Introduction to Accounting

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Source Documents: Whenever a business transaction takes place, involving sales or purchases, receiving or paying money, or owing or being owed money, it is usual for the transaction to be recorded on a document. Source documents are the source of all the information recorded by a business. Examples

Invoice, Credit Note, Debit Note, Goods Received Note,

Books of Original Entry: In the course of business, source documents are created. The details on these source documents need to be summarized, as otherwise the business might forget to make some payments, ask for money owed or even accidentally pay for something twice. It is therefore imperative to keep records of source documents of transactions. Such records are made in “books of original entry”. The books of original entry also called a daybook are a descriptive and chronological (diary-like) record of day-to-day financial transactions. The main books of original entry are:

oSales Day Book (book of original entry for credit sales)
oPurchase Day Book (book of original entry for credit purchases) oSales Return Day Book (book of original entry for goods returned from customers) oPurchases Return Day Book (book of original entry for goods returned to suppliers) oJournal (book of original entry for credit sales)

oCash Book (book of original entry for cash receipts and payments. It records all transactions that go through the bank account) oPetty Cash Book (It records payments of small amounts of cash)

Double entry book keeping: is the method used to transfer our weekly/monthly totals from our books of original entry into the nominal ledger. The double entry system of book keeping ensures that every transaction is recorded twice in the accounts. The basic rule which must allows be observed is that every financial transaction gives rise to two accounting entries, one a debit and the other a credit. The total value of debit entries in the nominal ledger is therefore always equal at any time to the total value of credit entries. Which account receives the credit entry and which receives the debit entry depends on the nature of the transaction.

For example if you are to purchase car for GH¢2,000.00 you would be affected in two ways: a)You would own a car worth GH¢2,000.00
b)You have GH¢2,000.00 less cash
The rules of book keeping
A debit entry will:
Increase an asset (e.g. a purchase of office furniture)
Decrease a liability (paying a creditor)
Increase an expense (e.g. purchase of stationery)
A credit entry will:
Decrease an asset (e.g. making a cash payment)
Increase a liability (e.g. buying goods on credit)
Increase income/revenue (e.g. a sale transaction)
Examples
Show the two sides of the following transactions
a)A cash sale of GH¢1,000.00
b)Payment of a rent bill totaling GH¢1,500.00
c)Buying some goods for cash at GH¢2,000.00
d)Buying some furniture for cash at GH¢2,500.00
e)The business sells goods on credit to Lexis for GH¢3,500.00 f)The business buys goods on credit from Aaliyah for GH¢4,000.00

Show the two sides to the following transactions
a)Bought a furniture on credit from Bella, cost GH¢8,000.00 b)Bought goods on credit from Flora, cost GH¢5,000.00
c)Sold goods on credit to Michael, cost GH¢8,800.00
d)Paid Doctor (a credit supplier) GH¢1,200.00
e)Collected GH¢4,500.00 from John , a credit customer
f)Paid wages GH¢12,000.00
g)Received rent bill of GH¢5,555.00 from landlord Gomez
h)Paid rent of GH¢8,888.00 to landlord Gideon
i)Paid insurance premium GH¢2,700.00

Ledger Accounts
Ledger Accounts summarise all the individual transactions listed in the books of original entry. Ledger Accounts
Ledger Accounts summarise all the individual transactions listed in the books of original entry. The principal accounts are contained in a ledger called the nominal ledger The nominal ledger is an accounting record which summarises the financial affairs of a business. It...
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