Accounting Course Book 5

Accounting Course – Book 5

- 1 -

The Returns Day Book After this section you should be able to:

• Make appropriate entries relating to returns outwards and inwards in the Day Books

• Make correct postings from returns day books to Purchase, Sales & General Ledgers

• Explain the difference between a Credit and a Debit note • Describe how a debtor should use statements received from suppliers • Enter up the accounts for credit card transactions • Explain the need for internal checks on sales and purchases invoices

and credit notes • Describe what use may be made of factoring

The Returns Day Books

The Returns Inwards Day Book The Returns Outwards Day Book

(Or Journals) Postings will be the mirror image of ones you learnt to make for sales

and purchases! Returns Inwards and Credit Notes

Businesses allow customers to return goods and often give a refund Businesses that deal with trade customers may operate a similar policy When a seller agrees to take back goods and refund a Credit Note is

issued. It is called this because the customers account will be credited to show the reduction in the amount owed – they are sometimes printed in red to avoid confusion with invoices! *See example of a Credit note on the next page.

Returns Inwards

The Returns Inwards Day Book is used for posting the items SALES LEDGER: credit amount of credit notes to customer

accounts GENERAL LEDGER: at END of period post the TOTAL of the Returns

Day Book to the debit side of the Returns Inwards account


- 2 -

Example of a Credit Note

2007 Per Unit Total

R. Grant Higher Side Preston

8th September 2007 Tel: Fax:

Credit Note No. 9137

To: D. Poole 4 Charles Street Manchester

Mc Brand Pears Less 20% trade discount

25 50 (10) 40

2

Quantity


- 3 -

Example of a Returns Inwards Day Book and how this is entered in the Sales Ledger and then the Returns Inwards Account in the General Ledger

Sales Ledger

AAmmoouunntt ((££)) 4400

112200 229900 116600 661100

FFOOLLIIOO SSLL1122 SSLL3388 SSLL9999 SSLL111122 GGLL111144

NNoottee NNoo 99//3377 99//3388 99//3399 99//4400

22000066 SSeepptt 88 DD PPoooollee 1177 AA BBrreewwsstteerr 1199 CC VViicckkeerrss 3300 DD SStteevveennss && CCoo TTrraannssffeerrrreedd ttoo RReettuurrnnss IInnwwaarrddss AAccccoouunntt

Returns Inwards day Book Page 10

Pg 12Date Details Folio Amount (£) Date Details Folio Amount (£)

2006Sept 8 Returns Inwards RI10 40



D. Poole

A. Brewster


- 4 -

General Ledger





C. Vickers

D. Stevens & Co

Pg114Date Details Folio Amount (£) Date Details Folio Amount (£)

2006Sept 30 Returns for March RI10 610

Returns Inward Account


- 5 -

Returns Outwards and Debit Notes

If supplier agrees goods may be returned. When this happens a DEBIT note is sent by the customer to the supplier giving details of goods returned. *See example of a Debit note on the next page.

The credit note from the supplier will be evidence of the suppliers agreement of amounts involved

Allowance may be also made for faulty goods Statement of Accounts

At the end of each month a statement should be sent to each debtor who owes money. It is really a copy of the debtors account in the sellers books

It shows – amount owing at start of month Amount of each sales invoice Credit notes sent to debtor Cash and cheques received from debtor Amount owing at the end of the month

Statements and Debtors

Debtors will check their accounts agree with statement Statement also acts as a reminder to debtors


- 6 -

Example of a Debit Note

It is important to note that the Debit note is the reverse of the Credit note on the previous page. The Debit note is issued by the customer to the supplier with the returned goods, (see the date). The supplier then authorises a Credit note to the Customer.

