The use of

double entry and

accounting
systems

25/9/2024 By S.Chaitezvi
The role of source documents
• Business transactions are recorded on source documents.
Examples include sales and purchase orders, invoices and
credit notes.
Types of source documents
Whenever a business transaction takes place, involving sales
or purchases, receiving or paying money, or owing or being
owed money, it is usual for the transaction to be recorded on
a document. These documents are the source of all the
information recorded by a business.
25/9/2024 By S.Chaitezvi
Types of source documents
(a) Quotation.
A document sent to a customer by a company stating the fixed
price that would be charged to produce or deliver goods or
services. Quotations tend to be used when businesses do not
have a standard listing of prices for products, for example
when the time, materials and skills required for each job vary
according to the customer's needs. Quotations can't be
changed once they have been accepted by the customer.

25/9/2024 By S.Chaitezvi
(b) Purchase order
A document of the company that details goods or services
which the company wishes to purchase from another
company.
Two copies of a purchase order are often made, one is sent to
the company from which the goods or services will be
purchased, and the other is kept internally so the company
can keep track of its orders. Purchase orders are often
sequentially numbered.

25/9/2024 By S.Chaitezvi
• (c) Sales order. A document of the company that details an
order placed by a customer for goods or services. The customer
may have sent a purchase order to the company from which the
company will then generate a sales order. Sales orders are
usually sequentially numbered so that the company can keep
track of orders placed by customers.

• (d) Goods received note. A document of the company that lists

the goods that a business has received from a supplier. A goods
received note is usually prepared by the business's own
warehouse or goods receiving area. This is discussed further
below.

25/9/2024 By S.Chaitezvi
• (e) Goods despatched note. A document of the company that
lists the goods that the company has sent out to a customer.
The company will keep a record of goods despatched notes in
case of any queries by customers about the goods sent.
• The customer will compare the goods despatched note to
what they receive to make sure all the items listed have been
delivered and are the right specification.
• (f) Invoice. This is discussed further below.

25/9/2024 By S.Chaitezvi
• (g) Statement. A document sent out by a supplier to a
customer listing the transactions on the customer's account,
including all invoices and credit notes issued and all payments
received from the customer. The statement is useful, as it
allows the customer to reconcile the amount that they believe
they owe the supplier to the amount the supplier believes
they are owed. Any differences can then be queried.

• (h) Credit note. A document sent by a supplier to a customer

in respect of goods returned or overpayments made by the
customer. It is a 'negative' invoice.
25/9/2024 By S.Chaitezvi
• (i) Debit note. A document sent by a customer to a supplier in
respect of goods returned or an overpayment made. It is a formal
request for the supplier to issue a credit note.

• (j) Remittance advice. A document sent to a supplier with a

payment, detailing which invoices are being paid and which credit
notes offset. A remittance advice allows the supplier to update the
customer's records to show which invoices have been paid and
which are still outstanding. It also confirms the amount being paid,
so that any discrepancies can be easily identified and investigated.
•
• (k) Receipt. A document confirming confirmation that a payment
has been received. This is usually in respect of cash sales, eg a till
receipt from a cash register.

25/9/2024 By S.Chaitezvi
Invoices
• An invoice relates to a sales order or a purchase order.
a) When a business sells goods or services on credit to a
customer, it sends out an invoice. The details on the invoice
should match the details on the sales order. The invoice is a
request for the customer to pay what they owe.
b) When a business buys goods or services on credit it
receives an invoice from the supplier. The details on the
invoice should match the details on the purchase order.

25/9/2024 By S.Chaitezvi
• The invoice is primarily a demand for payment, but it is used for
other purposes as well. Most accounting software packages can
generate invoices; however, in smaller businesses with paper
based systems, the invoice is often produced on multi-part
stationery, or photocopied, or carbon-copied.

• The top copy will go to the customer and other copies will be
used by various people within the business.

