Topic three

Topic threeTopic three

Measuring and recording transactions

Learning outcomesLearning outcomesIn this lesson you will learnDifferences between subsidiary

and general ledgerHow to post transactions to the T

AccountsHow to balance off T AccountsTransferring balances to the trial

balancePreparation of financial

statements from the trial balance04/21/23


RecapitulationRecapitulationLet us remind ourselves some of

the important lessons we have learnt.

What is the accounting equation?How do we record increase in

AssetsLiabilitiesCapitalIncomeExpenses

04/21/23Measuring and recording transactions

RecapitulationRecapitulation


Account Increase Decrease

Assets Debit Credit

Expenses Debit Credit

Income Credit Debit

Capital Credit Debit

Liabilities Credit Debit

RecapitulationRecapitulationThe table above forms the basic

foundation of accountingThe double entry concept is also

critical;◦A transaction will always have both a

debit and a credit entry.◦Total debit amount(s) from a

transaction should be equal to the total credit amount(s)


General ledger and General ledger and subsidiary ledgersubsidiary ledgerSubsidiary ledgers contain account

listings say for customers or suppliers

General ledger is a control total of amounts in the subsidiary accounts

In the case of customers’ accounts, the subsidiary ledger will contain details of each customer

General ledger will show total amounts due from all customers


Subsidiary accounts Subsidiary accounts exampleexample


Abdi Retailers Account Debit CreditReference Date Amount Reference Date AmountSales 23.07.11 500 Bal c/d 500Total 500 500 Total

AmountsYusuf Traders Account 500

Debit Credit 800Reference Date Amount Reference Date Amount 450Sales 16.07.11 800 1,750 Bal c/d 800Total 800 800

Rukia Juma Groceries Account Debit CreditReference Date Amount Reference Date AmountSales 31.07.11 450 Bal c/d 450Total 450 450

General ledger General ledger


Richy Wholesalers

Accounts receivables Subsidiary Ledger

For the month ended 31 July 2011

Debit Credit

Ref. Date Amount Reference Date Amount

Sales Jul-11 1,750

Bal c/d 1,750

Total 1,750 1,750

General accountGeneral accountThe amount of $1,750 in the

general ledger is simply a sum total of the figures in the three customers accounts.

Note that the transactions in customer account are posted according to the date of transaction

General ledger provides a summary of transactions for a period, in this case for the month of July 2011


Posting to the T-AccountsPosting to the T-AccountsDo you recall the lessons learnt in

topic two about posting transactions to the ledger accounts

Refer to the recap in the beginning of the topic on how to record changes in various accounts

The notes provide a summary of some of the most common types of transactions and how to post them


Posting to T-AccountsPosting to T-AccountsCommon transactionsCredit sales

Dr Accounts receivablesCr Sales

Cash salesDr Cash

Cr SalesCredit purchases

Dr Stocks/inventoriesCr Accounts payable


Posting to T AccountsPosting to T Accounts Cash purchases

Dr Stocks/inventoriesCr Cash

Cash payment for expensesDr Expenses

Cr Cash

See the next slide for a class exercise


Posting to T AccountsPosting to T AccountsBased on the guidance provided above,

determine how to post the following Payment for credit purchases Receipt from credit customers Sales discounts Purchase discounts Sales returns Purchase returns Cash payment for expenses Accrued expenses Purchase and disposal of property, plant and

equipment Capital contribution by owners Borrowings


Prepare a trial balancePrepare a trial balanceIn Topic 5 we learnt that after

transactions have been recorded in the T Accounts, they should be balanced off

Balances in each of the account should then be transferred to the trial balance

In case balances are not properly transferred, errors will occur

As we shall learn in Topic 5, such errors might cause the trial balance not to balance and should be identified


Prepare trial balancePrepare trial balanceOther errors committed at this

stage will not cause the trial balance not to balance

Need for one to be keen when transferring balances from ledger accounts

To help us learn more about this process, we look at a detailed illustration


IllustrationIllustrationMr. Isaac Hassan is a retailer of

motor parts in an establishment named Ouru Super Stores located in the heart of a busy town. At 1 Jan 2010 the opening balances for the business were as tabulated below.



