Accountancy

 

CHAPTER 01

BOOK-KEEPING TO THE TRIAL BALANCE

whereby 'every debit has a credit.' This is known as the Double Entry THE System of book-keeping which is almost universally employed is that System, to distinguish it from the Single Entry System, a much less detailed and less accurate method now very little used. The principles of Single Entry and its disadvantages, a knowledge of which is essential for examination purposes, are dealt with in Chapter. 

The Double Entry System seeks to record every transaction in money or money's worth in its double aspect-the receipt of a benefit by one account and the surrender of a like benefit by another account, the former entry being to the DEBIT of the account receiving, the latter to the CREDIT of the account surrendering. The fact that every debit has a credit does not necessarily entail the task of literally entering a separate credit for each debit, as, by the employment of special books, and the utilization of the totals of all entries contained therein, certain debits will be reflected, not in a series of separate credits but in a composite or collective item. Following the same principle, certain credits will be reflected in a compo- site or collective debit entry.

The student should find no difficulty in the entries in the Ledger accounts if he remembers the 'three cardinal rules' of double-entry book-keeping, viz:

1. Real Accounts. Accounts relating to tangible things, such as Cash, Fixtures, and Goods. 'Debit what comes in: Credit what goes out.'

2. Personal Accounts. Accounts relating to transactions with persons necessitated by 'Credit' transactions, i.e. where goods are sold and services rendered, payment being made at a subsequent date, or in the case of 'Debit' transactions where the converse position arises, i.e. payment is made at once for the future delivery of goods or rendering of services. 'Debit receiver: Credit supplier.'

3. Nominal Accounts. Accounts relating to gains or losses, e.g. Rents, Discounts. 'Debit losses (or expenses): Credit gains.'

As the first principle of double entry is that every entry in the Ledger shall be the subject of an originating entry in a book or Journal of prime or original entry, it is necessary as a preliminary to outline briefly the books or Journals of prime entry usually met with. These are as follows:

1. The General Journal.

2. Purchases and Sales Day Books or Journals.

3. Purchases and Sales Returns Books or Journals.

In addition may be included the Cash Book, which though strictly part of the Ledger, is, in practice, employed as a book of prime entry.

The books or journals will be considered separately.

1. The General Journal

ACCOUNTANCY

transactions of a special nature. It should be borne in mind that every This is employed for (a) opening entries, (b) closing entries and (c) transaction is capable of entry in the General Journal, but in order to economize labour, other books are almost invariably employed in place of

the General Journal.

The rule to be employed in writing up the General Journal is to enter in the debit column thereof the amount which is to be entered on the debit side of the Ledger, and in the credit column the amount which is to be entered on the credit side of the Ledger. The title of the appropriate account will be entered against each item. It is thus necessary to visualize the entry as it will appear in the Ledger, and to enter the items accord- ingly in the General Journal. The amount in the debit column must equal that in the credit column either in separate items or in a composite item.

At the foot of each entry a note, called the narration (or narrative), must be appended, showing the nature of and, where necessary, the authority for, the entry.

The entries made upon the inauguration of a business are-Debit assets: Credit liabilities and CAPITAL. These initial entries must balance simply because Capital is the excess of Assets over Liabilities. This rule is only a modified expression of the rules outlined on p. 0101, as Assets are usually Real Accounts, and as they come into the business are therefore debited. If some of those Assets consist of Debtors, they are personal accounts and are consequently debited as the persons in question have received goods and/or services from the proprietor at some time; as regards the credit entries, liabilities and capital are Personal Accounts and are credited in accordance with the rule appropriate thereto, i.e. credit supplier.

2. Sales and Purchases Day Books or Journals

Each sale (ignoring Cash Sales) will be entered in the Sales Day Book or Journal with such details as are required, e.g. date, name, reference to duplicate invoice, and posted to the debit of the buyer's account in the Ledger (Personal Accounts: debit receiver). At the end of a suitable period, weekly, monthly, or in fact at any interval, provided that it does not overlap the period for which the final accounts are to be prepared, additions of all the entries in the Sales Day Book or Journal will be made, and the total posted to the credit of Sales Account. (Real Accounts: credit what goes out.)

When this has been done the double entry in the Ledger has been effected in that the individual debits to the Personal Accounts are bal- anced by the total credit to the Sales Account.