25/9/2024 By S.Chaitezvi
What does an invoice show?
• Invoices should be numbered, so that the business can keep track of all the
invoices it sends out. Information usually shown on an invoice includes the
following.
• (a) Name and address of the seller and the purchaser
• (b) Date of the sale
• (c) Description of what is being sold
• (d) Quantity and unit price of what has been sold (eg 20 pairs of shoes at $25 a
pair)
• (e) Details of trade discount, if any (eg 10% reduction in cost if buying over 100
pairs of shoes)
• (f) Total amount of the invoice including (usually) details any of sales tax
• (g) Sometimes, the date by which payment is due, and other terms of sale

25/9/2024 By S.Chaitezvi
 Uses of invoices

Invoices may be used for different purposes.

•Copy to customer as a request for payment

•Copy to accounts department to match to eventual payment
•Copy to warehouse to generate a despatch of goods, as
evidenced by a goods despatched note
•Copy matched to sales order and kept in sales department as
a record of sales
25/9/2024 By S.Chaitezvi
Other documents
• The following documents are sometimes used in connection with sales and
purchases.
(a) Debit notes (b)Goods received notes
A debit note might be issued to adjust an invoice already issued. This is also
commonly achieved by issuing a revised invoice after raising a credit or debit
note purely for internal purposes (ie to keep the records straight).
More commonly, a debit note is issued to a supplier as a means of formally
requesting a credit note.
Goods received notes (GRNs) record a receipt of goods, most commonly in a
warehouse. They may be used in addition to suppliers' advice notes.

25/9/2024 By S.Chaitezvi
 The need for books of
prime entry
• In the course of business, source documents
are created. The details on these source
documents need to be summarised, as
otherwise the business might forget to ask
for some money, or forget to pay some, or
even accidentally pay something twice.

• It needs to keep records of source documents

of transactions so that it knows what is going
on. Such records are made in books of prime
entry.

25/9/2024 By S.Chaitezvi
The main books of prime entry are as follows

(a) Sales day book

(b) Purchase day book
(c) Sales returns day book
(d) Purchase returns day book
(e) Journal (revisit)
(f) Cash book
(g) Petty cash book

25/9/2024 By S.Chaitezvi
The sales day book
• Is the book of prime entry for credit sales.
• The sales day book is used to keep a list of all invoices sent out to
customers each day. An extract from a sales day book might look like
this.

25/9/2024 By S.Chaitezvi
 The purchase day book

An extract from a purchase day book might look like this

25/9/2024 By S.Chaitezvi
• The purchase day book records other people's invoices, which have all
sorts of different numbers. For ease of reference, the business may
assign its own sequential internal invoice number to each purchase
invoice.
• Like the sales day book, the purchase day book analyses the invoices
which have been sent in. In this example, three of the invoices related
to goods which the business intends to resell (called simply 'purchases')
and the other invoice was an electricity bill.
• Most accounting software allows you to enter details of the purchase
invoices onto the system, and automatically generate Purchases Day
Book reports of the invoices entered.

25/9/2024 By S.Chaitezvi
The sales returns day book
• When customers return goods for some reason, a credit note is
raised. All credit notes are recorded in the sales returns day book. An
extract from the sales returns day book follows.

25/9/2024 By S.Chaitezvi
The purchase returns day book
• Not surprisingly, the purchase returns day book records credit notes
received in respect of goods which the business sends back to its
suppliers. An extract from the purchase returns day book follows.

25/9/2024 By S.Chaitezvi
Cash book

• The cash book may be a manual record or a computer file. It records

all transactions that go through the bank account.
• The cash book is also a day book, used to keep a record of money
received and money paid out by the business.
• The cash book deals with money paid into and out of the business
bank account. This could be money received on the business
premises in notes, coins and cheques, subsequently paid into the
bank.

25/9/2024 By S.Chaitezvi
• There are also receipts and payments made by bank transfer, standing
order, direct debit and bank interest and charges, directly by the
bank.
• Some cash, in notes and coins, is usually kept on the business
premises in order to make occasional payments for odd items of
expense. This cash is usually accounted for separately in a petty cash
book.
• One side (the left) of the cash book is used to record receipts of cash,
and the other side (the right) is used to record payments.
• The best way to see how the cash book works is to follow through an
example. For convenience, we are showing the cash receipts and cash
payments sides separately, but they are part of the same book.

