⁶INTRODUCTION TO ACCOUNTING

 Accounting is regarded as the language of business.

 Accounting can be divided into two sections:

i. Bookkeeping Is a process of detailed recording of all the financial transactions of a

business.
These records must be properly maintained and the basis of
maintaining these detailed records is double-entry book-keeping.
ii. Accounting Is the use of bookkeeping records to prepare financial statements at
regular intervals.
These financial statements are then used for decision making.
 Hence bookkeeping is the first stage and it starts as soon as a business transaction is completed.
 When a transaction takes place, that transaction is documented and the documentation of a
transaction is very important as it proves that a certain transaction has taken place.
 Information that is recorded is extracted from these business documents and they are called
source documents.
 Accounting begins where bookkeeping ends.

Difference between Bookkeeping and Accounting

Bookkeeping Accounting
i. Focus Detailed recording of financial Using the bookkeeping records to
transactions. prepare financial statements.
ii. Decision Management cannot make a decision Management can take critical
making based on the data provided by decisions based on the data provided
bookkeeping by accounting.
iii. Stage It is a primary stage. It starts when a It is a secondary stage. It begins
transaction is completed. where bookkeeping ends.
iv. Objective To maintain systematic records of To ascertain net results of operations
financial transaction. and financial position.
v. Staff Performed by Junior staff Performed by senior staff.

vi. Skills Does not require special skills and Requires special skills and
knowledge knowledge.
vii. Nature of job Clerical in nature Analytical and professional in nature.

viii. Users Used by internal users only. Used by both internal and external
users.
ix. Job title Bookkeeper/Clerk Accountant

Branches of Accounting
 Two branches of accounting are;
i. Financial accounting Is a field of accounting which is concerned with creating
financial statements which will be communicated to
external users.
ii. Management accounting Is a field of accounting that analyzes and provides cost
information to the internal management for the purpose
of planning, controlling and decision-making.

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Comparison between Financial and Management accounting.

Financial accounting Management accounting

i. Objective To create financial statements to be To provide information to
shared to internal and external users. management that is used to plan, set
goals and evaluate these goals.
ii. Audience External users Internal users

iii. Focus Focuses on history Focuses on the present and forecasts

for the future.
iv. Systems Only cares about the worth and Looks for bottleneck operations and
generating a profit and not the whole examines various ways to enhance
system. profits by eliminating bottleneck
issues.
v. Scope Looks at the entire business Looks at individual departments

vi. Timing Are due at the end of an accounting Issued more frequently to provide
period managers with relevant information
they can act on immediately.
vii. Proven Relies on precision, that is accurate Deals with estimates as opposed to
information data for reporting proven data.
viii. Standards Must follow various accounting No set standard to compile that
standards information.

FINANCIAL ACCOUNTING
Users of Financial accounting information

a) Owners/Shareholders b) Managers
c) Prospective investors d) Lending institutions
e) Government f) Employees
g) Regulatory agencies h) Researchers
i) Customers j) Present Investors
k) Auditors l) The Public

BOOKKEEPING.
What is a Transaction?
 It is a completed agreement between a buyer and a seller to exchange goods, services or financial
assets in return for payment.
 The payment ca be immediate or future in which case goods would have been bought or sold on
credit.

Elements of a Transaction
 Two elements of a transaction are:

i. Item exchanged: Examples include car, computer, Inventory

ii. Form of settlement: Cash, Deposit into the bank, credit, Capital

 If there is no item exchanged (i.e. bought or sold), there is no transaction.

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 Hence if a businessman asks the price for something, but does not buy it, there is no transaction.
Examples of transactions
a. Purchase of a machine
b. Payment of electricity bill
c. Sale of a sandwich
d. Interest received from a bank for money deposited.

The Accounting cycle for a profit-making organization

Source documents  Sales and Purchase invoices

Where original information is  Debit and credit notes for returns
to be found  Bank pay-in-slips and cheque
 Receipts for cash paid out and received
 Statement of account

Original entry Classified and then entered in books of original (prime) entry
What happens to it  The Cash book
 Sales and Purchases day books (journals)
 Returns inwards and outwards day books (journals)
 The journal

Double entry Double entry accounts

How the dual aspect of each General Sales Ledger Purchases Cash books
transaction is recorded Ledger Ledger
Real and Trade Trade payable Cash book
nominal receivable and petty cash
accounts book
(Note: Cash books fulfil the role both of books of original entry
and double entry accounts)

Check Arithmetic Trial balance

Checking the arithmetical
accuracy of double entry
accounts

Profit or Loss Income Statement (Statement of Profit or Loss)

Calculation of profit or loss for
the reporting period shown in a
financial statement.

