RECORDING BUSINESS TRANSACTIONS IN THE BOOKS OF ACCOUNTS

Entrepreneurship-and-Communication-Skills-notes

Business transactions refer to the exchange of goods and services. Many transactions take place in a business on a daily basis. Such transactions include: purchase of goods, selling of goods , payment of expenses, return of goods, payment of expenses, return of goods bought, purchase of assets, receipt of payment from debtors among others. These transactions are recorded in the books of account in order to aid in preparation of financial statements at the end of the year. Business transactions are recoreded in different books of accounts. These include:

  1. The journals such as purchases journal, sales journal, returns journal, general journal
  2. The ledger
  3. The cash book

THE JOURNAL

The term ”journal” means daily list of ooccurences,. A journal is a book in which the daily list of occurrences of transactions is made. The different types of journals are discussed below.

  • The Purchases Journal

Credit purchases are recorded in the purchases journal. The information recorded in the journal is obtained from copies of purchases invoice. The format is as follows:

  • Date column is used to record the date of the transaction
  • Details column also known as particulars column is used to record details or particulars of the transactions like the name of the credit supplier or description of the goods.
  • The invoice column is used to record the serial number of the purchases invoice received.
  • The folio column is used to record the account number to which the entry is to be pasted in the ledger.
  • The amount column show the value of the item or items purchased.

Example:

Salim, an entrepreneur made the following credit purchases for the month of February 2009.

February 2:    From Katue enterprises, invoice no 312, sugar 5000, detergent 3000, rice 4500

February 5:    From Great fun distributors, invoice no 210, stationery 3200, books 1200

February 11: From Kyalo, invoice no 1200, flour 4800, mineral water 700

February 15: From Zakayo, invoice no 98, soaps 400, soda 1800

Required:

Prepare the purchases journal in Salim’s books.

Purchases Journal

Date Details Invoice no Folio Amount
2/2/2009

 

 

 

 

 

5/2/2009

 

 

 

 

11/2/2009

 

 

 

15/2/2009

Katue enterprises Sugar

Detergent

Rice

 

 

Great fun distributors

Stationery

Books

 

 

Kyalo

Mineral water

Flour

 

Zakayo

312

 

 

 

 

 

210

 

 

 

 

 

1200

 

 

98

Purchases ledger (PL 1)

 

 

 

 

PL 2

 

 

 

 

 

PL 3

 

 

PL 4

 

 

 

GL 1

 

5000

3000

4500          12500

 

 

 

3200

1200           4200

 

 

 

700

4800          5500

 

400

1800         2200

 

24400

 

The purchases Returns Journal

This journal is used to record goods bought on credit but returned to the supplies for one reason or another.

The format of a PR Journal is as follows

Example:       Goods were returned as shown

February 6:    Goods worth sh.1, 200 were returned to Katu enterprises. Credit note no. 063 was

received

February 12: Goods worth sh. 200 were returned to Kyalo, credit note 064 being issued

Sales Journal

This is a subsidiary book used to record all credit sales. The source documents for this journal are invoice and debit notes issued to customers when goods are supplied to them. The ruling of a sales journal is as shown below.

Sales Returns Journal

This is the journal that is used to record sales returns. A credit note is issued for returned goods so that the sales recorded earlier in returning customers account can be reduced the amount in the credit note.

The Sales returns journal is as shown below;

Example

Mapengo, a textile dealer made the following credit sales in the month of January 2010.

Jan 3:      Credit sale to C.Rama (invoice no. 29) 8 rolls of material 16,000, dresses 9,000, ribbons

3,000

Jan 7:      Rama returned dresses worth shs. 3,800

Jan 8:      Credit sale to Oyugi (invoice no. 72) material 12,000 ribbons 1,300

Jan 10:    Credit sale to Cyrus Magero (invoice no 80) rolls of material 28,000, ribbons 7,000

Dresses 17,000

Jan 10:    Credit sale to Manooj (invoice no 81). Rolls of material 80,000, dresses 56,000

 

