CIMA CO2 Official Learning System - Fundamentals of Financial Accounting
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STUDY MATERIAL C2
240
ORGANISING THE BOOKKEEPING SYSTEM
Purchase Ledger
Abdul & Co.
$
4 Mar. 101 84.60
Ace Co.
$
20 Mar. 102 239.70
Nominal Ledger
Sales
$
31 Mar. Sales daybook 1,340.00
Purchases
$
31 Mar. Purchases
daybook
276.00
Sales returns
$
31 Mar. Sales returns
daybook
72.00
Sales tax
$ $
31 Mar. Purchases
daybook
48.30 31 Mar. Sales daybook 234.50
Sales returns
daybook
12.60
8.4.3 Extending the use of daybooks
The examples above assumed that only sales of the organisation’s products, and purchases
of its goods for sale or raw materials, were entered in the daybooks. This used to be the
case when most of an organisation’s transactions were in goods for sale. Nowadays, organi-
sations have a wide range of expenses and services too, and the daybooks can be extended
to cater for these also. As an example, consider a purchase daybook that is used to record
all the organisation’s purchases on credit as follows:
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FUNDAMENTALS OF FINANCIAL ACCOUNTING
ORGANISING THE BOOKKEEPING SYSTEM
Date Doc. no. Details
Purchases
($)
Stationery
($)
Heat and
light ($)
Motor
expenses ($)
Sales
tax ($) Total ($)
1 Jan. 001 ABC Ltd 1,000 175 1,175
2 Jan. 002 XYZ 400 70 470
3 Jan. 003 PQ Ltd 2,000 350 2,350
4 Jan. 004 GL Motors 120 21 141
005 ABC Ltd 4,000 700 4,700
5 Jan. 006 XYZ 200 35 235
007 Genlec 600 105 705
6 Jan. 008 RS Motors 240 42 282
7 Jan. 009 Goodgas 400 70 470
Totals
7,000 600 1,000 360 1,568 10,528
The credit entries to the payables accounts would be made immediately, but the nominal
ledger entries to purchases, stationery, heat and light, motor expenses and sales tax would
be made in total at the end of the period.
8.5 The cash books
Again, the term ‘ cash book ’ dates back to the days when organisations dealt only in actual
cash transactions. Nowadays businesses rarely deal in cash, and so the term ‘ cash book ’
refers to any book that records monies received and paid.
It was stated earlier that the cash books have a dual purpose, both as books of prime
entry and as part of the ledger. As part of the ledger, they are used to maintain the bank
and cash ledger accounts, but because of the importance of keeping bank and cash records
up to date they are the fi rst place of entry for all bank and cash transactions.
8.5.1 The banking system
Today’s banking system is highly automated, with large numbers of transactions being con-
ducted electronically. However, many organisations still use cheques to make payments,
and paying-in slips to make deposits to their accounts. Some common methods of trans-
acting business through a bank account are as follows:
●
By cheque . The drawer makes out a cheque to the person being paid (the payee ). The
cheque is entered in the drawer’s ledger accounts at once, and sent to the payee. The
payee pays it into his own bank account some days later, using a paying-in slip to record
its details and that of other cheques paid in at the same time. The bank clearing system
passes it to the drawer’s bank for approval and payment, with the result that it is taken
out of the drawer’s bank account. This is known as presenting a cheque for payment.
STUDY MATERIAL C2
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ORGANISING THE BOOKKEEPING SYSTEM
Until the cheque is accepted by the drawer’s bank, it is considered to be uncleared and
the bank has the right to return it as dishonoured if there is something amiss with it, or
there are insuffi cient funds in the drawer’s account. The time delay between making out
a cheque and it being cleared depends on various factors, such as postal delays, adminis-
trative delays, holiday periods and so on. Each cheque has a reference number by which
it can be identifi ed.
●
By bankers automated clearing system (BACS). This avoids the use of the postal system
and the writing of numerous cheques by creating a transfer between the bank accounts
of different organisations. It is a faster means of payment and it is also more cost-
effective when there are regular payments to the same people. The account holder pro-
duces a list of the payments to be made at any particular time. There are also specialised
types of automated payments suitable for the immediate transfer of funds both within
the country and outside the country.
●
By direct debit or standing order . These work in a similar manner to each other, and
are suitable for regular payments to a particular person. The bank makes the transfer
automatically.
●
By bank-initiated transactions . The transactions such as the charging of fees for maintain-
ing the account (bank charges), interest paid on overdrawn balances, interest received,
charges for dealing with dishonoured cheques and so on.
An organisation may both make and receive payments by any of these methods.
Tight control of cash and bank balances is vital, and it is important to take account of
the fact that some methods of transaction involve delays, and organisations may not be
aware of, or may forget, automated transactions.
