C Credit note D Bank statement Answer: A

Question 2 A document from a seller notifying the purchaser that an overcharge has been made is called: A An advice note B A credit note C A consignment note D A debit note Answer: B

QB 5 Net profit was calculated as being $10,200. It was later discovered that capital expenditure of $3,000 had been treated as revenue expenditure, and revenue receipts of $1,400 had been treated as capital receipts. The correct net profit should have been A $5,800 B $8,600 C $11,800 D $14,600 Answer: D

QB 6 A credit balance on a ledger account indicates A An asset or an expense B A liability or an expense C An amount owing to the organisation D A liability or a revenue Answer: D

QB 7 Which ONE of the following is not a book of prime entry? A The petty cash book B The sales returns day book C The receivables ledger D The cash book Answer: C