Financial Accounting (SPAF123)

Trimester 2 2023/2024

TOPIC 4: ACCOUNTING PROCESS

Learning outcomes
After studying this topic students should be able to:
 Understand the history and development of accounting
 Explain the meaning and objective of accounting
 Identify the user of accounting information and their needs.
 Explain the nature and differences between sole proprietorship, partnership and
corporation
 Understand the accounting principles

1. Accounting Cycle
▪ The accounting cycle, also commonly referred to as accounting process, is a series of
procedures in the collection, processing, and communication of financial information.
▪ It begins with the analysis of business transactions through source documents and ends
with the preparation of closing entries.
▪ The cycle represents the flow of information from the beginning of the recording process
to the preparation of financial reports.
▪ The complete accounting cycle is as Figure 3.1:

Source Posting to the

Journalization
Documents Ledger

Prepare Balancing and

Preparing a
Financial Closing off
trial balance
Statements accounts
Figure 3.1

➢ Source documents – This is the business documents/papers used as the basis of

recording transactions in books of accounts. Some common business documents are the
official receipts, invoices, cash vouchers, debit note etc.
➢ Journalization – This is the process of recording transactions in a book of original entry
called the journal.
➢ Posting to the Ledger – This is the process of transferring the accounts from the journal
to a book of final entry called the ledger.
➢ Balancing and Closing off accounts – Balancing is adding the increases to and
subtracting the decreases from the previous balance in an account so that both sides
come up to the same amount while closing off accounts means to bring the balance to
zero.
➢ Preparing a trial balance – This is the process of taking account balances from the ledger
and preparing a list of the debit and credit balances of all accounts.

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 Financial Accounting (SPAF123)
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➢ Prepare Financial Statements – The financial reports are prepared from the data
recorded, classified and summarized in the above steps.

Cash Cash Receipts

Journal
Cash Payments
Journal
Business Ledger Trial Financial
Transactions accounts Balance Statements

Credit Sales Journal

Purchase
Journal
Sales Return
Journal
Purchase
Return Journal
General Journal
Figure 3.2: Summary of the accounting cycle

1.1. Source Documents

▪ A source document is a specially designed form which supplies details of a business
transaction. It should describe all the key aspects of the transaction such as:
➢ the names and addresses of the entity buying/selling the good/services
➢ the date when the transaction occurred
➢ the amount of the transaction
➢ the amount of any taxes
➢ the nature and purpose of the transaction (i.e. descriptions)
➢ the special terms and conditions of the transaction (i.e. discount, payment and
delivery details) authorized signature for payment or acceptance of goods/services
▪ Source documents are important for:
➢ Providing details of transactions to input into the internal accounting system on a
month-to-month basis
➢ Providing evidence of the transactions recorded in the accounting system in the
event of a end-of-year financial audit
➢ Satisfying the requirements of the tax law in regard to proof of income and
expenditure.
▪ A description of the source documents is provided below:
➢ Sales invoice - used to record the goods/services details and the amount owing to
the business by a customer. The original goes to the customer with the copy held
by the business.
➢ Purchase invoices - used to record the goods/services details and the amount
owing by the business to suppliers. The original is provided by the supplier to the
business.

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➢ Credit Note - used by a business/supplier to correct an overcharge in the invoice

➢ Debit Note - used by a business/supplier to correct an undercharge in the invoice
➢ Petty cash voucher - used as evidence of cash payment to another party
➢ Cheque butt/stubs - used to record the amount paid on a particular numbered
cheque to the payee.
➢ Cash receipts - used to acknowledge money received from customers and cash
paid to suppliers.
➢ Bank statement - used as a summary of cash movements through the business
bank account.
➢ ATM receipts - used as evidence that money was taken from the business bank
account via the ATM.
➢ Cash Register tapes - automatically generated by the cash register and provides
an unbroken sequence of cash transactions and events
➢ Bank Deposit slips/forms - used to record the bankings deposited to the bank. The
original is provided to the bank with the copy retained by the business.
➢ Credit Card receipts - used to verify transactions on credit card statements that
relate to the business.
➢ Payroll Records - used to verify payments made to employees in the form of
salaries and wages and includes timesheets.

