Creating Ledger Accounts

1. Debit and Credit amount of ledger should be equal. If not equal, then we should find
out the balancing amount which is called 'balance c/f' (Carried Forward) or 'balance
c/d' (carried down).
2. The balancing amount 'c/f' is carried forward to next period as opening balance b/f
(brought forward). So, closing balance of this period is equal to opening balance of next
period.
3. We have b/f and c/f for only balance sheet items. Profit and Loss items do not have b/f
and c/f. This is because the statement of profit and loss is prepared only for a financial
year. We find profit for the period and is transferred to the retained earning at end of
the year and we create next statement for next year.
4. PNL items also have balancing amount which is transferred to the income statement.
5. The opening balance for debit items (eg: assets and expenses) are in debit side of
ledger account. In the same way, the opening balance for credit items (eg: liabilities,
income, equity) are in credit side.

Dr. Debit items Cr. Dr. Credit items Cr.

$ $ $ $
b/f xx b/f xx
c/f xx c/f xx
xxx xxx xxx xxx

Q. Robert is starting a new company. Prepare the Journal Entries and the relevant ledger
accounts.
1. Robert subscribes for $10,000 of share capital in the newly formed company, paying by
cheque.
Dr. Cash 10000
Cr. Share Capital 10000
2. Robert buys supplies worth $4,000 and pays by cheque.
Dr. Purchase 4000
Cr. Cash 4000
3. Robert buys a delivery van for $2,000 and pays by cheque
Dr. Non-Current Assets 2000
Cr. Cash 2000
4. Robert buys $1,000 of purchase on credit.
Dr. Purchase 1000
Cr. Payables 1000
5. Robert sells goods for $1,500 and receives a cheque of that amount.
Dr. Cash 1500
Cr. Sales 1500
6. Robert sells all his remaining goods for $5,000 on credit.
Dr. Receivables 5000
Cr. Sales 5000
7. Robert pays $800 to his supplier by cheque.
Dr. Payables 800
Cr. Cash 800
8. Matthew pays rent of $200 by cheque.
Dr. Cash 200
Cr. Income 200

Q. Prepare the Journal Entries for the following items:

a) Started a business with $50,000.
Dr. Cash 50000
Cr. Capital 50000

b) Payment of Loan $5,000.

Dr. loan liability 5000
Cr. Cash 5000

c) Mr. Matthew took some goods worth $3,500 from inventory for his personal use.
Dr. Drawing 3500
Cr. Purchase/cogs 3500

d) Cash payment of $2,500 to the supplier.

Dr. Payables 2500
Cr. Cash 2500

e) Cash received of $3,500 from the customer

Dr. Cash 3500
Cr. Receivables 3500
 REVISION QUESTIONS
Q.1 What accounting concept should be considered if the owner of a business takes goods
from inventory for his own personal use?
a) The fair presentation concept
b) The accruals Concept
c) The going concern concept
d) The business entity concept

Q.2 Sales revenue should be recognized when goods and services have been supplied; costs
are incurred when goods and services have been received.
Which accounting concept governs the above?
a) The business entity concept
b) The materiality concept
c) The accruals concept
d) The duality concept

Q.3 Which accounting concept states that omitting or misstating this information could
influence users of the financial statements?
a) The consistency concept
b) the accruals concept
c) The materiality concept
d) The going concern concept

Q.4 A trader's net profit for the year may be computed by using which of the following
formulae?
a) Opening capital + drawings – capital introduced – closing capital
b) Closing capital + drawings – capital introduced – opening capital
c) opening capital – drawings + capital introduced – closing capital
d) opening capital – drawings – capital introduced – closing capital

Q.5 The profit earned by a business in 20X7 was $72,500. The proprietor injected new
capital of $8,000 during the year and withdrew goods for his private use which had cost
$2,200.
If net assets at the beginning of 20X7 were $101,700, what were the closing net assets?
a) $35,000
b) $39,400
c) $168,400
d) $180,000
Q.6 A sole trader took some goods costing $800 from inventory for his own use. The normal
selling price of the goods is $1,600.
Which of the following journal entries would correctly record this?
Dr Cr
$ $
a) Inventory account 800
Purchase account 800
b) Drawings account 800
Purchase account 800
c) Sales account 1,600
Drawings account 1,600
d) Drawings account 800
Sales account 800

Drawing: Drawings are reduction in the liability of business to the owner. Whatever the
owner takes out of the business for personal use, whether goods or cash, reduces the
liability of the business towards the owner, and are thus called drawings.

Q.7 Which of the following are books of prime entry?

1. sales day book
2. Cash book
3. Journal
4. purchase ledger

Q.8 In which book of prime entry will a business record debit notes in respect of goods which
have been sent back to suppliers?
a) The sales return day book
b) The cash book
c) The purchase returns day book
d) The purchase day book

Q.9 A company's trade payables account at 30 September 20X1 is as follows:

Dr. Trade Payables a/c Cr.

