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:
- The journals such as purchases journal, sales journal, returns journal, general journal
- The ledger
- The cash book
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.
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
Prepare the purchases journal in Salim’s books.
|Katue enterprises Sugar
Great fun distributors
|Purchases ledger (PL 1)
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
February 12: Goods worth sh. 200 were returned to Kyalo, credit note 064 being issued
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 by the amount in the credit note.
The Sales returns journal is as shown below;
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
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
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
Enter the above information in
- 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:
- 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:
- When cash is received in cash or cheque, the amount should be recorded on the debit side.
- 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, thereby saving on time.
Format: The Column Cash Book
- When money is received in cash, the amount should be recorded on the debit side on the cash column.
- When money is received by cheque, this should be recorded on the credit side of the cash book.
- When money is paid in cash, the amount should be recorded on the credit side of the cash book.
- When money is paid by 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
- Required Enter the above transactions in the two column cash book.
- The sales journal
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 by 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
The information given below was obtained from the business records of Omondi Stores for the month of March 2010.
Prepare a three column cash book for Omondi stores
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
Enter the above information in Muindi’s books of accounts
Balance off the accounts on 15th January, 2010.
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 by a person assigned to make the necessary payments but not necessarily by the accountant who keeps the records of all major cash transactions in the business.
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:
- Trading, profit and loss accounts
- 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
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 ×××××
Less returns ×××× ××××
Less closing stock ××××
Cost of sales ××××
Gross profit c/d ××××
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:
- Profitability ratios
- Turnover ratios
- Return ratio
Examples of such interpretations are as follows:
- 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 by sales less cost of sales. Gross profit to sales is worked as follows:
Gross Profit × 100
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 by dividing the cost of sales by the average stock held during the year.
Rate of stock turnover = Cost of sales______________ = _____ times
(Opening stock + closing stock )
- Debtors ratio
This is another activity ratio that shows the average credit period allowed to debtors.
Debtors ratio = __Debtors ×365 = ______________ days
- Creditors ratio
Like the debtors ratio, the creditors ratio shows the average credit period allowed by creditors.
Creditors ratio = creditors___ ×365 = ________________ days
- Net profit margin
It gauges the company’s overall efficiency. It is given by:
Net Profit × taxes ×100
- 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:-
- The success or failure of a business depends on the decisions that are mad e
- Budgeting helps to remove future uncertainties as it combines activities with resources
- It helps the entrepreneur to remain focused on the goods
- Resources are acquired when they are needed and therefore there is no time lost waiting
- It facilitates long term planning within the business.
- i) Textbooks
- ii) Newspaper cuttings
Suggested learning activity
Visit various financial institutions and compare their lending terms.
The following Trial balance was extracted from the books of John Wafula’s Enterprise on 1.6.2009
Additional information 31st March, 2009.
- Goods taken for personal use valued at sh. 8,500
- Stock was valued at shs. 107,250
- 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)
Trading, profit and loss accounts
For the period ended 30th June 2009