To: R. Grant

Higher Side Preston

D. Poole 45 Charles Street Manchester

7th September 2007 Tel: Fax:

Debit Note No. 9.22

Mc Brand Pears damaged in transit Less 20% trade discount

25 50 (10) 40

2


- 7 -

Example of a Returns Outwards Day Book and how this is entered in the Customers accounts in the Purchase Ledger and then the Returns Outwards Account in the General Ledger

Purchase Ledger

AAmmoouunntt ((££)) 4400

224400 3300 336600 667700

FFOOLLIIOO PPLL2299 PPLL4466 PPLL5555 PPLL8877 GGLL111166

NNoottee NNoo 99..2222 99..2233 99..2244 99..2255

22000066 SSeepptt 77 RR.. GGrraanntt 1166 BB RRoossee 2288 CC BBllaakkee 3300 SS.. SSaauunnddeerrss TTrraannssffeerrrreedd ttoo RReettuurrnnss OOuuttwwaarrddss AAccccoouunntt

Returns Outwards day Book Page 7


2006Sept 7 Returns Outwards RO7 40



R. Grant

B. Rose


- 8 -

General Ledger





C. Blake

S. Saunders


2006Sept 30 Returns for March RO7 670

Returns Outwards Account


- 9 -

Credit Cards

Sales and purchases via credit cards Customer is not a debtor! Seller must collect from Credit Card Company: Double entry :

o Sale via credit card = Debit Credit Card Co / Credit Sales Account

o Receipt of money from Credit Card Company = Debit Bank Account / Credit the Credit Card Company

o Commission Charged by Credit Card Company = Debit Selling Expenses / Credit the Credit Card Company

Commission isn’t deducted from selling price; it is treated as a cash

discount i.e. the selling expense goes in the Profit and Loss part of T&P&L Internal Check

Sales invoices need checking CAREFULLY usually at each stage e.g. rubber stamped and initials


- 10 -

Each Debit note is posted separately

Returns Outward Day Book

Book of Original Entry (Debit Notes)

Returns Inward Day Book

Book of Original Entry (Credit Notes)

General Ledger

Returns Outward Account

Debit / Credit

Returns Inwards Account

Debit / Credit

Sales Ledger

Customer Accounts

Debit / Credit

Purchases Ledger

Suppliers Accounts

Debit / Credit

Each Credit note is posted separately

Total Only to the Returns Inward Account

Total Only to the Returns Outwards Account


- 11 -

Factoring

Debtors can cause cash flow problems and one way to solve this is FACTORING

This means selling the debts to another company – for a bit less than they are worth!

E & EO

Stands for Errors and Omissions Excepted which means figures COULD be incorrect!

Found on some invoices and is a warning to CHECK figures carefully.


- 12 -

Exercise 1

AAmmoouunntt ((££)) 111199 9988 111144 2255 5566 5599 8899 6677 119966 111199 5566 9988 11009966

FFOOLLIIOO IInnvvooiiccee NNoo

22000077 MMaayy 11 HH LLllooyydd MMaayy 44 DD SSccootttt MMaayy 44 AA SSiimmppssoonn MMaayy 44 AA WWiilllliiaammss MMaayy 44 SS WWoooodd MMaayy 1100 SS SSiimmppssoonn MMaayy 1188 MM WWhhiittee MMaayy 1188 JJ WWoonngg MMaayy 1188 HH MMiilllleerr MMaayy 1188 HH LLeewwiiss MMaayy 3311 AA WWiilllliiaammss MMaayy 3311 CC CCooooppeerr TTrraannssffeerrrreedd ttoo PPuurrcchhaasseess AAccccoouunntt

Purchases day Book Page


- 13 -

Purchases Ledger

AAmmoouunntt ((££)) 1166 1144 55 1111 4466


22000077 MMaayy 77 HH LLllooyydd MMaayy 77 DD SSccootttt MMaayy 2255 JJ WWoonngg MMaayy 2255 AA SSiimmppssoonn TTrraannssffeerrrreedd ttoo RReettuurrnnss OOuuttwwaarrddss AAccccoouunntt

Returns Outwards day Book Page

Date Details Folio Amount (£) Date Details Folio Amount (£)2007 2007May 7 Returns Outwards 16 May 1 Purchases 119

Date Details Folio Amount (£) Date Details Folio Amount (£)2007 2007May 7 Returns Outwards 14 May 4 Purchases 98