25/9/2024 By S.Chaitezvi
Example: cash book
• At the beginning of 1 September, Robin Plenty had $900 in the bank.
• During 1 September 20X7, Robin Plenty had the following receipts and payments.
• (a) Cash sale: receipt of $80
• (b) Payment from credit customer Hay $400 less discount allowed $20
• (c) Payment from credit customer Been $720
• (d) Payment from credit customer Seed $150 less discount allowed $10
• (e) Cheque received from Len Dinger $1,800 to provide a short-term loan
• (f) Second cash sale: receipt of $150
• (g) Cash received for sale of machine $200
• (h) Payment to supplier Kew $120
• (i) Payment to supplier Hare $310
• (j) Payment of telephone bill $400
• (k) Payment of gas bill $280
• (l) $100 in cash withdrawn from bank for petty cash
• (m) Payment of $1,500 to Hess for new plant and machinery

25/9/2024 By S.Chaitezvi
The receipts part of the cash book for 1
September would look like this.

25/9/2024 By S.Chaitezvi
Notes

• 1 There is a space on the right-hand side of the cash book so that the
receipts can be analysed under various headings – for example, 'cash
from receivables', 'cash sales' and 'other receipts’.

• 2 The cash received in the day amounted to $3,470. Added to the

$900 at the start of the day, this comes to $4,370. This is not the
amount to be carried forward to the next day, because first we have
to subtract all the payments made during 1 September.

25/9/2024 By S.Chaitezvi
The payments part of the cash book for 1 September
would look like this.

25/9/2024 By S.Chaitezvi
Notes
• As you can see, this is very similar to the receipts part of the cash book.
The only points to note are as follows.

(a) The analysis on the right would be under headings like 'payments to
payables', 'payments into petty cash', 'wages' and 'other payments’.
(b) Payments during 1 September totalled $2,710. We know that the total of
receipts was $4,370.
That means that there is a balance of $4,370 – $2,710 = $1,660 to be 'carried
down' to the start of the next day. As you can see, this 'balance carried
down' is noted at the end of the payments column, so that the receipts and
payments totals show the same figure of $4,370 at the end of 1 September.

25/9/2024 By S.Chaitezvi
Bank statements
• Weekly or monthly, a business will receive a bank statement.
• Bank statements should be used to check that the amount shown as
a balance in the cash book agrees with the amount on the bank
statement, and that no cash has 'gone missing’.
• This agreement or 'reconciliation' of the cash book with a bank
statement is the subject of a later topic.

25/9/2024 By S.Chaitezvi
Petty cash
• Most businesses keep a small amount of cash on the premises to
make occasional small payments in cash, eg staff refreshments,
postage stamps, to pay the office cleaner, taxi fares, etc. This is often
called the cash float or petty cash account.
• The cash float can also be the resting place for occasional small
receipts, eg cash paid by a visitor to make a phone call.

25/9/2024 By S.Chaitezvi
• Although the amounts involved are small, petty cash transactions still
need to be recorded; otherwise the cash float could be abused for
personal expenses or even stolen. A typical layout follows.

25/9/2024 By S.Chaitezvi
QUESTION
• State which books of prime entry the following transactions would be
entered into.

A. Your business pays A Brown (a supplier) $450.00

B. You send D Smith (a customer) an invoice for $650
C. Your accounts manager asks you for $12 urgently in order to buy some
envelopes
D. You receive an invoice from A Brown for $300
E. You pay D Smith $500
F. F Jones (a customer) returns goods to the value of $250
G. You return goods to J Green to the value of $504
H. F Jones pays you $500
25/9/2024 By S.Chaitezvi
ANSWER

A .Cash book
B .Sales day book
C .Petty cash book
D .Purchases day book
E .Cash book
F .Sales returns day book
G .Purchase returns day book
H .Cash book

25/9/2024 By S.Chaitezvi
 Ledger accounts
and double
entry
25/9/2024 By S.Chaitezvi
Why do we need ledger accounts?
• Ledger accounts summarise all the individual transactions listed in the
books of prime entry
• A business is continually making transactions, eg buying and selling. It does
not prepare a statement of profit or loss and a statement of financial
position on completion of every individual transaction.
• To do so would be a time-consuming and cumbersome administrative task.
• However, a business should keep a record of the transactions that it makes,
the assets it acquires and liabilities it incurs.
• When the time comes to prepare a statement of profit or loss and a
statement of financial position, the relevant information can be taken from
those records.