$ $
Cash at bank 21,600 Balance b/f 14,000
Balance c/f 11,900 Purchases 19,500
33,500 33,500
What is the balance for trade payables in the trial balance at 30 September 20X1?
a) $14,000 Dr
b) $14,000 Cr
c) $11,900 Dr
d) $11,900 Cr

Q.10 Bert has extracted the following list of balances from his general ledger at 31 October
20X5: $
Sales 258,542
Opening Inventory 9,649
Purchases 142,958
Expenses 34,835
NCA (carrying amount) 63,960
Receivables 31,746
Payables 13,864
Cash at bank 1,783
Capital 12,525
What is total of the debit balances in Bert's trial balance at 31 October 20X5?

Business:
Any activity undertaken with the intention to make profit, but result can be profit or loss.
Thus, it is an organization which sells something or provides a service with the objective of
earning profit.
Organization:
It is a place where a group of people are working together to achieve a common goal.
 Types of Business Organization

Sole Trader Partnership Limited Company

➢ Owned and managed ➢ Owned and managed by ➢ Owned and managed by

by one person. a number of partners. many people
➢ Sole trader and their ➢ Partners share profits ➢ A company is a legal
business are legally and losses in accordance entity in its own right,
the same entity with their agreement. and therefore the
➢ Therefore sole trader ➢ Partners and business shareholders have only
is fully and personally are legally same due to limited liability for any
liable for any losses of which partners have losses of company.
the business. unlimited liabilities for ➢ Limited company are of
any losses of business. two types: Public and
private limited company.

Types of accounting

Financial Accounting Management Accounting

• Deals with production of financial • Deals with preparation of accounting

statements/ accounting reports for reports for internal users (employees,
external users. management and etc.
• Prepared annually (six monthly or • Normally prepared in monthly basis.
quarterly in some countries). • Not required by law and is not
• Generally required by law. mandatory.
• Reflects past performance and • Production of detail accounts which
current position. help management in control of
• Information are calculated and business.
presented as per International • Includes budget and forecast of
Financial reporting standards. (IAS or future activities as well as
IFRS) reflecting past performance.
Users of Financial Statements:
1. Owners of business:
Owners of the business are interested in their current and future profits and security
of their investment. Profits are shown by Statement of Profit and Loss and Other
Comprehensive Income and financial strength is shown by the Statement of Financial
Position (SOFP).

2. Trade Receivables/customers
They need to know if the company will continue to supply them in future.

3. Trade Payables/Suppliers
They need to know that they will be regularly paid.

4. Lenders
They need to know the ability of business to repay them. Long term loans may also be
backed by 'security' given by business over specific assets. The value of these assets
will be indicated in the SOFP.

5. Government
Information is needed to make financial policies for economy and calculation of tax
payable by a business.

6. Employees
They need to know the financial position and performance of a business to check the
security of their employment. It also gives them information about their future
salaries, bonuses and benefits.

7. Public
They want to assess the effect of company on economy, environment and local
community.

8. Financial analysts/advisors
They want information to base their future investments on it.
 Effects of Some Important Transaction on Accounting Equation

1. Owner puts money into business ($1000)

Dr. Cash 1000
Cr. Capital 1000
Asset = Capital + Liabilities
1000 = 1000 + 0

2. Owner took loan from bank for business ($500)

Dr. Cash 500
Cr. Loan 500
Asset = Capital + Liabilities
1000+500 = 1000 + 500

3. Purchase of building ($600)

Dr. NCA 600
Cr. Cash 600
Asset = Capital + Liabilities
1500+600-600 = 1000 + 500

4. Purchase of goods $100 for cash and $100 on credit

Dr. Purchase 200 (ignore)
Cr. Cash 100
Cr. Payables 100
Asset = Capital + Liabilities
1500-100 = 1000 + 500+100

5. Sale of all the stock goods for $300 ($200 on credit; $100 on cash)
Dr. Receivables 200 Sales 300 o/s + P – c/s = cogs
Dr. Cash 100 cogs (200) 0 + 200 = 200
Cr. Sales (inventory) 300 Profit 100 closing stock = 0
Asset = Capital + Liabilities
1400+200+100 = 1000+100 + 600

6. Payment of trade payable $100

Dr. Payables 100
Cr. Cash 100
Asset = Capital + Liabilities
1700-100 = 1100 + 600-100
 7. Owner took $200 of cash for personal use
Dr. Drawing 200
Cr. Cash 200
Asset = Capital + Liabilities
1600-200 = 1100-200 + 500
1400 = 900 + 500
1400 = 1400

(FA Jan-13 Assignment)

Q. The transactions of a new business in its first five days are as follows:
Day 1 Avon commenced business introducing $1000 cash.
Day 2 Bought a motor car for $400 cash.
Day 3 Obtained a $1000 loan.
Day 4 Purchased goods for $300 cash.
Day 5 Sold all of the goods purchased on day 4 for $400 on credit.
Use the accounting equation to illustrate the position oof the business at the end of each
day. (ignore inventory for this example)