H Lloyd

D Scott


- 14 -

Date Details Folio Amount (£) Date Details Folio Amount (£)2007 2007

May 25 Returns Outwards 11 May 4 Purchases 114May 10 Purchases 59


May 4 Purchases 25May 31 Purchases 56


May 4 Purchases 56


May 18 Purchases 89


25 May Returns Outwards 5 May 18 Purchases 67

S Wood

M White

J Wong

A Simpson

A Williams


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General Ledger


May 18 Purchases 196


May 18 Purchases 119


May 31 Purchases 98

H Lewis

C Cooper

H Miller


May 31 Credit Purchases 1096


May 31 Returns for May 46

Purchase Account



- 16 -

Exercise 2

AAmmoouunntt ((££)) 118888 6600 7777 8888 111144 111188 6666 997700 9911 11777722


22000088 JJuunnee 11 AA SSiimmeess JJuunnee 11 PP TTuulllloocchh JJuunnee 11 JJ FFllyynnnn JJuunnee 11 BB LLooppeezz JJuunnee 66 MM HHoowweellllss JJuunnee 66 SS TThhoommppssoonn JJuunnee 66 JJ FFllyynnnn JJuunnee 2200 MM BBaarrrrooww JJuunnee 3300 MM PPaarrkkiinn TTrraannssffeerrrreedd ttoo SSaalleess AAccccoouunntt

Sales day Book Page


- 17 -

Sales Ledger

AAmmoouunntt ((££)) 1122 1177 55 3344


22000088 JJuunnee 1100 AA SSiimmeess JJuunnee 1100 BB LLooppeezz JJuunnee 2244 SS TThhoommppssoonn TTrraannssffeerrrreedd ttoo RReettuurrnnss IInnwwaarrddss AAccccoouunntt

Returns Inwards day Book Page


June 1 Sales 188 June 10 Returns Inwards 12


June 1 P. Tulloch 60

A. Simes

P. Tulloch


- 18 -


June 1 Sales 77June 6 Sales 66




June 6 Sales 114




June 20 Sales 970

J. Flynn

M. Barrow

B. Lopez

M. Howells

S. Thompson


- 19 -

General Ledger


June 30 Sales 91

M. Parkin


June 30 Credit Sales 1772


June 30 Returns for June 34

Sales Account



- 20 -

Exercise 3 You are to enter up the sales, purchases, returns inwards and returns outwards day books from the following details, then to post the items to the relevant accounts in the sales and purchase ledgers. The total of the day books are then to be transferred to the accounts in the General Ledger. The month is August and the year is 2007

AAmmoouunntt ((££)) 5566 114488 114455 8899 7788 225577 5577 6655 111122 5555 11006622


22000077 AAuugg 11 TT.. TThhoommppssoonn AAuugg 11 LL.. RRooddrriigguueezz AAuugg 11 KK.. BBaarrttoonn AAuugg 77 KK.. KKeellllyy AAuugg 77 NN.. MMeennddeess AAuugg 77 NN.. LLeeee AAuugg 2244 KK.. MMoohhaammmmeedd AAuugg 2244 KK.. KKeellllyy AAuugg 2244 OO’’ GGrreeeenn AAuugg 3311 NN.. LLeeee TTrraannssffeerrrreedd ttoo SSaalleess AAccccoouunntt

Sales day Book Page


- 21 -

AAmmoouunntt ((££)) 55 1111 1144 24 54


22000077 AAuugg 1144 TT.. TThhoommppssoonn AAuugg 1144 KK.. BBaarrttoonn AAuugg 1144 KK.. KKeellllyy AAuugg 2288 NN.. MMeennddeess TTrraannssffeerrrreedd ttoo RReettuurrnnss IInnwwaarrddss AAccccoouunntt