Jan 15:           Manooj returned materials worth shs. 14,000

Required

Enter the above information in

    1. The sales journal
      • The single column cash book
      • The two column cash book
      • The three column cash book
      • The petty cash book
      • The analysis cash bookThe sales returns journal
      • The Cash Book The cash account and the bank account are the most active accounts in the ledger. This is because they are concerned with money which is the central focus of all business activities. The main purpose of the cash book is to ensure that the cash account and the book accounts are contained in one special ledger making it convenient to make entries relating to cash transactions since both accounts are on the same page. The entrepreneur is able to keep control over the finances of the business.Depending on the size and the nature of the business organization, there are five types of cash books. These cash books are:
    2. THE SINGLE COLUMN CASH BOOK A very small business such as  a kiosk, often does not have a bank account. The amount of cash involved is often so small that that the owner finds it unnecessary to keep a record of cash transactions in two accounts. i.e. cash and bank account . single column cash book operates in the same manner as cash account.

      Format of a cash book.

      When making entries, the following principles should be followed:

      1. When cash is received in cash or cheque, the amount should be recorded on the debit side.
      2. When money is paid in cash or cheque the amount is credited to the cash book

       THE TWO COLUMN CASH BOOK

      This cash books keep a record of the cash in hand and cash at bank in one page. This makes it easier and convenient to make entries in the two accounts on the same page, theresaving on time.

      Format: The Column Cash Book

      1. When money is received in cash, the amount should be recorded on the debit side on the cash column.
      2. When money is received cheque, this should be recorded on the credit side of the cash book.
      3. When money is paid in cash, the amount should be recorded on the credit side of the cash book.
      4. When money is paid cheque, this should be recorded on the credit side in the bank column.The two column cash book has columns of both cash and bank on both debit and credit sides. When making entries in the cash book, the following principles are followed:EXAMPLE:

      The following transactions took place in the month of March 2010 in Kiboswa retailers

    3. Required Enter the above transactions in the two column cash book.

      TWO COLUMN CASH BOOK

THREE COLUMN CASH BOOK

In order to facilitate the recording of the discount allowed and discount received in the cash book, the two column cash book is extended to have a third column adding one more column on either sides of the cash book. This makes the three column on either sides hence the name “three column cash book”. The third column on the Debit side is used to record discount allowed while the third column on the credit side is used to record the discount received. This is because discount allowed is an expense while discount received is revenue.

Format: Three column cash BOOK

Example

The information given below was obtained from the business records of Omondi Stores for the month of March 2010.

Required

Prepare a three column cash book for Omondi stores

THE LEDGER

A ledger is a book containing a collection of accounts. Accounts of all assets, liabilities, capital , expenses and revenues are maintained in a ledger. Since accounts are found in a ledger, they are referred to as “ledger accounts”

A Ledger Account

An account is a chronological entry of all transactions affecting a given item. This has the effect of showing any changes that take place in an account. The change could be of an increase or a decrease nature, which must be recorded accurately in the relevant ledger account.

Format of an Account

An account has two sides that are similar i.e. the debit side and the credit side. The debit side is used for recording an increase on gain value while the credit side is used for recording decrease or less in value. The difference between all debits and credit at the end of the period reflects the account balance.

Double entry and the ledger

Recording of transactions is based on the double entry rule which states that every debit entry must have corresponding credit entry of the same value.

Jan 2:  Zuma Muindi Started a business with shs. 120,000, in cash and shs. 300,000 at Bank

Jan      5          2010:  Purchased goods worth 5,000 cash

6              ”      Purchased goods worth 13,000 writing a cheque no 024

7              ”      Return goods worth sh. 400 to a supplier

7              ”      sale of goods sh. 40,000 cash, 25,000 paid through cheques

8              ”      wrote a cheque (025) for sh. 1,800 to pay for electricity

8              ”      Purchased  goods worth sh. 1,500 cash

9              ”      Bought furniture worth 23,000, writing cheque no 026

10            ”      Sold goods worth sh. 62,000 on Credit to Omar Hassan

11            ”      Bought stationary worth sh 9,000 cash

15            ”      Returned goods worth sh. 800 to a supplier

 

Required

Enter the above information in Muindi’s books of accounts

Balance off the accounts on 15th January, 2010.