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Closing financial position Statement of Financial Position
Financial statement showing
liabilities, assets, and capital at
the end of reporting the period.
 The main parts of the accounting cycle are:
 Collect source documents
 Enter transactions in the books of original entry
 Post to ledgers
 Extract a trial balance
 Prepare the statement of profit or loss (Income Statement)
 Draw up the statement of financial position.

Source/Business Documents
 It is a document or a piece of paper that proves that a certain transaction has occurred.

Examples of source documents

a. Invoice
 When a business sells goods on credit it will issue an invoice to the purchaser.
 From the supplier’s viewpoint an invoice is described as a sales invoice and from the
customer’s viewpoint, a purchases invoice.
 Each business has its own style of invoice, but they all contain the following information:
 The name and address of the supplier
 The name and address of the customer
 The date
 Full details, quantities, and prices of the goods supplied.
 As soon as the sales invoice has been prepared, the customer is given an original copy
and the business keeps a copy or copies of the invoice which they use to record credit
sales.
Invoice
No. I 3624
INVOICE

The Weaving Shed

14 Industrial Street
Hightown
Telephone 11101357

Sew and Sew

92 The Avenue
Lowtown 3 April 2009
Quantity Description Unit price Amount
$ $
30 metres Brocade fabric Design; B320 Colour; Crimson 15.00 450.00
10 metres Polycotton fabric Design; P21 Colour; Lemon 6.00 60.00
510.00
Less 20% trade discount 102.00
408.00

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Terms: 2½% cash discount if account paid by 31
May 2009

 Sometimes the business allows the customer a trade discount (this is a reduction in the
price of goods).
 A supplier may allow a customer trade discount if the businesses are in the same trade
and also for buying in bulk.
 The rate of trade discount often increases according to the quantity purchased, and this
encourages customers to buy in bulk.
 TIP: Trade discount is shown as a deduction on an invoice, but cash discount is not
deducted on an invoice.

b. Debit note
 The customer should check that goods received are in satisfactory order and that they are
exactly what was ordered (in respect of price, quantity and quality).
 The supplier must be informed of any shortages, overcharges and faults.
 This is done by issuing a debit note to the supplier.
 A debit note contains the following information:
 The name and address of the supplier
 The name and address of the customer
 The date
 Full details, quantities and sometimes prices of the goods returned or overpriced.
Debit note
Number 29
DEBIT NOTE
Sew and Sew
92 The Avenue
Lowtown

The Weaving Shed

14 Industrial Street
Hightown
6 April 2009
The following goods have been returned:

Quantity Details Unit Price Amount

$ $
10 metres Polycotton fabric Design; P21 Colour; Lemon 6.00 60.00
Less 20% trade discount 12.00
48.00
Reason for return: Wrong colour supplied
Please issue a credit note

 Hence a debit note is a document issued by a purchaser of goods on credit to the supplier
detailing return of the goods and the reason for their return.
 When a price is included on a debit note it is the price which the customer was actually
charged for those goods (the price after the deduction of trade discount).
 A debit note is issued before a credit note can be created by the supplier.
 TIP: Debit notes are never entered in the accounting records.

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 A Debit note is merely a request to the supplier to reduce the total of the original invoice.
c. Credit note
 Some businesses may allow customers to return goods which will have either been
damaged or overcharged within a few days of the sale.
 When the business agrees to take the goods back and refund the amount paid, a document
known as a credit note will be sent to the customer, showing the amount of the allowance
given by the seller.
 Credit notes act as a source document for the sales return journal to the supplier, and
purchase return journal to the customer.
 Hence a credit note is a document issued by a business that would have sold goods on
credit to a customer detailing return of the goods and reason for the return.
 A credit note contains the following information:
 The name and address of the supplier
 The name and address of the customer
 The date
 Full details, quantities and prices of the goods returned or overpriced.
Credit note
C 529
CREDIT NOTE

The Weaving Shed

14 Industrial Street
Hightown
Telephone 111 01357
Sew and Sew
92 The Avenue
Lowtown 9 April 2009

Quantity Description Unit Price Amount

$ $
10 metres Polycotton fabric Design; P21 Colour; Lemon 6.00 60.00
Less 20% trade discount 12.00
48.00
Reason for issue of credit note:
Wrong colour supplied

 The customer receives the original credit note and uses it to record the purchase returns.
 The supplier keeps a copy of the credit note and uses it to record the sales returns.
 To stop credit notes from being mistaken for invoices, credit notes are often printed in
red.

d. Statement of account
 At the end of each month, a supplier will usually issue each customer with a statement of
account.
 This is a summary of the transactions for the month.
 It is a reminder to the customer of the amount outstanding.
 This can be checked against the customer’s own records to ensure that no errors have
been made by either the supplier or the customer.