AAmmoouunntt ((££)) 114444 2255 7766 2244 5588 112233 5544 6655 7755 664444


22000077 AAuugg 33 PP.. PPootttteerr AAuugg 33 HH.. HHaarrrriiss AAuugg 33 BB.. SSppeenncceerr AAuugg 99 BB.. PPeerrkkiinnss AAuugg 99 HH.. HHaarrrriiss AAuugg 99 HH.. MMiilleess AAuugg 1177 HH.. HHaarrrriiss AAuugg 1177 BB.. PPeerrkkiinnss AAuugg 1177 LL.. NNiixxoonn TTrraannssffeerrrreedd ttoo PPuurrcchhaasseess AAccccoouunntt



- 22 -

Sales Ledger

AAmmoouunntt ((££)) 1122 2222 1144 4488


22000077 AAuugg 1111 PP.. PPootttteerr AAuugg 1111 BB.. SSppeenncceerr AAuugg 2200 BB.. SSppeenncceerr TTrraannssffeerrrreedd ttoo RReettuurrnnss OOuuttwwaarrddss AAccccoouunntt


Date Details Folio Amount (£) Date Details Folio Amount (£)2007 2007Aug 1 Sales 56 Aug 14 Returns Inwards 5

Date Details Folio Amount (£) Date Details Folio Amount (£)2007 2007Aug 1 Sales 148

T. Thompson

L. Rodriguez


- 23 -



Aug 24 Sales 65


Date Details Folio Amount (£) Date Details Folio Amount (£)2007 2007Aug 7 Sales 257

Aug 31 Sales 55


Aug 24 Sales 57

N. Mendes

N. Lee

K. Mohammed

K. Barton

K. Kelly


- 24 -

Purchase Ledger


Aug 24 Sales 112

O' Green


Aug 11 Returns Inward 12 Aug 3 Purchases 144


Aug 3 Purchases 25


Aug 11 Returns Inward 22 Aug 3 Purchases 76Aug 20 Returns Inward 14


Aug 9 Purchases 24Aug 17 Purchases 65

P. Potter

H. Harris

B. Spencer

B. Perkins


- 25 -


Aug 9 Purchases 58Aug 17 Purchases 54


Aug 9 Purchases 123


Aug 17 Purchases 75

H. Harris

H. Miles

L. Nixon


- 26 -

General Ledger


Aug 31 Credit Sales 1062


Aug 31 Returns for August 54


Aug 31 Credit Purchases 644


Aug 31 Returns for August 48


Purchase Account


Sales Account


- 27 -

Exercise 4 You are to enter the following items in the books, post to personal accounts, and show the transfers to the General ledger. The Month is December and the year is 2008.

AAmmoouunntt ((££)) 551100 224466 335566 330077 225500 118855 118888 331100 442200 22777722


22000088 DDeecc 33 EE RRiiggbbyy DDeecc 33 EE PPhhiilllliippss DDeecc 33 FF TThhoommppssoonn DDeecc 88 AA GGrreeeenn DDeecc 88 HH GGeeoorrggee DDeecc 88 JJ FFeerrgguussoonn DDeecc 2200 EE PPhhiilllliippss DDeecc 2200 FF PPoowweellll DDeecc 2200 EE LLeeee TTrraannssffeerrrreedd ttoo SSaalleess AAccccoouunntt

Sales day Book Page


- 28 -

AAmmoouunntt ((££)) 1188 2222 2277 3300 9977


22000088 DDeecc 1144 EE PPhhiilllliippss DDeecc 1144 FF TThhoommppssoonn DDeecc 3311 EE PPhhiilllliippss DDeecc 3311 EE RRiiggbbyy TTrraannssffeerrrreedd ttoo RReettuurrnnss IInnwwaarrddss AAccccoouunntt


AAmmoouunntt ((££)) 338800 550000 110066 220000 118800 441100 6666 11884422


22000088 DDeecc 11 KK HHiillll DDeecc 11 MM NNoorrmmaann DDeecc 11 NN SSeenniioorr DDeecc 55 RR MMoorrttoonn DDeecc 55 JJ CCooookk DDeecc 55 DD EEddwwaarrddss DDeecc 55 CC DDaavviieess TTrraannssffeerrrreedd ttoo PPuurrcchhaasseess AAccccoouunntt