8.5.2 The cash book
At its simplest, the cash book is no more than an ordinary ledger account, used to record
the movements in the bank account. Some organisations use it to record cash movements
as well as bank movements, by using two ‘ money ’ columns on each side as follows:
Date Details Ref.
Bank
($)
Cash
($) Date Details Ref.
Bank
($)
Cash
($)
1 Jan. Balance
b/fwd
400 50 3 Jan. ABC Ltd 000123 100
4 Jan. XYZ Ltd 101 200 5 Jan. Wages 20
8 Jan. Cash sales 120 7 Jan. Offi ce
equipment
000124 300
10 Jan. PQR Ltd 102 150 8 Jan. Advertising 000125 125
RST Ltd 102 170 12 Jan. Wages 30
14 Jan. Cash banked 103 50 14 Jan. Cash banked 50
14 Jan. Balance c/d 445 70
970 170 970 170
15 Jan. Balance b/d 445 70
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FUNDAMENTALS OF FINANCIAL ACCOUNTING
ORGANISING THE BOOKKEEPING SYSTEM
Discount columns
The cash book can also be used to indicate cash discount that has been given or received.
We looked at the recor
ding of cash discount in Chapter 5. We saw how, when cash dis-
count is received or given, the amount is credited/debited to discounts received/discounts
allowed account. Cash discount often involves a large number of small-value transactions,
so it is possible that the nominal ledger (which contains the discount accounts), would
soon fi ll up with the detail of a large number of small-value transactions. By adding an
extra column to each side of the cash book, the discount can be identifi ed at the point of
payment (which is when it becomes known), and the total of those columns used to make
the entries in the discount accounts.
Example 8.B
Zadie Traders Ltd had a favourable balance of $216 in its business bank account as at the start of business on
2 May 20 X 8. The following is a list of bank transactions for the week ending 7 May 20 X 8:
2 May Paid an insurance premium of $130 by cheque
3 May Paid an invoice for $110 from Goodies Ltd in full after deducting 10% for prompt
settlement
4 May Received a cheque for $314 from Freda Dexter, a credit customer. Ms Dexter was settling
an invoice for $320 and had been entitled to $6 discount
6 May Paid employees their week’s wages of $182 by cheque
You are required to record these transactions in the cash book of Zadie Traders Ltd below.
Solution
Date Details
Bank
($)
Disc.
all’d ($)
Total
($) Date Details
Bank
($)
Disc.
all’d ($)
Total
($)
1 May Balance b/f 216 2 May Insurance 130 130
4 May Dexter 314 6 320 3 May Goodies 99 11 110
6 May Wages 182 182
Balance c/f 119
530 6 320 530 11 422
7 May Balance b/f
119
For the transaction on 3 May, Goodies will be debited with $110, and for the transaction on 4 May, Dexter will
be credited with $320, whereas the bank account has only been debited/credited with the amount received/
paid. The discount accounts have yet to have their entries made, and this can be done at the end of the period by
totalling the discount columns and debiting discount allowed with $6, and crediting discount received with $11.
Analysed cash books
It is common for cash books to have a number of columns, called analysis columns, in which receipts and pay-
ments of a similar nature may be collected together and eventually totalled. An example is given below.
STUDY MATERIAL C2
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ORGANISING THE BOOKKEEPING SYSTEM
Date Details
Rec.
from
Receivables
Other
income
Total
rec’d Date Details
Paid to
Payables
Petty
cash Wages Sales tax Sundry Total
As well as entering the amount of each payment and receipt in the total columns, the amount would also be
entered in one or other of the analysis columns. This means that when the book is totalled, at regular intervals, it
will be immediately apparent how much cash has been received from receivables, how much paid to payables,
how much paid in wages and so on. The totals can be used to make ledger entries, but can also be used in the
control process covered in Chapter 9.
Exercise 8.4
N Ramrod keeps cash and bank records. At the close of business on 29 May 20 X 1 he
reached the bottom of a page and carried forward the following:
Discount ($) Cash ($) Bank ($)
Total b/f 27.40 114.10 214.30 Debit side
Total b/f 40.10 74.50 210.00 Credit side
The following sums were received on 30 May 20 X 1:
Cheque from J Cuthbertson for $120 in settlement of an account for $125
Cash from N green $40
Cheque from Xu for $75 in settlement of an account for $76.50
The following payments were made on 30 May 20 X 1:
Cheque to Morris Brown for $140.40
Cheque to local council in payment of local business tax for the half-year $150.40
N Ramrod cashed a cheque for private drawings and took $50 from the offi ce cash for
the same purpose.