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 TIP: A statement of account is never entered in the accounting records.
 The style of a statement of account may vary, but they all contain the following
information:
 The name and address of the supplier
 The name and address of the customer
 The date
 The balance owing at the start of the period
 Invoices and credit notes issued
 Payments received
 Any cash discounts allowed
 The balance owing at the end of the period.

STATEMENT OF ACCOUNT

The Weaving Shed

14 Industrial Street
Hightown
Telephone 111 01357
Sew and Sew
92 The Avenue
Lowtown 30 April 2019

Date Reference Debit Credit Balance

$ $ $
2009
April 3 Invoice number I 3624 408.00 408.00
9 Credit Note number C529 48.00 360.00
The last amount shown in the balance column is the amount due.
Terms: 2½% cash discount if account is paid by 31 May 2009

e. Cheque

 It is a written order to a bank to pay a stated sum of money to the person or business
named on the order.

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 A book of preprinted cheques is issued by the bank, and the customer is only required to
complete the necessary details of date, amount, and payee (the person or business to
whom the money is to be paid).
 The supplier receives the cheque. A paying-in-slip is completed when the cheque is paid
into the bank.
 The customer keeps the cheque counterfoil and uses it to make the entry in the cashbook
to show the money paid out of the bank and to make a note the discount in the discount
received column.

f. Receipt
 It is a written acknowledgment of money received and acts as proof of payment.
 Since a cheque passes through the banking system it can act as a receipt, so many
businesses do not issue receipts if accounts have been paid by cheque.
 Where goods are sold for cash, the customer is usually provided with a receipt.

Exam style Questions

1. On 4 February Ann purchased goods, list price $5 200, on credit from Maria. The terms of trade
were:
20% trade discount on orders over $5 000
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2 % cash discount if account paid by the end of the month.
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Which amount did Ann enter in her accounts on 4 February?
A. $4 056 B. $4 160 C. $5 070 D. $5 200

2. Kate sells goods on credit to Kylie. Kate does not allow cash discount. On 1 May Kylie owed Kate
$350
The following documents were exchanged in May:
$
May 4 Invoice 420
8 Debit note 112
10 Credit note 92
19 Cheque 350
26 Invoice 170
How much did Kylie pay on 31 May to settle her account?
A. $148 B. $386 C. $498 D. $610

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3. Certain items are missing from the following business document:

Credit note
AB Jones
Unit 4 Industrial Estate
Hightown
Tom Brown
123 High Street
Anytown 11 May 2012

Unit price Amount

$ $

46 tins of paint 11.50 i. ………………………

Less 20% iv ………………… discount ii. ………………………
iii. ………………………

a. Insert the missing words or figures i to iv on the document

b. Name the person who issued the credit note.
c. Suggest one reason why the credit note was issued.
d. Name the document which may have been issued to request this credit note.

4. Kate sells goods on credit to Kylie. Kate does not allow cash discount. On 1 May Kylie owed Kate
$350
The following documents were exchanged in May:
$
May 4 Invoice 420
8 Debit note 112
10 Credit note 92
19 Cheque 350
26 Invoice 170
How much did Kylie pay on 31 May to settle her account?
E. $148 F. $386 G. $498 H. $610

5. Zodwa sold goods on credit to Elspeth.

Which document did Elspeth issue when she returned these goods?
A. Credit note E. Debit note F. Invoice G. Statement

6. State two reasons why a supplier may allow a customer trade discount.

7. Explain the difference between trade discount and cash discount.

8. Give a description of the purpose of each of the following business documents:

a) Invoice b) Statement of account
c) Credit note d) Receipt

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9. There are some missing figures from the following document which Dinesh received:
Trade Supplies
345 London Road
Hightown
Dinesh
110 Long Road
Northwood 31 October 2011

Date Details Debit Credit Balance

2011 $ $ $
Oct 1 Balance 950 950
4 Sales 1 120 2 070
11 Sales returns 110 1 960
27 Cheque 931 ?
Discount 19 ?
a. Name this document.
b. Suggest one reason for the issue of the document.
c. State the amount owing by Dinesh on 31 October 2011
d. Name the document sent by Trade Supplies to Dinesh on 4 and 11 October.
e. Calculate the percentage rate of discount allowed on 27 October.
f. Suggest one reason why this document was allowed.