- 29 -

Sales Ledger

AAmmoouunntt ((££)) 3300 1166 1133 1111 7700


22000088 DDeecc 1122 MM NNoorrmmaann DDeecc 1122 NN SSeenniioorr DDeecc 3311 JJ CCooookk DDeecc 3311 CC DDaavviieess TTrraannssffeerrrreedd ttoo RReettuurrnnss OOuuttwwaarrddss AAccccoouunntt


Date Details Folio Amount (£) Date Details Folio Amount (£)2008 2008Dec 3 Sales 510 Dec 31 Returns Inward 30


Dec 20 Sales 188 Dec 31 Returns Inward 27

E Rigby

E Phillips


- 30 -


Date Details Folio Amount (£) Date Details Folio Amount (£)2008 2008Dec 8 Sales 307




Dec 20 Sales 310

F Thompson

A Green

H George

J Ferguson

F Powell


- 31 -

Purchase Ledger


Dec 20 Sales 420

E Lee


Dec 1 Purchases 380


Dec 12 Returns Outward 30 Dec 1 Purchases 500




Dec 5 Purchases 200

K Hill

M Norman

N Senior

R Morton


- 32 -




Dec 5 Purchases 410




Dec 24 Purchases 550


Dec 24 Purchases 900

J Cook

D Edwards

C Davies

C Ferguson

K Ennevor


- 33 -

General Ledger


Dec 31 Credit Purchases 2772


Dec 31 Returns for December 97


Dec 31 Credit Purchases 1842


Dec 31 Returns for December 70


Sales Account

Returns Inward Account

Purchases Account


- 34 -

The Journal The objectives of this section are as follows: ♦ Explain the purpose of the Journal ♦ Enter up the Journal ♦ Post from Journal to ledgers ♦ Complete opening entries for a new set of accounting books in the journal

and make appropriate entries in the ledgers ♦ Describe and explain the accounting cycle The Journal This is the book of original entry that “Sweeps Up” all transactions not yet entered in the other FIVE

Question 1

What are the other FIVE called? Answer – Cash Book, Sales Day Book, Purchases Day Book,

Returns Inwards and Returns Outwards. All these are devoted to one form of transaction

What does the Journal do? ♣ The journal deals with less common items and sometimes more

complicated! ♣ It would be easy for the book keeper to forget details of transactions if they

were made directly to the ledgers from source documents and may be impossible to understand at a later date!

Question 2 What do you think might need recording in the journal? Answers

errors, corrections or changes all transactions relating to fixed assets transfers involving the capital account, e.g. setting aside funds for building

repairs writing off bad debts opening entries for new set of books


- 35 -

What is recorded in the journal? ♦ Date ♦ Name of account to be debited ♦ Name of account to be credited ♦ Description/explanation, (called the Narrative) ♦ Folio reference to the source document

Benefits of having a Journal

♥ The journal makes fraud more difficult ♥ Reduces the risk of entering only once instead of double entry ♥ Despite those benefits some businesses do not have a journal!

Journal Entries and Exams

♠ Examiners say that questions on the journal are often badly answered. Not because they are difficult but due to a mental block!

♠ It is possible that students fail to view the Journal as a document containing instructions – 3 per transaction.

What are the Instructions?

1. Account to be DEBITED 2. Account to be CREDITED 3. A description of the transaction

Date Details Folio Dr CrThe name of the account to be debited The name of the account to be creditedThe Narrative


- 36 -

Example 1 Machinery purchased £500 on credit from Toolmakers Ltd on the 1st July 2006 Workings

Date Details Folio Amount (£) Date Details Folio Amount (£)2006

1st July Toolmakers Ltd PL55 500


1st July Machinery GL1 500

Machinery

Toolmakers Ltd

Date Details Folio Dr Cr2006

1st July Machinery GL1 500 Toolmakers Ltd PL55 500Purchase of milling machine on credit. Capital purchases invoice no.7/59


- 37 -

Example 2 Sale of stationary no longer required for £300 on credit to K. Lamb on 2nd July 2006

General Ledger

Sales Ledger


2nd July Machinery SL79 300

Stationary


2nd July Stationary GL 51 300

K Lamb

Date Details Folio Dr Cr2006

2nd July K. Lamb SL79 300 Stationary GL51 300Sale of Stationary no longer required - see letter ref:KL3X8


- 38 -

Bad Debts The following example illustrates how we deal with them. A debt of £78 owing to us from H. Mander is written off as a bad debt on 31st Aug 2006.