25/9/2024 By S.Chaitezvi
• The records of transactions, assets and liabilities should be kept in the
following ways.
(a) In chronological order, and dated so that transactions can be related
to a particular period of time.

(b) Built up in cumulative totals.

(i) Day by day (eg total sales on Monday, total sales on Tuesday)
(ii) Week by week
(iii) Month by month
(iv) Year by year

25/9/2024 By S.Chaitezvi
The nominal ledger
• The principal accounts are contained in a ledger called the general or
nominal ledger.
• The nominal ledger is an accounting record which summarises the
financial affairs of a business.
• The nominal ledger is sometimes called the 'general ledger'. The
information contained in the books of prime entry (eg the sales and
purchases day books) is summarised and posted to accounts in the
nominal ledger.
• Accounting software operates in the same way; however, it is more
common for the information in the sales and purchases day books to
be posted to the nominal ledger as individual transactions rather than
summaries.

25/9/2024 By S.Chaitezvi
• The nominal ledger contains details of all accounts including assets,
liabilities, capital, income and expenditure, and so profit and loss. Each
account has an account name and an account code.

• Access to certain accounts in the nominal ledger may be restricted to

certain accounting staff, as a control against fraud, or for confidentiality
reasons (eg salary accounts).

25/9/2024 By S.Chaitezvi
Examples of accounts in the nominal ledger include
the following.
(a) Plant and machinery at cost (non-current asset)
(b) Motor vehicles at cost (non-current asset)
(c) Plant and machinery, provision for depreciation (liability)
(d) Motor vehicles, provision for depreciation (liability)
(e) Proprietor's capital (liability)
(f) Inventories – raw materials (current asset)
(g) Inventories – finished goods (current asset)
(h) Total trade accounts receivable (current asset)
(i) Total trade accounts payable (current liability)
(j) Wages and salaries (expense item)
(k) Rent and local taxes (expense item)

25/9/2024 By S.Chaitezvi
(i)Advertising expenses (expense item)
(m) Bank charges (expense item)
(n) Motor expenses (expense item)
(o) Telephone expenses (expense item)
(p) Sales (revenue item)
(q) Total cash or bank overdraft (current asset or liability)

• When it comes to drawing up the financial statements, the revenue and

expense accounts will help to form the statement of profit or loss, while
the asset and liability accounts go into the statement of financial
position.

25/9/2024 By S.Chaitezvi
The format of a ledger account

• If a ledger account were to be kept as a manual system in an actual

book, rather than as a file in a computerised system, it might look like
this:

25/9/2024 By S.Chaitezvi
• A computerised system performs the same functions, although the
actual ledger accounts will be stored as computer files and so may be
hidden away within the system.
• There are two sides to a ledger account, and an account heading on top,
and so they are often referred to as T-accounts.

(a) On top of the account is its name.

(b) There is a left-hand side, or debit side.
(c) There is a right-hand side, or credit side.

25/9/2024 By S.Chaitezvi
25/9/2024 By S.Chaitezvi
The accounting equation
• The accounting equation is ASSETS = CAPITAL + LIABILITIES.
• We will start by showing how to account for a business's transactions
from the time that trading first begins.
• We will use an example to illustrate the 'accounting equation', ie the
rule that the assets of a business will at all times equal its liabilities.
• This is also known as the statement of financial position equation.

25/9/2024 By S.Chaitezvi
Example: the accounting equation
• Business entity concept. Regardless of how a business is legally set
up, for accounting purposes, a business is always treated separately
from its owner(s).
• Liza starts a business. The business begins by owning the cash that
Liza has put into it, $2,500.
• The business is a separate entity in accounting terms and so it owes
the money to Liza as capital.