Write up N Ramrod’s cash and bank records and balance them at close of business on
30 May 20 X 1.
Solution
Date Details ($)
Disc.
all’d ($)
Cash
($)
Bank
($) Date Details
Disc.
all’d
($)
Cash
($)
Bank
($)
29 May Balance b/f 27.40 114.10 214.30 29 May Balance b/f 40.10 74.50 210.00
30 May J Cuthbertson 5.00 120.00 30 May Morris Brown 140.40
N Green 40.00 Rates 150.40
Xu 1.50 75.00 Drawings 50.00 50.00
Balance c/f 141.50 Balance c/f 29.60
33.90 154.10 550.80
40.10 154.10 550.80
Authorising bank payments
All payments out of the bank account should be authorised by a senior member of staff
.
Two signatories may be required for amounts of more than a certain, fi xed fi gure.
245
FUNDAMENTALS OF FINANCIAL ACCOUNTING
ORGANISING THE BOOKKEEPING SYSTEM
All items to be paid should be evidenced by source documents, for example, invoices,
that have been approved for payment.
8.5.3 The petty cash book
The petty cash book is similar in many ways to the cash books described earlier in this
chapter except that it is intended to be used for small payments made in cash.
It usually operates on an imprest system whereby an agreed balance of cash is held by
an individual nominated as the petty cashier. This person can often be a junior member
of staff due to the fact that he or she is responsible only for small sums of money that are
tightly controlled. Small payments of cash and reimbursements of expenses to employees
are then made via the petty cash system and at the end of each week (or other agreed
period) the amount paid out of petty cash is reimbursed from the main cash book to
restore the imprest (balance) to its agreed level. The amount to be reimbursed is evidenced
by petty cash vouchers raised by the petty cashier, and signed by the person receiving the
cash, as evidence of receipt. The cash itself can be counted and compared to the balance in
the petty cash book.
The petty cash book would not normally receive income other than from the main cash-
ier, although such a possibility does exist, and so its design concentrates on the analysis of
expenditure by using a columnar approach as illustrated by the example below. At the end
of each accounting period the columns are totalled. The balance on the petty cash account
is carried forward to the next accounting period.
Example 8.C
Beechfi eld Ltd make use of a petty cash book as part of their bookkeeping system. The following is a summary of
the petty cash transactions for the month of November 20 X 9.
$
1 Nov. Opening petty cash book fl oat received from cashier 350
2 Nov. Cleaning materials 5
3 Nov. Postage stamps 10
6 Nov. Envelopes 12
8 Nov. Taxi fare 32
10 Nov. Petrol for company car 17
14 Nov. Typing paper 25
15 Nov. Cleaning materials 4
16 Nov. Bus fare 2
20 Nov. Visitors ’ lunches 56
21 Nov. Mops and brushes for cleaning 41
23 Nov. Postage stamps 35
27 Nov. Envelopes 12
29 Nov. Visitors ’ lunches 30
30 Nov. Photocopying paper 40
You are required to draw up a petty cash book for the month using analysis columns for stationery, cleaning,
entertainment, travelling and postages. Show clearly the receipt of the amount necessary to restore the fl oat and
the balance brought forward for the start of the following month.
STUDY MATERIAL C2
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ORGANISING THE BOOKKEEPING SYSTEM
Solution
Debit
($) Date Details
Total
($)
Stat’y
($)
Cleaning
($)
Ent’ment
($)
Travel
($)
Post
($)
350
1 Nov. Cashier
2 Nov. Materials 5 5
3 Nov. Stamps 10 10
6 Nov. Envelopes 12 12
8 Nov. Taxi 32 32
10 Nov. Petrol 17 17
14 Nov. Paper 25 25
15 Nov. Materials 4 4
16 Nov. Bus fare 22
20 Nov. Lunches 56 56
21 Nov. Mops, etc. 41 41
23 Nov. Stamps 35 35
27 Nov. Envelopes 12 12
29 Nov. Lunches 30 30
30 Nov. Paper 40 40
321 30 Nov. Cashier 321
30 Nov. Balance c/d 350
671 671 89 50 86 51 45
The totals of the various expense columns are then debited to those accounts in the nominal ledger.
Exercise 8.5
Explain briefl y the operation of the imprest system of controlling petty cash.
Solution
The imprest system of controlling petty cash is based on a set ‘ fl oat ’ of cash that the petty
cashier commences with. This amount is used to pay for small items during the coming
week or month, for which a petty cash voucher should be prepared. At the end of the
period (or when the cash runs out), the vouchers can be totalled and the amount spent is
reimbursed to the petty cashier so as to commence the next period with the same ‘ fl oat ’ .