1.2. Journalising
▪ Journal is also known as books of prime entry and books of original entry.
▪ Books of prime entry are the first books in which the business transactions are
recorded throughout the accounting process.
▪ Each transaction recorded must be supported by documentary evidence such as
invoices, receipts, cheques etc.
▪ Table 3.1 showed a list of journal and its description.
No. Types of Journal Description
1. Sales Journal ▪ This is used to record credit sales of merchandise.
▪ It excludes cash sales and sales of fixed assets.
2. Purchase Journal ▪ This is used to record credit purchases of merchandise.
▪ It excludes cash purchase and purchase of fixed assets.
3. Return Inwards ▪ This is used to record returns of goods by the
Journal customers.
@ ▪ It also used when the customers are overcharged.
Sales Return ▪ It also known as sales return journal.
4. Return Outwards ▪ This is used to record returns of goods bought for resale.
Journal ▪ It also records overcharges by suppliers.
@ ▪ It also known as purchase return journal.
Purchase Return
5. General Journal ▪ This is usually used to record the following transactions:
▪ Purchase and sale of fixed assets on account.
▪ Other transactions such as drawings, additional
capital by the owner.

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▪ Opening entry
▪ Closing entry
▪ Adjustments and corrections of errors
6. Petty Cash Book ▪ This is used to record cash received and paid.
7. Cash Book ▪ Cash Receipts Journal – this is used to record cheques
received (and cash paid into the bank).
▪ Cash Payments Journal – this is used to record
payments made by cheque (and cash withdrawn from
the bank).
Table 3.1:Summary of the journal

Example: Sales and Return Inwards

From the following information of B Black, record the transactions into the appropriate journals:
March 9 Sold goods to W White for RM1,800, invoice no. 222
14 Sold goods to B Brown for RM1,750, invoice no. 223
14 W White returned goods worth RM150, credit note no. 113
18 Notified by B Brown that goods were faulty, allowance given RM140,
credit note no. 134
24 Issued invoice no. 224 to W White for RM1,500
25 Issued invoice no. 225 to B Brown for RM1,860

Suggested Solution:
SALES JOURNAL
Date Particulars Invoice No. Amount (RM)
March 9 W White 222 1,800.00
14 B Brown 223 1,750.00
24 W White 224 1,500.00
25 B Brown 225 1,860.00
31 Post to General Ledger 6,910.00

RETURN INWARDS JOURNAL

Date Particulars Invoice No. Amount (RM)
March 14 W White 113 150.00
18 B Brown 134 140.00
31 Post to General Ledger 290.00

Example: Purchase and Return Outwards

From the following information of B Black, record the transactions into the appropriate journals:
March 10 Purchased goods from R Red for RM800, invoice no. 120
11 Purchased goods from P Purple for RM750, invoice no. 899
15 Returned goods worth RM50 to R Red, credit note no. 110
17 Notified P Purple that goods were faulty and was allowed RM40, credit
note no. 180

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25 Received invoice no. 199 from R Red for RM1,200

26 Received invoice no. 988 from P Purple for RM660

Suggested Solution:
PURCHASE JOURNAL
Date Particulars Invoice No. Amount (RM)
March 10 R Red 120 800.00
11 P Purple 899 750.00
25 R Red 199 1,200.00
26 P Purple 988 660.00
31 Post to General Ledger 3,410.00

RETURN OUTWARDS JOURNAL

Date Particulars Invoice No. Amount (RM)
March 15 R Red 110 50.00
17 P Purple 180 40.00
31 Post to General Ledger 90.00

Example: General Journal

March 11 The business bought a delivery van for RM40,000.00 on credit from Safety
Sdn Bhd
15 The owner withdrew goods worth RM100 for personal use.

GENERAL JOURNAL
Date Particulars Debit Credit
RM RM
March 11 Dr Motor Vehicle 40,000.00
Cr Safety Sdn Bhd 40,000.00
(Being purchase of a delivery van)

March 15 Dr Drawings 100.00

Cr Purchases 100.00
(Being withdrawal of goods for personal use)

Example: Cash Book

▪ Cash Receipts Journal – this is used to record cheques received (and cash paid into the bank).
▪ Cash Payments Journal – this is used to record payments made by cheque (and cash
withdrawn from the bank).
March 27 Received cheque from W White on settling her debts
28 Paid R Red the remaining debts by cheque (less 5% discount)
28 Cash sales of RM600 was made to Y Yellow (paid by cheque)
29 Received a cheque from B Brown for RM3,270 after deducting RM200
cash discount.