Purchases will be similarly recorded but posted to the credit of the supplier's account in the Ledger (Personal Accounts: credit supplier). The total of the Purchases Day Book or Journal will be posted periodically to the debit of Purchases Account (Real Accounts: debit what comes in). Particular attention must be paid to the method of dealing with trade

 

BOOK KEEPING TO THE TRIAL BALANCE

0103

discounts. These are adjustments of the listed price of goods, and should be deducted before the sale or purchase is entered in the Day Book or Journal in order that This entry may reflect the actual sale or purchase price. Any cash discount allowed will be based upon the true figure, i.e. after deducting trade discount.

With regard to Cash Sales and Purchases, three alternative methods are usually met with, viz:

(a) To enter them in the Cash Book, debiting Cash and crediting Cash Sales Account, or crediting Cash and debiting Cash Purchases Account. By using a separate column in the Cash Book, posting to Cash Sales (or Purchases) Account can be made in total.

(b) To enter the transaction in the appropriate Day Book or Journal in the same way as a credit sale or purchase, and to post the amount to the debit or credit respectively of Cash.

(c) To enter the transaction in the appropriate Day Book or Journal and post to the debit (sales) or credit (purchases) of a ledger account called Cash Sales (or Purchases) (Personal) Account, exactly as if it were a credit transaction.

3. Sales and Purchases Returns Books or Journals

These books or Journals occupy the converse position to the Day Books or Journals all postings being made, in respect of Sales Returns, to the credit of the account of the customer who returns goods (Personal Accounts: credit supplier), and in respect of Purchases Returns, to the debit of the account of the supplier to whom the goods are returned. The respective totals are posted periodically to the debit of Sales or Sales Returns Account, and to the credit of Purchases or Purchases Returns Account.

In these books or journals the treatment of trade discounts will be similar to that in the case of Sales and Purchases; that is, the amount to be entered will be the net figure after deduction of trade discount.

Cash Book. It will be recollected that one of the fundamental rules of double-entry book-keeping is that all entries must originate in a subsidiary book-a book of prime or original entry-and be posted therefrom to the Ledger. In practice, however, expedience and convenience dictate a departure from this rule in the case of cash and bank entries.

The Cash Book is a LEDGER, but the use of a subsidiary book in this connection is often dispensed with, and the double entry is completed by direct transfer from the Cash Book to the other ledgers.

The type of Cash Book employed depends largely on the circumstances, but for the purpose of exposition of principles the usual 'three-column' type will be taken. It should be noted that the three columns which appear on each side of the Cash Book represent the three types into which accounts are classified:

1. Discount, which is a NOMINAL ACCOUNT.

2. Cash, which is a REAL ACCOUNT.

3. Bank, which is a PERSONAL ACCOUNT.

 

0104

ACCOUNTANCY

The principal rules are as follows:

Receipts. (a) On receipt of cash from debtors, the amount actually received is entered in the Cash column debit (Real Accounts: debit what comes in) or if the money is paid direct into the Bank, into the Bank column debit (Personal Accounts: debit receiver). The credit in each case is to the debtor's Personal Account (Personal Accounts: credit supplier).

(b) On receipt of an amount in respect of Cash Sales, the entry is made in the Cash or Bank column debit, the credit in this case being either to the Cash Sales Account, or as a posting to the Sales Day Book or Journal, or to the credit of Cash Sales (Personal) Account. (See p. 0103.)

(c) On receipt of an amount from the sale of an Asset, the entry will be to the debit of Cash or Bank as outlined above, whilst the credit will be to the Asset Account (Real Accounts: credit what goes out).

In all the above cases, if a CASH DISCOUNT is allowed, such amount is entered in the Discount Allowed column debit, this column being totalled periodically, and the total transferred to the debit of Discounts Allowed Account (Nominal Accounts: debit loss or expense).

Payments. (a) On payment of an amount by cash to a creditor, the amount is entered in the Cash column credit (Real Accounts: credit what goes out); if the payment should be made by cheque, the amount is entered in the Bank column (instead of Cash) credit (Personal Accounts: credit supplier), the debit in each case being to the creditor's Personal Account (Personal Accounts: debit receiver).

(b) On payment of an amount in respect of Cash Purchases, the entry is made in the Cash or Bank column credit (rule as above), the debit in this case being either to Cash Purchases Account, or as a posting to the Purchases Day Book or Journal or to the debit of Cash Purchases (Personal) Account. (See p. 0103.)

(c) On payment of an amount for the purchase of an Asset, the credit will be to Cash or Bank, whilst the debit will be to the Asset Account (Real Accounts: debit what comes in).