10. Bill is a credit customer of Rick. The following documents were exchanged in June.
Complete the following table to name the person who issued each document and the entries (if
any) made in the books of Bill and Rick.

Document Person issuing document

Invoice
Debit note
Credit note
Statement of account

11. Agrotech sells farming equipment and supplies on credit. A new customer, Chalk Farm, has
recently been supplied with goods shown on the invoice as follows:

AGROTECH
INVOICE
Unit 2
Downyer Way Invoice No: 0/5721
Midtown Date: 6 April 2002
DESCRIPTION QUANTITY PRICE TOTAL
$ $
Sacks of Groquick fertiliser 50 sacks $20 per sack i.
Tractor tyres (type B/6) 4 $125 each 500
Total goods
20% trade discount ii.
INVOICE TOTAL (NET GOODS) iii.

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Chalk Farm iv.
Springfield
OXTON
Terms: 3% for settlement within one month
a) Calculate the missing amounts at i, ii, iii and iv on the invoice.
b) When the goods were delivered, one tractor tyre was found to be faulty. Agrotech could not
replace the tyre and issued a credit note to Chalk Farm on 17 April 2002.
Calculate the net amount shown on the credit note issued by Agrotech to Chalk Farm. Show your
workings.
c) Chalk Farm paid the amount due to Agrotech from these transactions by cheque on 24 April,
deducting cash discount of 3%.
Write up the Ledger account of Agrotech in Chalk Farms books from the above information.
[IGCSE 2002]

12. Zak is a trader.

a. Arrange the following business documents in the order they would be issued by Zak to a
credit customer.
Statement of account: Credit note: Receipt: Invoice:
b. Explain why a credit customer may send a debit note to Zak.
c. Give four items of information you would expect to find on a statement of account.
d. On 1 August 2007 Zak made a sale on credit to Sasha of 170 pencils @$0.85 each.
Complete the following invoice for the sale to Sasha using the information given above.

Zak Trading

Date

Quantity Price $ Amount $

Terms: 2.5% for settlement within 14 days

e. Zak received payment by cheque from Sasha on 12 August.

Show the entries to be made in Zak’s cash book to record the payment of the invoice.
f. Zak allows trade discount of 5% for orders of more than 200 pencils. Sasha orders 250
pencils.
I. State the amount of the trade discount given by Zak on this order.
II. State the net amount of the invoice for this order.
III. Sasha pays this invoice within 14 days. Calculate the amount of cash discount to
be allowed.
[IGCSE 2007]

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13. On 2 May 2000 Marianne Jones received the document shown below from her supplier, Zen
Wholesale.
ZEN WHOLESALE
Riverside Warehouse Tel. 0796 151023
New Street
South Town

Date Details Folio Dr Cr Balance

$ $ $
2000
April 1 Balance b/f 1 000 1 000 Dr
12 Sales 300 1 300 Dr
19 Sales returns 50 1 250 Dr
30 Bank 975
Discount 25
Ms M Jones A/C No: J/2657
High Street Date: 30 April 2000
South Town
a) Name the above document.
b) Calculate the balance due from Marianne to Zen Wholesale on 30 April 2000. Show your
workings.
c) For the transactions on 12 and 19 April,
I. Insert the names of the documents sent by Zen Wholesale to Marianne in the following
sentences
1) 12 April Zen Wholesale sent ………………………………………………to Marianne.
2) 19 April Zen Wholesale sent ………………………………………………to Marianne.
II. Complete the boxes below to show the ledger account entries recording the transactions on
12 and 19 April in the books of Zen Wholesale.
Date of transaction Ledger account to be debited (dr) Ledger account to be credited (cr)
2000 Account Name Amount ($) Account Name Amount ($)
12 April ……………….. ……………….. ……………….. ………………..
19 April ……………….. ……………….. ……………….. ………………..
III. Calculate the percentage rate of the discount allowed to Marianne on 24 April. Show your
workings. [IGCSE 2000]

14. Pieter Burg is in business and buys goods from the General Supply Company. He received the
following invoice from them.

GENERAL SUPPLY COMPANY

SALES INVOICE
Pieter Burg 25 September 2005
Description Unit price Amount
Quantity ($) ($)
i. Bolt fastenings 0.40 1 200.00
1 000 Grommets 0.10 ii.

Total iii.
Terms: 3% iv. For payment within 14 days of invoice
a) Write down the missing words or figures from the invoice.

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i. …………… ii. …………… iii. …………… iv. …………..

b) Pieter had brought

15.

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