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30 Purchase office equipment of RM580 by cheque.

30 Made a cash purchase of RM320 and paid by cheque.

RECEIPTS JOURNAL
Date Cheque Particulars Amount Cash Trade Discount
No. Sales Debtors Allowed
Mar 27 W White 3,150.00 3,150.00
28 Cash Sales 600.00 600.00
29 B Brown 3,270.00 3,270.00 200.00

31 Post to General Ledger 7,020.00 600.00 6,420.00 200.00

PAYMENTS JOURNAL
Date Cheque Particulars Amount Cash Trade Discount
No. Purchase Creditors Received
Mar 28 R Red 1,852.50 1,852.50 97.50
30 Office Equipment 580.00
29 Cash Purchase 320.00 320.00

31 Post to General Ledger 2,752.50 320.00 1,852.50 97.50

Example: Petty Cash

▪ Businesses generally keep small amounts of cash to meet small miscellaneous payments
such as entertainment expenses and stationery costs. Such payments are generally handled
by a petty cash imprest system whereby an amount of 'float' is fixed. This is the maximum
amount of cash that can be held at any time. Each time cash level runs low, the petty cash
imprest is injected with cash by drawing a cheque. Petty cash imprest system is an effective
way to manage small day to day expenses.

▪ The advantages of the imprest system are:

➢ It facilitates control of the total petty cash expenditure in each period.
➢ It deters theft of cash by the petty cashier since a large cash balance cannot be
accumulated by drawing cash from the bank at irregular intervals.
➢ The entries in the petty cash book are kept up to date because the cash expenditure is
not reimbursed until the petty cash book is written up.

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G Green maintains a columnar petty cash book on the imprest system. The imprest amount is
RM700. During November 2017 the cash transactions were as follows:
Date Particulars Amount (RM)
November 1 Balance in hand 78.00
3 Received cash to make up the imprest
4 Postage 120.00
5 Stationery 75.00
7 Entertainment 35.00
9 Travelling expenses 41.00
14 Miscellaneous expenses 26.00
15 Entertainment 19.00
16 Repairs 31.00
17 Postage stamps 18.00
20 Entertainment 10.00
22 Entertainment 8.00
24 Stationery 51.00
25 Postage stamps 12.00
28 Repairs 10.00

Suggested Solution:
PETTY CASH BOOK
Amount Date Voucher Particulars Amount Postage Stationery Travelling Repairs Entertainment Misc.
Received No. Paid Exp.
RM RM RM RM RM RM RM RM
78.00 Nov1 Balance b/d
622.00 3 Cash
4 Postage 120.00 120.00
5 Stationery 75.00 75.00
7 Entertainment 35.00 35.00
9 Travelling 41.00 41.00
14 Miscellaneous 26.00 26.00
expenses
15 Entertainment 19.00 19.00
16 Repairs 31.00 31.00
17 Postage 18.00 18.00
stamps
20 Entertainment 10.00 10.00
22 Entertainment 8.00 8.00
24 Stationery 51.00 51.00
25 Postage 12.00 12.00
stamps
28 Repairs 10.00 10.00
30 Nov’s total 456.00 150.00 126.00 41.00 41.00 72.00 26.00
30 Balance c/d 244.00
700.00 700.00
244.00 Dec1 Balance b/d
456.00 Cash

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1.3. Posting to Ledger

▪ Posting to ledger is the act of transferring the information in the journal to the
appropriate accounts.
▪ Ledger is a summary, by account of all transactions affecting that account.
▪ A ledger account has a format which in its simplest form is known as the “T” format as
it looks like a large “T”.
Dr Account Name Cr

Debit side Credit side

Example 3.6: Ledger

**Refer Journal from Example 1 and Example 4**
W White Account
RM RM
March 9 Sales 1,800.00 March 14 Return inwards 150.00
24 Sales 1,500.00 27 Bank 3,150.00
3,300.00 3,300.00

B Brown Account
RM RM
March 14 Sales 1,750.00 March 14 Return inwards 140.00
25 Sales 1,860.00 29 Bank 3,270.00
29 Discount allowed 200.00
3,610.00 3,610.00

Sales Account
RM RM
March 31 Income Statement 6,910.00 March 31 Trade debtors 6,910.00
6,910.00 6,910.00

Return Inwards Account

RM RM
March 31 Trade debtors 290.00 March 31 Income Statement 290.00
290.00 290.00

