ACCA F3 (INT) Financial Accounting - 2010 - Study text - Emile Woolf Publishing
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Answer
Debit Credit
1 $ $
Bankaccount 7,000
Capital7,000
Capitalintroducedintothebusiness
2
Tradereceivables 25,000
Sales25,000
Salesoncredit
Transactions recorded in the journal are posted to the main ledger accounts.
Exercise 3
Record the following transactions as journal entries:
(i) Payment to a credit supplier of $1,000
(ii) Cash sale of $100
(iii) Credit sale of $2,000
(iv) Purchase on credit of $1,500
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Account balances: opening and closing balances
Account balances and a trial balance
Closing balance and opening balance
From trial balance to income statement and balance sheet
5 Account balances: opening and closing balances
5.1 Account balances and a trial balance
At any time, the balance on an account can be established. The balance on an
account is the difference between the total value of debit entries and the total value
of credit entries.
If total debits exceed total credits, there is a debit balance
If total credits exceed total debits there is a credit balance.
In the previous example in paragraph 4.3, the debit and credit balances on the main
ledger accounts are as follows, at the end of transaction number 5.
Debitbalances
$
Creditbalances
$
Bank 2,000
Capital 5,000
Purchases 4,000 Tradepayables 3,000
Receivables 4,000 Sales 6,000
Equipment 3,000
Rent 1,000
14,000 14,000
Total debit balances and total credit balances should always be equal. A list of the
debit and credit balances in the main ledger accounts is called a trial balance.
At any time, it should be possible to ‘extract’ a trial balance from the main ledger,
and prepare a list of debit balances and credit balances. If the accounts have been
prepared correctly, total debit balances and total credit balances must be equal.
Closing off an account at the end of an accounting period
The debit or credit balance on an individual account at the end of an accounting
period can be recorded by ‘closing off’ the account. The balance on the account is
recorded as an ‘opening balance’ on the account at the start of the next period. This
is explained in more detail below.
5.2 Closing balance and opening balance
At the end of an accounting period, an account is closed off. On many accounts
(particularly asset, liability and capital accounts), there will be a balance.
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Balances on expense accounts and income accounts are transferred to the income
statement. (Note: There might be some accruals and prepayments on expense
accounts. These are explained in a later chapter.)
Balances on the asset, liability and capital accounts are carried forward as
closing balances at the end of the period, and become opening balances at the
beginning of the next period.
To close off an account, the closing balance is entered in the T account so that total
debits and total credits are equal. The debit and credit columns are then totalled and
a line drawn underneath the entries. Below the line, the opening balance for the
beginning of the next period is entered.
Example
Bankaccount
$ $
Capital5,000 Purchases1,000
Sales2,000 Equipment3,000
Rent1,000
Closingbalancec/f 2,000
7,000 7,000
Openingbalanceb/f 2,000
In this example, there is a debit balance on the bank account at the end of the period.
The closing balance to carry forward is entered on the credit side, so that total debits
and total credits add up to $7,000. The debit balance of $2,000 is brought forward as
the opening balance on the account at the beginning of the next period. This
indicates that the business has an asset (a debit balance) of cash in the bank account
totalling $2,000.
Note
c/f stands for carried forward. You might also see:
c/fwd (for carried forward), or
c/d for ‘carried down’.
Similarly, b/f stands for brought forward. You might also see:
b/fwd (for brought forward), or
b/d for ‘brought down’.
A similar method of carrying forward the closing balance is used for liability
accounts such as trade payables, and the capital account. When the trade payables
account below is balance there is a closing balance of $1,500 indicating that $1,500 is
payable to suppliers in total – this is a credit balance as it is a liability.
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Tradepayablesaccount
$ $
Bank 2,500 Purchases3,000
Bank 5,000 Purchases2,000
Balancec/d 1,500 Purchases4,000
9,000 9,000
Balanceb/d1,500
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Information technology and accounting systems
Manual accounting systems
Computerised accounting systems
Additional aspects of a computerised system
Advantages and disadvantages of computerised systems
Main features of a computerised accounting system
Accounting packages
Integrated software
6 Information technology and accounting systems
6.1 Manual accounting systems
In a manual financial accounting system, day books and ledgers are contained in
bound books, with specially printed pages. (Loose-leaf records are inappropriate
because of the risk of fraud: it is relatively easy to remove or replace sheets in loose-
leaf records, so that transactions can be inserted or removed fraudulently, without
the change being apparent.)