General Ledger

Sales Ledger

Journal

♥Bad debts are an expense so are posted as debits, i.e. they reduce capital and reductions in capital are debits.


Aug 31 H Mander SL99 78

Bad Debts


Aug 31 Bad debts GL16 78

H Mander

Date Details Folio Dr Cr200631 Aug Bad Debts GL16 78

H Mander SL99 78Debt written off as bad - see letter in file HM2X6


- 39 -

Opening Entries The following example illustrates how we deal with opening entries. J. Brew after being in business for some years without keeping proper records now decides to keep a double entry set of books. On the 1st July 2006 he establishes that his assets and liabilities are as follows: ASSETS: Van £840 – post to the Van account in the General Ledger Fixtures £700 – post to the Fixtures & Fittings account in the General Ledger Stock £390 – post to the Stock account in the General Ledger Debtors: - B Young £95 – post to Customers account in the Sales Ledger D Blake £45 – post to the Customers account in the Sales Ledger Bank £80 – post to the Cash Account Cash £20 – post to the Cash Account LIABILITIES: Creditors: - M Quinn £129 – post to the Suppliers Account in the Purchase Ledger C Walters £41 – post to the Suppliers Account in the Purchase Ledger Capital Capital was calculated from the above by the accounting equation Assets = Liabilities + Capital (See below for the workings) This gave us a figure of: Capital £2000 – post to the Capital account in the General Ledger

ASSETS LIABILITIES CAPITAL

840 129700 4139095458020

2170 170 2000


- 40 -

General Ledger


2006 2006July 1 Balance J5 840







Van

Fixtures & Fittings

Stock

Capital


- 41 -

Sales Ledger

Purchase Ledger





B Young

D Blake





M Quinn

C Walters


- 42 -

The Journal

Cash Book

Date Details Folio Dr Cr2006July 1 Van GL1 840

Fixtures GL2 700Stock GL3 390Debtors - B Young SL1 95 D Blake SL2 45Bank CB1 80Cash CB1 20 Creditors - M Quinn PL1 129 C Walters PL2 41 Capital GL4 2000Assets and Liabilities at this date are entered to open the Books 2170 2170

Date Details Folio Cash Bank Date Details Folio Cash Bank2006 2006July 1 Balances J5 20 80

CASH BOOK


- 43 -

The Accounting Cycle for a Profit Making Organisation

Double Entry

How the dual aspect of each transaction is recorded

Check Arithmetic

Checking the arithmetical accuracy of double entry accounts

Profit or Loss

Calculation of profit or loss for the accounting period

Closing Financial Position

Financial statement showing liabilities, assets and capital at the end of the accounting period

Source Documents

Where original information is to be found

• Sales and purchase invoices • Debit and credit notes for returns • Bank pay-in slips and cheque counterfoils • Receipts for cash paid out and received • Correspondence containing other financial

information

Original Entry

What happens to it

Classified and then entered into books of prime entry:

• The Cash Books* • Sales and Purchases Day Books • Returns Inwards and Outwards Day Books • The Journal

General Ledger

Sales Ledger

Purchases Ledger

Cash Books*

Real and Nominal Accounts

Debtors' Accounts

Creditors' Accounts

Cash Book and Petty Cash Book

Double Entry Accounts

*Note Cash Books fulfil both the roles of books of original entry and double entry accounts

Trial Balance

Trading and Profit & Loss Account

Balance Sheet


- 44 -

Review Question 1

Journal

Date Details Folio Dr Cr2008May 1 Van 6790May 1 Kingston Garage 6790

Bought a vanMay 3 Bad debt 34May 3 H Newman 34

Written off bad debtMay 8 Unique Offices 490May 8 Office Furniture 490

Unsuitable furniture returned to unique offices with full allowance given to usMay 12 Bank 39May 12 W Charles 39May 12 Bad Debt 111May 12 W Charles 111