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 Financial Accounting (SPAF123)
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**Refer Journal from Example 2 and Example 4**

R Red Account
RM RM
March 15 Return Outwards 50 March 10 Purchases 800.00
31 Bank 1,852.50 25 Purchases 1,200.00
Discount received 97.50
2,000.00 2,000.00

P Purple Account
RM RM
March 15 Return 40.00 March 11 Purchases 750.00
Outwards
31 Balance c/d 1,370.00 26 Purchases 660.00
1,410.00 1,410.00
April 1 Balance b/d 1,370.00

Purchases Account
RM RM
March 31 Trade creditors 3,410.00 March 31 Income Statement 3,410.00
3,410.00 3,410.00

Return Outwards Account

RM RM
March 31 Income Statement 90.00 March 31 Trade creditors 90.00
90.00 90.00

1.4. Balancing and Closing off Accounts

▪ Ledger account balance is the net amount obtained by setting off the sum of all debits
and sum of all credits against each other. In setting off, the greater sum is being set
off from the smaller one. Thus the ledger account balance is also interpreted as
➢ Total debit side – Total credit side (if total debit side is greater)
➢ Total credit side – Total debit side (if total credit side is greater)
▪ Closing an account means to bring the balance to zero. It transfers balances from
income and expense account into the income statement while balances for assets,
liabilities and owner’s equity are transferred into the next accounting period and stated
in the balance sheet of the accounting period.

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 Introductory Financial Accounting 1 (AFAF014)
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Example: Balancing and closing off accounts

Bank Account
RM RM
March 5 Capital 10,000.00 March 14 Furniture 800.00
10 Trade debtors 5,600.00 21 Rental 2,500.00
17 Interest received 3,100.00 27 Salaries 1,000.00
31 Balance c/d 14,400.00
18,700.00 18,700.00
April 1 Balance b/d 14,400.00
The total of debit side is RM18,700 and that of credit side is RM4,300.
Therefore, the balance in this ledger account is RM14,400 (18,700 – 4,300).

1.5. Trial Balance

▪ A trial balance is a list of accounts and their balances at a given time. Usually, a trial
balance is prepared at the end of the accounting period. A trial balance is prepared to
check the mathematical/arithmetic accuracy of accounting. It is also being used in the
preparation of final accounts.
▪ All account balances are extracted from the ledger and arranged in one report.
Afterwards, all debit balances are added. All credit balances are also added. Total
debits should be equal to total credits.
▪ A trial balance is only test the equality of total debits and total credits and not to
determine the correctness of accounting records. Some errors could exist even if
debits are equal to credits, such as double posting or failure to record a transaction.
When errors are discovered, correcting entries are made to rectify them or reverse
their effect.
▪ The most common format in which we find a trial balance is as below:
Name of the Organization
Trial Balance as at
Account Code Particulars Debit (RM) Credit (RM)

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 Introductory Financial Accounting 1 (AFAF014)
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Example: Trial Balance

Bersatu Enterprise
Trial Balance as at 31 December 2017
Debit (RM) Credit (RM)
Premises 187,000
Motor vehicles 118,600
Fixtures and fittings 17,400
Debtors 14,200
Creditors 12,200
Long term loan 50,000
Cash at bank 1,540
Drawings 2,300
Capital 250,000
Stock (at 1 January 2015) 3,400
Return inwards 1,240
Return outwards 1,300
Purchases 112,500
Carriage inwards 880
Sales 160,900
Salaries 13,500
Insurance 1,200
Water and electricity 720
Discount allowed 460
Discount received 540
474,940 474,940

Note: All account codes and names will be listed in the left-hand column. Place the account
balance in the appropriate debit or credit column for those accounts that have balances.
Remember that debits and credits MUST balance.

1.6. Financial Statements

▪ When the accounts are already up-to-date and equality between the debits and credits
has been tested, the financial statements can now be prepared. The financial
statements are the end-products of an accounting system.
▪ A complete set of financial statements is made up of:
➢ Statement of Comprehensive Income (Income Statement and Other
Comprehensive Income),
➢ Statement of Financial Position or Balance Sheet,
➢ Statement of Changes in Equity,
➢ Statement of Cash Flows, and
➢ Notes to Financial Statements.
***Note: Refer Topic Accounting Equation for the structure of Income Statement and BalanceSheet.
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