25/9/2024 By S.Chaitezvi
• When Liza sets up her business:
• Capital invested = $2,500
• Cash = $2,500
• Capital invested is a form of liability, because it is an amount owed by
the business to its owner(s).
• Adapting this to the idea that assets and liabilities are always equal
amounts, we can state the accounting equation as follows.
• ASSETS = CAPITAL + LIABILITIES

25/9/2024 By S.Chaitezvi
• For Liza , as at 1 July 20X6:
• Assets = Capital + Liabilities
• $2,500 (cash) = $2,500 + $0

25/9/2024 By S.Chaitezvi
Example continued
• Liza purchases a market stall from Len Turnip, who is retiring from his
fruit and vegetables business. The cost of the stall is $1,800.
• She also purchases some flowers and potted plants from a trader in
the wholesale market, at a cost of $650. This leaves $50 in cash, after
paying for the stall and goods for resale, out of the original $2,500.

25/9/2024 By S.Chaitezvi
• The assets and liabilities of the business have now altered and, at 3 July
before trading begins, the state of her business is as follows.

The stall and the flowers and plants are physical items, but they must be given a monetary value. This
monetary value is usually what they cost the business (called historical cost in accounting terms).

25/9/2024 By S.Chaitezvi
 Drawings
• Drawings are amounts of money taken out of a business by its
owner. Note. Drawings are relevant in sole traderships and
partnerships. In limited companies, the owners, ie shareholders,
are paid dividends.
• If the owner of a limited company is also a director of that
company, they may opt to pay themselves a salary as an
employee.
• If they withdraw any other money from the company for their
personal use, this should be accounted for as a director's loan,
which they must repay in accordance with an agreed repayment
schedule.

25/9/2024 By S.Chaitezvi
Payables and receivables
• Trade accounts payable are liabilities. Trade accounts receivable are
assets.
• A trade payable is a person or organisation to whom a business owes
money for debts incurred in the course of trading operations.
• In the accounts of a business, debts still outstanding which arise from
the purchase of materials, components or goods for resale are called
trade accounts payable, sometimes abbreviated to 'accounts payable'
or 'payables’.
• In some businesses, you may see trade accounts payable referred to
as trade creditors.
25/9/2024 By S.Chaitezvi
Trade accounts receivable
• In the accounts of the business, amounts owed by receivables are
called trade accounts receivable, sometimes abbreviated to 'accounts
receivable' or 'receivables’.
• Some businesses refer to trade accounts receivable as trade debtors.
• A trade account receivable is an asset of a business. When the debt is
finally paid, the trade account
• receivable 'disappears' as an asset, to be replaced by 'cash at bank
and in hand' as an asset.

25/9/2024 By S.Chaitezvi
Matching
• The matching convention requires that revenue earned is matched
with the expenses incurred in earning it.
• The matching convention comes from the accruals assumption. In the
example above, we have 'matched' the revenue earned with the
expenses incurred in earning it.
• So in part (iv), we included all the costs of the goods sold of $800,
even though $50 had not yet been paid in cash. Also, the interest of
$5 was deducted from revenue, even though it had not yet been paid.
This is an example of the matching convention.

25/9/2024 By S.Chaitezvi
QUESTION

• How would each of these transactions affect the accounting

equation?

A. Purchasing $800 worth of inventory on credit

B. Paying the telephone bill $25
C. Selling $450 worth of inventory for $650
D. Paying $800 to the supplier

25/9/2024 By S.Chaitezvi
ANSWER

25/9/2024 By S.Chaitezvi
Double entry
bookkeeping

25/9/2024 By S.Chaitezvi
• Double entry bookkeeping is based on the idea that each transaction
has an equal but opposite effect.
• Every accounting event must be entered in ledger accounts both as a
debit and as an equal but opposite credit.

25/9/2024 By S.Chaitezvi
Dual effect (duality concept)
• Double entry bookkeeping is the method used to transfer the
weekly/monthly totals from the books of prime entry into the
nominal ledger.
• Double entry bookkeeping is the method by which a business records
financial transactions.
• An account is maintained for every asset, liability, income and
expense. Every transaction is recorded twice so that every debit is
balanced by a credit.

25/9/2024 By S.Chaitezvi
• Central to this process is the idea that every transaction has two
effects, the dual effect.
• This feature is not something peculiar to businesses. If you were to
purchase a car for $1,000 cash, for instance, you would be affected in
two ways.