In all the above cases, if a CASH DISCOUNT is received, such amount is entered in the Discount Received column credit, this column being totalled periodically, and the total transferred to the credit of Discounts Received Account (Nominal Accounts: credit gains).

Bank. Where Cash is paid into the Bank, the entries will be: Credit Cash column (Real Accounts: credit what goes out) and debit Bank column (Personal Accounts: debit receiver) unless on receipt it was paid into Bank and entered direct into the Bank column debit. If Cash is drawn out of the Bank for use in the business the entries will be exactly opposite, viz. debit Cash column (Real Accounts: debit what comes in), and credit Bank column (Personal Accounts: credit supplier).

The Ledger. The Ledger is the most important book of account and is

BOOK KEEPING TO THE TRIAL BALANCE

0105

the destination of the entries made in the subsidiary books or journals. It is essentially a collection of the three types of accounts already enumerated-Real, Personal and Nominal. Real Accounts record transac- tions which deal with material things. Assets such as Cash and Stock are typical examples.

Personal Accounts record transactions of a personal nature. It should be noted that while Cash is a real account, Bank is a personal account.

Nominal accounts relate, on the one hand, to all gains, and on the other hand, to all losses, costs, and expenses connected with the particular business. Examples of nominal accounts are: Wages, Rent, Rates, Insur- ance, Carriage, Discount, Telephone, Depreciation and Interest. The debits (i.e. losses, etc.) will usually have their original entry in the Cash or Bank column of the Cash Book, Purchases Day Book or Journal or the Expenses Day Book or Journal the latter book being used to record expenses on similar lines to the Purchases Day Book or Journal.

In concerns of any magnitude, the Ledger is divided up into many separate books. There will be Sales Ledgers and Purchases. Ledgers. containing the accounts of Debtors and Creditors respectively, which in turn may be subdivided alphabetically, geographically or otherwise, in accordance with the requirements of the particular business.

In addition, a separate Ledger, known as the Nominal (or General) Ledger, will be utilized, containing the accounts relating to Sales, Purch- ases, and Expenses. In practice a Private Ledger is employed in order to ensure privacy in regard to such accounts as Capital, Drawings, Deposit Accounts at the Bank, and the like.

Drawings. Where, as is usual, the proprietor withdraws cash or goods from the business for his personal use, such amounts are in effect withdrawals of Capital. In order to free the Capital Account from a large number of small entries a Drawings Account is generally opened.

(a) Cash Withdrawals., The entries will be: debit Drawings Account (Personal Accounts: debit receiver); credit Cash (Real Accounts: credit what goes out), or Bank (Personal Accounts: credit supplier).

(b) Goods Withdrawals. The entries will be: debit Drawings Account; credit Purchases Account (Real Accounts: credit what goes out).

The balance of Drawings Account will be transferred periodically by means of a Journal entry, thus: debit Capital Account; credit Drawings Account.

Not infrequently does a payment out partake of both a nominal and a. private character, e.g. entertainment expenses, and, consequently, the correct proportions (often necessarily approximated) should be charged to their appropriate accounts. It is immaterial whether the whole composite item is first debited to the Nominal or to the Drawings Account, so long as the correct adjusting transfer is made. Suppose £10 is paid out represent- ing £6 entertainment expenses and £4 drawings, it may be treated in two

ways, viz:

 

JOURNAL

Date (1)       (2)	Cash' Being Drawings and Entertainment Expenses Being Drawings	£ 4 6     10       6	4 10       10       6
	Drawing Being Drawings
	Entertainment Expenses Drawings Being transfer of the amount of Entertainment Expenses included in Drawings.

 

Dishonoured Cheques. It frequently occurs that a cheque received in respect of a debt on which cash discount has been allowed is dishonoured (i.e. not paid), thus necessitating an adjusting Journal entry in order to restore the original position. On receipt of the cheque the following entries will have been made:

JOURNAL

£

£

 

When the cheque is dishonoured these entries must be written back, care being taken that the discount is written back to the credit of Discounts Allowed Account and not to the credit of Discounts Received Account through the discount column credit in the Cash Book, as it is not a discount received but the cancellation of a discount allowed. The entries will therefore be:

 

Bank'. Discounts Allowed Debtor. JOURNAL Being receipt of cheque and discount allowed

£

£

 

Bad Debts. If it becomes necessary to consider a debt as bad (whether a cheque has been dishonoured or not) a transfer must be made through the 'In practice cash transactions are not usually journalized.