Ouru Super StoresOpening Trial BalanceAs at 01.01.2011

Amount ($) Amount ($)Dr Cr

Capital 11,042 Bank Account 2,600 Cash in Hand 100 Motor Vehicles - cost 5,600 Motor Vehicles - Accumulated deprec. 1,400 Fixtures and Equipment - cost 1,200 Fixtures and Equipment - Accumulated deprec. 300 Trade Accounts receivable 7,800 Trade Accounts payable 900 Bank loan 4,700 VAT Control Account 700 Accrued telephone 52 Accrued electricity 46 Inventories at 01.01.2011 1,840

19,140 19,140


Receivables Payables

Mr Daniel 2,000

Mr Suleiman 1,400

Mr Ahmed 2,400

Mr Sheikh 2,000

Mr Halima 200

Mr Salim 100

Mr Khalif 600

7,800 900

Additional informationOpening balances for accounts payables and receivables were as per the table below;

For the 3 Months to end of March 2011, the For the 3 Months to end of March 2011, the following transactions were recorded.following transactions were recorded.


02-Jan Cash sales of $940 inclusive of VAT made03-Jan Sales on account of $1520 plus VAT to Mr Ahmed03-Jan Purchased on account of $1200 plus VAT from Mr Halima 06-Jan $10 from petty cash spent to purchase stamps. No VAT was charged on stamps08-Jan Received $1900 from Mr Daniel in settlement of his balance at 1.1.2011, cash

discount was given for the balance10-Jan $2000 received from Mr Sheikh in full settlement of his debt11-Jan Paid Mr Salim on account $10011-Jan Paid insurance premiums for the year amounting to $450. No VAT was charged12-Jan Sales on account of $2000 plus VAT to Mr Suleiman 17-Jan Paid outstanding VAT liability to the tax agencies19-Jan Paid advertising costs $47 including VAT from petty cash25-Jan Received a telephone invoice for $376 inclusive of VAT31-Jan Received bills for welding gas $84 including 5% VAT02-Feb Spent $10 on stamps from petty cash05-Feb Invoice for electricity received and immediately paid, $126 inclusive of VAT at

5%. 09-Feb Legal fees invoice of $80 plus VAT received and paid


12-Feb Welding gas bill settled in full17-Feb Telephone bill settled in full25-Feb Mr Khalif paid $550 in settlement of his opening balance at 1.1.10 and remainder of

the balance given as discount28-Feb Sold goods on account to Mr Daniel for $400 plus VAT 28-Feb Injected $5,000 into the business as capital28-Feb Sold goods to Mr Ahmed on account for $600 plus VAT 01-Mar Received $1,300 from Mr Suleiman in respect of his opening balance at 01.01.11,

balance allowed as a discount 02-Mar Made cash sales of $611 including VAT 03-Mar Paid Mr Halima $180 in settlement of his balance at 1.1.09, remainder of the balance

being given as a discount4-Mar Bought new equipments on account at a cost of $440 plus VAT payment to be made

in in 6 months’ time. The equipment was imported with import duty of $52 was paid08-Mar Cash sales of $235 including VAT made11-Mar Sold a motor vehicle for $300 in cash. The vehicle originally cost $800 on 22.3.07.

Full year’s depreciation is charged in the year of acquisition and none in the year of disposal.

15-Mar Purchased goods on account for $200 plus VAT from Mr Halima 18-Mar Purchased goods on credit for $320 plus VAT from Mr Salim21-Mar Sold goods on account to Mr Ahmed for $1000 plus VAT 27-Mar Purchased a vehicle on account for $400 plus VAT, the payment will be done due in

May 2011 31-Mar Reimbursed petty cash float to top back up to $100 by raising a cheque

Additional informationAdditional informationVAT unless otherwise stated is

charged at a rate of 17.5%.

Required:-

Post the above transactions in the respective ledger balances

Prepare a trial balance as at 31 March 2011

Prepare final accounts.04/21/23


Suggested solution Suggested solution To be worked out in class


ConclusionConclusionThe illustration provides an

extensive coverage of the accounting cycle

Students should rework on the same and where challenges are faced seek help in the next lesson

See our course text for similar exercises


Questions

Topic two: measuring and recording transactions23-04-21 24

Topic three

Documents

Transcript of Topic three