8.6 The journal
In a bookkeeping system involving the use of books of prime entry, it is inevitable that
there will be transactions that do not correspond with the main books of prime entry used,
that is, the daybooks and cash books. In order to complete the system, another book is
needed in which to capture sundry items prior to entering them in the ledger. This book is
called ‘ the journal ’ and is used for a wide variety of transactions, such as:
●
the purchase and sale of non-current assets on credit;
●
depreciation;
247
FUNDAMENTALS OF FINANCIAL ACCOUNTING
ORGANISING THE BOOKKEEPING SYSTEM
●
the write-off of bad debts;
●
allowances for receivables;
●
accruals and prepayments;
●
transfers between accounts, such as the transfers to income statement at year end;
●
the correction of errors;
●
opening entries when a new business is formed;
●
entries when another business in acquired;
The correction of errors will be considered in the next chapter.
The journal is used to record any transaction that does not fi t into any of the other
books of prime entry, that is, transactions that are not sales or purchases on credit, and
transactions not involving cash.
The journal has debit and credit columns. However, these are not part of the double-
entry system. They are merely a memorandum of what is going to be recorded in the
ledger accounts for a particular transaction or adjustment. It is also common for journal
entries to be authorised by a senior accountant. In the narrative to a journal entry it is
possible to add more information about the transaction, and to cross reference to other
documentation.
It is common for a computer-based assessment question to ask for the journal entries for
a transaction.
This is sometimes used as an alternative to asking for the ledger entries. You must, there-
fore, know how to layout a journal and record the debits and credits of a transaction.
8.6.1 The layout of the journal
The basic layout is as follows:
Date Account name/details Debit ($) Credit ($) Explanation
8.6.2 Using the journal for miscellaneous
transactions
The following transactions are to be entered in the journal:
1 May Purchased plant on credit from J Smith for $1,000 plus sales tax at 17.5%
3 May Wrote off the following bad debts
P Taylor $500
M Morris $300
Y Bhatti $100
4 May Sold offi ce machinery for $800 to A Bell on credit. The machinery had cost
$1,000 and had been depreciated by $400
STUDY MATERIAL C2
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ORGANISING THE BOOKKEEPING SYSTEM
Solution
Date Account name/details Debit ($) Credit ($) Explanation
1 May Plant 1,000 Purchase of plant on credit, see
invoice No. X123
Sales tax 175
J Smith 1,175
3 May Bad debts written off 900 Bad debts – see bad debt fi le
reference May 003
Taylor 500
Morris 300
Bhatti 100
4 May Offi ce machinery at cost 1,000 Offi ce machinery sold on
credit, see invoice No. Y345
O f fi ce machinery accum.
depreciation
400
A Bell 800
Disposals account 200 Profi t on disposal
8.6.3 Using the journal for end-of-year transactions
The following year end adjustments are to be made to the accounts:
$
1. Depreciation of fi xtures 500
2. Electricity accrued 150
3. Allowance for receivables 240
4. Transfer of balances
(a) sales 12,000
(b) opening inventories 1,500
(c) purchases 8,000
(d) closing inventories 1,200
(e) heat and light 700 (excluding the adjustment above)
(f ) wages 4,300
The journal entries would be as follows:
249
FUNDAMENTALS OF FINANCIAL ACCOUNTING
ORGANISING THE BOOKKEEPING SYSTEM
Date Account name/details Debit ($) Credit ($) Explanation
(1) Income statement 500
Accumulated 500
Depreciation
(2) Income statement 150
Heat and light account 150
(3) Income statement 240
Allowance for 240
Receivables
(4) Sales account 12,000
Trading account 12,000
Trading account 1,500 Balances transferred at year end.
Inventories account 1,500
Trading account 8,000
Purchases account 8,000
Inventories account 1,200
Trading account 1,200
Income statement 700
Heat and light 700
Income statement 4,300
Wages account 4,300
Authorisation of journal entries
Because journal entries involving adjustments and transfer have no source documents to
support them, it is vital that all such entries ar
e authorised by a senior member of staff.
This can be done by signing the journal entries, or by referencing them to other forms of
authorisation, for example, letters, minutes and so on.
8.7 Inventory records and methods
of inventory measurement
The measurement of inventories is important because, as we have already learned, it is
part of the overall value of an organisation shown in the statement of fi nancial position.
From your work in preparing an income statement it should already be clear that the value
placed on inventories affects the amount of profi t or loss made by an organisation during a
period of time.
This ability to alter the profi t of an organisation by changing its inventories measure-
ment explains the need to regulate the methods to be used when valuing inventories.
Inventories should be valued at the lower of cost and net realisable value (NRV).
●
Cost is the total cost incurred in bringing the product to its present location and condi-
tion. For bought-in items this will be the cost of the items themselves plus the costs of
carriage associated with obtaining them.
●
NRV is the selling price of the item less any costs to be incurred in making the item
suitable for sale. These might include packaging and costs of delivering the items to
customers.