The way in which a manual accounting system works is as follows:
Similar types of transactions are recorded together in books of prime entry.
Each book of prime entry is a separate book. Entries are entered as a
transaction on each line of a page, with columns of figures and totals at the
bottom of each page.
These transactions are periodically posted in total to the ledger accounts in the
main ledger. The main ledger is kept in a separate book, with an account on
each page or double page.
The individual transactions are also periodically posted from the day books to
the individual accounts in the receivables ledger and purchase ledger. Each of
these ledgers is a separate book, with an account for each customer or supplier
on each page or double page.
On a regular basis, checks are made on the accuracy of the postings by
carrying out receivables ledger and payables ledger control account
reconciliations and bank reconciliations. These are explained in a later chapter.
At certain time intervals, a trial balance is drawn up as a check on the accuracy
of the postings and as a basis for preparing the annual financial statements.
Preparing a trial balance is also explained in a later chapter.
6.2 Computerised accounting systems
In principle, a computerised accounting system works in exactly the same way as a
manual system:
The information from the source documents such as sales invoices, purchase
invoices and cash payment details are input into the computer system.
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The computer records these in the main ledger accounts and the individual
accounts. However, whereas entries in a manual system are posted from the
day books to the ledger only periodically, posting to the ledgers can be done
immediately within a computer system, so that the ledger accounts are always
fully up-to-date if required.
The computer is able to produce automatically a trial balance and draft
financial statements.
Effectively the computer system is still using books of prime entry, ledger accounts
and double entry, but this is done automatically and so has become ‘invisible’ to the
accountant operating the system.
Accounting systems may be either manual or computerised, or a mixture of the two.
Both systems use paper documents for transactions, such as sales invoices, purchase
invoices and credit notes.
Manual systems have ‘paper’ records (books) for ledgers and accounts within
ledgers.
Computerised systems have electronic ledgers and accounts, and accounting
transactions are processed by entering the data into the system.
Manual systems and computerised systems are, however, based on exactly the same
accounting principles and conventions.
6.3 Additional aspects of a computerised system
As well as processing all accounting entries a computerised accounting system is
capable of additional procedures such as:
producing sales invoices from input data about sales transactions (and posting
these details automatically to the main ledger and receivables ledger)
producing monthly statements for each customer from the details in the
customers’ accounts in the receivables ledger
producing an aged receivables analysis: this is a report on receivables, giving
details of how long the money has been owed, and how much is overdue for
payment
producing standard letters for customers with old outstanding debts
producing a non-current asset register (a file of non-current assets)
storing standing data for customers and suppliers
producing remittance advices (often as part of the sales invoice)
producing cheques or sending instructions to the bank for payments by
electronic bank transfer.
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6.4 Advantages and disadvantages of computerised systems
Advantages
The advantages of a computerised accounting system are as follows:
The data can be processed very quickly, freeing up the time of accounts
personnel
It is more accurate than a manual system, because a computer does not make
some mistakes that a human being might, such as adding up figures
incorrectly
The system can handle large amounts of data
In an integrated accounting system, one entry into the system can update
different ledgers and other files
Data can be analysed quickly and easily in a variety of different ways.
Repetitive tasks and calculations can be carried out quickly
Checking for errors can be made simpler and the computer can carry out
automatic control account reconciliations. (Control account reconciliations are
explained in a later chapter.)
Disadvantages
The disadvantages of a computerised accounting system are as follows:
The cost of buying and installing the system might be high.
Personnel must be trained to use the system.
Security checks are necessary to ensure that only authorised personnel can use
the system.
There is a risk of unauthorised access to computerised accounting records, by
a ‘hacker’ into the system.
There is a lack of ‘audit trail’ or visibility of transactions within the system.
In computerised accounts, more systems of coding are needed.
There is a need for accuracy in coding and putting data into the system. This
leaves scope for some human errors.
Even so, many business entities use computerised accounting systems, and there are
standard accounting software packages for computer systems of all sizes.
6.5 Main features of a computerised accounting system
Computerised systems vary in size. Large companies have large computer systems,
to handle the volume of their transactions and records. Small business entities may
use a small microcomputer-based system.
Computerised systems share the same general characteristics.
Ledgers are computer files, and each ledger contains accounts in electronic
form.