£39 is accepted as full settlement of £150 debt from W Charles due to bankruptcy, £111 written off as a bad debt

May 14 Drawings 45 Stock 45Goods withdrawn out of business stock without paying for them

May 28 76May 28 Insurance 76

£76 still owing on Insurance Account due to mispayment to private insurance from this account

May 28 Machinery 980May 28 Systems Accelerated 980

Bought machinery on credit


- 45 -

Review Question 2

Journal

Date Details Folio Dr Cr2007April 1 Fixtures 1809

J Harper 1809Bought fixtures

April 4 Drawings 500 Stock 500Goods withdrawn out of business stock without paying for them

April 9 Stock 28 Capital 28Return of some of the stock drawn on April 4

April 12 Office Equipment 500April 12 K Lamb 500

Office Equipment taken as full value of K Lamb's debtApril 18 J Harper 65April 18 Fixtures 65

Unsuitable fixtures returned to J Harper for full allowanceApril 24 Bad debt 68April 24 J Brown 68

Bad debt written offApril 30 Office Equipment 2190April 30 Super Offices 2190

Office equipment bought on credit


- 46 -

Errors not affecting the Trial Balance

Types of Error Errors of Omission – where a transaction is completely missed from the books. Errors of Commission – when the correct amount is entered but in the wrong person’s account. Errors of Principle – where an item is in the wrong class of account. Compensating Errors – where 2 errors cancel each other out. Errors of Original Entry – where the original figure is incorrect yet double entry is still observed using this figure. Complete Reversal of Entries – where the correct accounts are used but each item is shown on the wrong side of the account. Transposition Errors – where the wrong sequence of characters within a number was entered, (more common on one side only in which case the Trial Balance would not balance). Casting

1. Casting means ADDING UP. 2. Overcasting means incorrectly adding up a column of figures to get an

amount greater than it should be. 3. Undercasting is incorrectly adding up a column of figures to give an

answer less than it should be.


- 47 -

Review Questions


- 48 -

The Answers The journal is part of the books of original entry. No Date, Name of the Debit Account, Name of the Credit Account, Description and Folio. Credit entries are offset on the line to highlight that is what they are. Journal entries help prevent fraud because it gives details of every transaction that is unusual.

Frank LawsonTrial Balance as at April 5 2007

Account Name Debit Credit

MachineryOpening Stock

17001400

Fittings 250

Bank

245

575

Jones

EvansSmith

65210

4275

Brown 105

Capital 40004275


- 49 -

22.1

The Journal

22.2

ASSETS LIABILITIES CAPITAL

6000 5000550 290

1010 320865 18535

425160

25001750

13295 5795 7500

Date Details Folio Dr Cr2007Jan 1 Premises 6000

Fittings 550Stock 1010Bank 865Cash 35Trade debtors - Fraser 425 Fisher 160 Mortgage Loan 5000Machinery 2500Van 1750 Rates 290 Trade Creditors - Mansel 320 Nutkins 185 Capital 7500