CASH

Petty cash

This is not the main cash book but a record in which minor transactions involving small sums of money are recorded. Examples of items maintained in the petty cash are tea expenses, postage and travel. It can be maintained a person assigned to make the necessary payments but not necessarily the accountant who keeps the records of all major cash transactions in the business.

FINANCIAL STATEMENTS

Financial statements are important for the entrepreneur in determining whether the business is operating at a profit or a loss and the financial wealth of the business. Two major financial statements the entrepreneur requires for sound decisions are:

  1. Trading, profit and loss accounts
  2. The balance sheet

Trading, profit and Loss Account

The financial statement is prepared to determine whether a business is operating at a profit or  a loss for a given period of time. E.g. one year

Trading Account

The trading account is prepared to determine the gross profit. The gross profit is the difference between the net sales and the cost of sales

Trading Account Format

 

Opening Stock                       ×××××

Purchases                     ××××

Less returns                 ××××     ××××

××××

Less closing stock                    ××××

Cost of sales                             ××××

Gross profit c/d                        ××××

×××××

Sales                         ××××

Less returns            ××××

 

 

 

 

 

××××

Gross profit b/d     ××××

 

NB:Gross profit is the difference between Net Sales and Cost of sales

PROFIT AND LOSS ACCOUNT

INTERPRETATION OF FINANCIAL STATEMENTS

As financial statements have been worked out, it is necessary to compare the relationship between items in the balance sheet and those in the profit and loss account. This gives a clearer picture of the company’s performance in relation to the prevailing economic conditions.

The interpretation can be in the form of ratios, or percentages showing different relationships. They are categorised into:

  1. Profitability ratios
  2. Turnover ratios
  3. Return ratio

Examples of such interpretations are as follows:

Profitability ratios

  • Current ratios

This is used to gauge the ratio of current assets compared to current liabilities. It is computed as:

Current Assets (CA)

Current Liabilities (CL)

  • Gross profit to sales or the gross profit margin

Gross profit is given sales less cost of sales. Gross profit to sales is worked as follows:

Gross Profit × 100

Sales

It gauges the efficiency with which the company can generate a given level of profits out of its sales activities.

  • Rate of Stock Turnover

This is an activity ratio that shows the number of times that stock is converted into sales on the average. It is calculated dividing the cost of sales the average stock held during the year.

Rate of stock turnover =                                   Cost of sales______________ = _____ times

(Opening stock + closing stock )

2

  • Debtors ratio

This is another activity ratio that shows the average credit period allowed to debtors.

Debtors ratio = __Debtors      ×365 = ______________     days

Sales

  • Creditors ratio

Like the debtors ratio, the creditors ratio shows the average credit period allowed creditors.

Creditors ratio =    creditors___ ×365   =   ________________ days

Purchases

  • Net profit margin

It gauges the company’s overall efficiency. It is given by:

Net Profit × taxes  ×100

Sales

  • Return on capital employed

It gauges the managements efficiency in utilising the capital employed.

The computation is thus: Net profit before taxes__ × 100

Total capital employed

Importance of Budgeting to a Business

Budgeting is important to a business in the following ways:-

  1. The success or failure of a business depends on the decisions that are mad e
  2. Budgeting helps to remove future uncertainties as it combines activities with resources
  3. It helps the entrepreneur to remain focused on the goods
  4. Resources are acquired when they are needed and therefore there is no time lost waiting
  5. It facilitates long term planning within the business.

Learning resources

  1. i) Textbooks
  2. ii) Newspaper cuttings

******

Suggested learning activity

Visit various financial institutions and compare their lending terms.

Suggested Question

The following Trial balance was extracted from the books of John Wafula’s Enterprise on 1.6.2009

Additional information 31st March, 2009.

  1. Goods taken for personal use valued at sh. 8,500
  2. Stock was valued at shs. 107,250

Required

  • Prepare Trading, profit and Loss Account for the year ended 31.3.2009
  • Balance sheet for the year ended 31.1.2009.

****(To be included in the guide omit)

John Wafula’s

Trading, profit and loss accounts

For the period ended 30th June 2009



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