(a) You own a car worth $1,000

(b) You have $1,000 less cash

25/9/2024 By S.Chaitezvi
• If instead you got a bank loan to make the purchase:

(a) You own a car worth $1,000

(b) You owe the bank $1,000
• A month later if you pay a garage $50 to have the exhaust replaced:
(a) You have $50 less cash
(b) You have incurred a repairs expense of $50

Ledger accounts, with their debit and credit sides, are kept in a way which
allows the two-sided nature of every transaction to be recorded. This is known
as the 'double entry' system of bookkeeping, because every transaction is
recorded twice in the accounts.

25/9/2024 By S.Chaitezvi
The rules of
double entry
bookkeeping

25/9/2024 By S.Chaitezvi
 In terms of T-accounts:

25/9/2024 By S.Chaitezvi
Example: double entry for cash transactions
In the cash book of a business, the following transactions have been
recorded.
(a) A cash sale (ie a receipt) of $250
(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 and to
which ledger accounts should they be posted? Don't forget that each
transaction will be posted twice, in accordance with the rule of double entry.

25/9/2024 By S.Chaitezvi
Solution
(a) The two sides of the transaction are:
• (i) Cash is received (debit entry in the cash at bank account).
• (ii) Sales increase by $250 (credit entry in the sales account).

25/9/2024 By S.Chaitezvi
(b) The two sides of the transaction are:

• (i) Cash is paid (credit entry in the cash at bank account).

• (ii) Rent expense increases by $150 (debit entry in the rent account).
•

25/9/2024 By S.Chaitezvi
c) The two sides of the transaction are:

• (i) Cash is paid (credit entry in the cash at bank account).

• (ii) Purchases increase by $100 (debit entry in the purchases account).

25/9/2024 By S.Chaitezvi
d) The two sides of the transaction are:
• (i) Cash is paid (credit entry in the cash at bank account).
• (ii) Assets – in this case, shelves – increase by $200 (debit entry in
shelves account)

25/9/2024 By S.Chaitezvi
 Credit transactions

• Some accounts in the nominal ledger represent the total of very many
smaller balances. For example, the trade accounts receivable account
represents all the balances owed by individual customers of the
• business while the trade accounts payable account represents all
money owed by the business to its suppliers

25/9/2024 By S.Chaitezvi
QUESTION
• See if you can identify the debit and credit entries in the following
transactions.
• A Bought a machine on credit from A, cost $8,000
• B Bought goods on credit from B, cost $500
• C Sold goods on credit to C, value $1,200
• D Paid D (a credit supplier) $300
• E Collected $180 from E, a credit customer

25/9/2024 By S.Chaitezvi
• F Paid wages $4,000
• G Received rent bill of $700 from landlord G
• H Paid rent of $700 to landlord G
• I Paid insurance premium $90
• J Received a credit note for $450 from supplier H
• K Sent out a credit note for $200 to customer I

25/9/2024 By S.Chaitezvi
25/9/2024 By S.Chaitezvi
25/9/2024 By S.Chaitezvi
* Note.
• Suppliers who have supplied non-current assets are included
among sundry accounts payable,
• as distinct from trade suppliers (who have supplied raw
materials or goods for resale) who are trade
• accounts payable. It is quite common to have separate 'total
accounts payable' accounts, one for trade accounts payable
and another for sundry other accounts payable.

25/9/2024 By S.Chaitezvi
HOMEWORK
• Ron Knuckle set up a business selling keep fit equipment, trading
under the name of Buy Your Biceps Shop. He put $7,000 of his own
money into a business bank account (transaction A) and in his first
period of trading, the following transactions occurred.

25/9/2024 By S.Chaitezvi
25/9/2024 By S.Chaitezvi
REQUIRED
• Record the ledger entries from Ron Knuckle transactions

25/9/2024 By S.Chaitezvi
HOMEWORK

1. Journal
2. Sales day book
3. Sales returns day book
4. Purchase day book and
purchases returns day
book
5. The receivables and
payables ledgers

25/9/2024 By S.Chaitezvi
END

25/9/2024 By S.Chaitezvi