Data about transactions is entered into the computer system. There are various
methods of data input. In microcomputer-based systems, transactions are
commonly entered into the system by keyboard and mouse.
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The computer program can recognise different types of input transaction, such
as sales invoice data, credit note data, sales returns and receipts (payments
received from customers) in a receivables ledger system.
Standing data in the ledgers and ledger accounts reduces the amount of data
that needs to be input to the system. For example, entering the account
number of a customer into a sales invoicing system or receivables ledger
system is sufficient to enable the system to recognise the customer name,
address and other ‘standing data’ on file.
Once transactions have been entered into the system, they can be posted
automatically to the relevant accounts in the ledgers. For example, when the
receipt of a payment by a credit customer is entered into a system, the
transaction can be posted automatically to the customer’s account in the
receivables ledger and the total receivables account and the bank account
(cash account) in the main ledger.
6.6 Accounting packages
An accounting ‘package’ is software for computerised accounting. An accounting
package is made up of a number of separate accounting modules which each deal
with a particular part of the business accounting system.
The typical modules that might make up an accounting package are:
sales invoicing
receivables ledger
payables ledger
inventory
cash book
main ledger
payroll
non-current asset register.
Many accounting systems are purchased ‘off the shelf’ from software suppliers.
Software packages are often available in the form of integrated packages or
‘modules’. Each package can be purchased and used separately, but the different
packages can also be used together, because they are integrated. This means that
data from one package can be transferred to another automatically.
An entity can introduce computerised systems gradually by purchasing one or two
modules first, and then acquiring other modules later.
6.7 Integrated software
An integrated software system is one where each module is integrated with the
others. This means that when an item of data is input into the system then the
system automatically updates all relevant modules.
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For example if data is input into the invoicing module regarding the despatch of
goods to a customer the following modules will also be updated for the details on
the invoice:
the invoicing module will produce the invoice
the main ledger module will record the addition to sales and total receivables
the receivables ledger module will record the sale in the individual customer’s
account
the inventory module will be updated to record the movement of goods
(where the business entity maintains up-to-date inventory records).
Coding
The key to using a computerised accounting system efficiently is in the coding of
data.
Example
The main ledger accounts may perhaps be coded as follows:
01 Capital
02 Plant and machinery
03 Receivables ledger control
04 Payables ledger control
05 Purchases etc
The accounts in the receivables ledger and payables ledger would similarly be
coded, for example:
0001 S Smith
0002 P Jones
0003 M Latham etc
Suppose that an invoice was received from S Smith for the purchase of materials for
$1,000. It might be coded for input to the computer as:
Supplier code 0001
Main ledger Debit 05
Credit 04
Amount $1,000
Inventory code 3214
Quantity 100
Practice multiple choice questions
1 The double entry for a credit sales transaction for $500 is:
A Debit Cash $500, Credit Sales $500
B Debit Sales $500, Credit Cash $500
C Debit Receivables $500, Credit Sales $500
D Debit Sales $500, Credit Receivables $500
(1 mark)
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2 When a business entity agrees to accept sales returns from a customer, the appropriate
document to produce is:
A a credit note
B a debit note
C a revised sales invoice
D a remittance advice
(1 mark)
3 Is the narrative correct for the associated journal entry?
Debit Credit
$ $
Bank 240
Finance charges (interest) 240
Interest received on a bank deposit
A The narrative is correct for the journal entry.
B The narrative is NOT correct for the journal entry.
(1 mark)
4 Which of the following make use of the double entry accounting method?
1 Receivables ledger
2 Main ledger
3 Journal
4 Sales returns day book
A 1, 2 and 3 only
B 2, 3 and 4 only
C 1 and 4 only
D 2 and 3 only
(2 marks)
5 What double entry is required to close off the following bank account at the end of the
accounting period?
Bankaccount
$ $
Openingbalanceb/f 300 Purchases12,000
Sales200 Wagesandsalaries 18,500
Receivables 38,200 Drawings1,000
A Debit side: Closing balance c/f $6,900. Credit side: Opening balance b/f $6,900
B Debit side: Opening balance b/f $6,900. Credit side: Closing balance c/f $6,900
C Debit side: Closing balance c/f $7,200. Credit side: Opening balance b/f $7,200
D Debit side: Opening balance b/f $7,200. Credit side: Closing balance c/f $7,200
(2 marks)