Date Details Folio Dr Cr2007March 2 Office Equipment 175March 2 Bank 175

Bought 2nd hand computerMarch 5 Purchases 138March 5 Cash 138

Cash PurchasesMarch 6 A Fircone 52March 6 Sales 52

Goods sold to A FirconeMarch 7 Purchases 130March 7 Horace Heap 130

Bought goodsMarch 8 Cash 45March 8 Office Equipment 45

Sold old computer for cashMarch 9 Stationary 5March 9 Cash 5

Bought stationaryMarch 30 Drawings 50March 30 Bank 50

Draw cheque for self


- 50 -

23.3

Journal

Date Details Folio Dr Cr2007July 1 Office Machinery 250July 1 Purchases 250

Error of Complete ReversalJuly 2 Sue 38July 2 Sarah Palliser 38

Error of CommissionJuly 3 A Smith 20July 3 J Smith 20

Error of CommissionJuly 4 Drawings 25July 4 Salaries 25

Error of PrincipleJuly 5 Machinery Repairs 75July 5 Machinery 75

Error of PrincipleJuly 6 Office Furniture 80July 6 Stationary 80

Error of PrincipleJuly 17 Purchases 18

Error of TranspostionJuly 30 Bank Interest 8.50July 30 Bank Charges 8.50

Error of Principle


- 51 -

More Review Exercises 1 Jonathon Smith had entered his profit and loss account for 30th November 2004 which showed a profit of £26790. His accountant then discovered the following errors:

1. The sales account had been undercast by£450 2. Discount allowed of £140 had been entered on the credit of the

discount allowed account 3. Wages of £2500 had been completely omitted from the books account 4. The cost of a fixed asset £9500 had been included in the purchases

account 5. A payment from BA Jones of £1200 had been entered in the account of

CA Jones 6. The closing stock had been entered as £2400; it was actually £2500

Required Calculate the corrected profit. Show clearly whether each adjustment is added, subtracted or has no effect on the total.

Jonathon Smith Corrected Profit for the year ended 30 November 2004

Profit calculated by Jonathon £26790 1. Sales undercast add £450 2. Discounts Allowed Credited minus £140 3. Wages omitted minus £2500 4. Fixed Asset in Purchases Account no effect 5. Payment in CA Jones Account no effect 6. Closing Stock entered incorrectly add £100 Total £24700


- 52 -

2

The Journal

Date Details Folio Dr Cra J Harris 678

J Hart 678Sale of Goods to J Harris misposted to J Harts account

b Machinery 4390 P Lyle 4390Purchase of Machinery ommited from the books

c Vehicles 3800 Motor Expenses 3800Purchase of Vehicle misposted to Motor Expenses

d E Fitzwilliam 9Sales misposted by £9 9

e Sales Account 257 Commission Received 257Commission Received misposted to Sales

f Cash Book 154 T Heath 154Receipt of Cash entered in error as a Credit in Cash Book

g Purchase 189 Drawings 189Purchase misposted to Drawings

h Discounts Allowed 366 Discounts Received 366Discounts entered in error to Discounts Received


- 53 -

3

The Journal

Date Details Folio Dr Cra H Wood 699

K Ward 699Misposting of Purchase to H Woods account

b Bank 189 Cash 189Misposting of Bank payment for advertising into Cash Column

c B Gordon 443 B Gorton 443Misposting of Sale to B Gorton's Account

d Purchase 10 K Isaacs 10Shortfall of £20 on Credit Purchase from K Isaacs

e H Moore 178 Cash Book 178Misposting of Cash Payment to Debit column of Cash book

f Sales Account 1000 Fittings 1000Misposting of Sale of fittings to Sales accounts

g Cash 100 Bank 100Cash withdrawn from bank entered into debit column in error

h Purchase 428 Fittings 428Misposting of Purchase to Fittings


- 54 -

4

a) 100 x 1.39 is £139 not £1390 b) i) stock would be overstated by £1251 c) ii) Cost of goods sold overstated by £1251 d) iii) Net profit overstated by £1251 e) iv) Current Assets overstated by £1251 f) v) Owners capital overstated by £1251


- 55 -

5

The Journal

Date Details Folio Dr Cra Sales Account 10000

Capital 10000b Drawings of Goods 700

General Expenses 700c Drawings 89

Insurance 89d Purchase 270

C Kelly 270e Bank 780

Cash 780f Bank 400

Cash 400J Charlton 168

g Mc Carthy 168h Motor Expenses 1000

Sales 1000


- 56 -

6

The Journal

Date Details Folio Dr Cra Rent Received 880

Commissions Received 880b Bank Charges 77

Rent Account 77c Sundry Expenses 23

Bank 23d Fixtures 478

Purchases 478e Returns Inwards 833

Returns Outwards 833f Capital 5000

Loan from R Smiley 5000g Loan Interest 500

Premises 500h Drawings of Goods 250

Purchases 250