Business Studies Form 4 Notes : SOURCE DOCUMENTS AND BOOKS OF ORIGINAL ENTRY

BUSINESS STUDIES NOTES

FORM FOUR

SOURCE DOCUMENTS AND BOOKS OF ORIGINAL ENTRY

These are documents containing the information that forms the basis of making entries in the books of accounts. They act as evidence that the transaction actually took place. They include:

• Cash sale receipt: a document that shows that cash has been received or paid out of the business either in the form of cash or cheque. It is a source document mainly used in making records in the cash journals, cash book, cash accounts, or bank accounts. If the receipt is received, it means payment has been made and therefore will be credited in the above accounts or taken to cash disbursement/payment journals. When issued, it means cash/cheque has been received and therefore will be debited in the above accounts or taken to cash receipt journals.
• Invoice: a document issued when the transaction was done on credit to demand payment. If the invoice is incoming (invoice received), it implies that purchases were made on credit; if outgoing (invoice issued), it implies that sales were made on credit. The incoming invoice is used to record information in the purchases journals/diary, while an outgoing invoice is used to record information in sales journals/diaries.
• Credit note: a document issued when goods are returned to the business by the customer or the business returns goods to the supplier, and to correct any overcharge that may have taken place. If received, it means part of the purchases has been returned and is used to record information in the purchases return journals. If issued, it means part of sales has been returned by customers and is used to record information in the sales return journals/diaries.
• Debit note: a document used to correct an undercharge that may have taken place to inform the debtor to pay more. It acts as an additional invoice.
• Payment voucher: a document used where it is not possible to get a receipt for the cash/cheque that has been received or issued. The person being paid must sign it to make it authentic. It is therefore used to record information just as receipts.

Books of original entries/Journals/Diaries/Day’s books/Subsidiary books

These are books where transactions are listed when they first occur, with entries made on a daily basis before they are posted to their respective ledger accounts. The information in the source documents is used to make entries in these books. The books of original entries include:

• Sales journals
• Sales return journals/Return inwards journals
• Purchases journals/Creditors journals/Bought journals
• Purchases return journals/Return outwards journal
• Cash receipt journals
• Cash payment/Cash disbursement journals
• Three column cash book
• The petty cash book
• Analysis cash book
• General journals/Journal proper

Sales journals

This is used to record credit sales of goods before they are recorded in their various ledgers. The information obtained in the outgoing invoice/invoice issued is used to record the information in this journal as the source document.

The overall total in the sales journal is posted in the sales account in the general ledger on the credit side and the debtors account in the sales ledger as a debit entry.

Sales journal

Example:

The following information relates to Tirop Traders for the month of June 2010:

• June 1: Sold goods to Wafula on credit of Ksh 200, invoice no 0114
• June 2: Sold to the following debtors on credit; Wanjiru Ksh 400, Musyoka Ksh 300, Wafula Ksh 300
• June 5: Sold goods on credit to Wanjiru of Ksh 300
• June 10: Sold goods to the following on credit; Kanini Ksh 100, Wafula Ksh 500, Wanjiru Ksh 600
• June 12: Sold goods on credit to Musyoka of Ksh 350

Required:

Prepare the relevant day book for the above transactions; then post the various amounts to their respective individual accounts.

Sales journal

(Post the rest to their individual debtors accounts)

Sales Return Journals/Return Inwards Journals

This is for recording goods that customers/debtors have returned to the business. It uses the information in the credit note issued as a source document. The information is recorded to the return inwards account in the general ledger, while the individual entries are credited in their respective debtors accounts to complete the double entry. It takes the following format:

Sales return journal

For example:

Record the following transactions for 2007 in their relevant diaries, then post them to their respective ledger accounts:

• May 1: Goods that had been sold to M Okondo of Shs 2600 on credit were returned to the business
• May 2: G. Otuya returned goods worth Shs 1320 that were sold to him on credit to the business
• May 8: The following returned goods that had been sent to them on credit to the business: H Wati Shs 3500, Muya Shs 4700, M Okondo Shs 2900
• May 12: G Otuya returned goods worth Shs 5400 that were sold on credit to the business
• May 30: Goods worth Shs 8900 that had been sold on credit to G Otuya were returned to the business

Sales Return journal

(Post the entries to the individual ledger accounts (Cr))

Purchases Journal

This is used to record credit purchases of goods. The totals are then debited in the purchases account in the general ledger, while the individual creditors’ accounts are credited. It uses the invoices received/incoming invoices as its source document. It takes the following format:

Purchases journal

For example:

The following information relates to Mikwa Traders for the month of April 2011. Record them in their relevant day’s book, then post the entries to their relevant ledger accounts.

• April 2: Bought goods worth Shs 25,000 on credit from Juma, Invoice no 3502
• April 3: Bought goods worth Shs 16,500 from Kamau on credit, Invoice no 2607
• April 6: Bought goods worth Shs 12,700 from Juma on credit, Invoice no 3509
• April 8: Purchased goods of Shs 25,200 from Juma, Invoice no 3605; Shs 17,500 from Kamau, Invoice no 3700; Shs 45,000 from Wamae Wholesalers, Invoice no 3750
• April 15: Purchased goods of Shs 9,200 from Wamae Wholesalers on credit, Invoice no 3762
• April 18: Bought goods of Shs 17,000 from Kamau on credit, Invoice no 3802
• April 24: Purchased goods of Shs 36,000 from Juma Suppliers on credit, Invoice no 3812

Purchases Day book

(Post the individual entries to their relevant accounts in the ledger (crediting))

Purchases Return Journals/Return Outwards Journals

This is used to record goods that have been returned to creditors by the business, reducing the value of goods purchased. It uses the credit note received as the source document, with totals posted to the purchases return account while individual creditors’ accounts are debited in their respective ledger accounts. It takes the following format:

Purchases return journal

For example:

Record the following transactions in the purchases return day book for Njiru’s Traders for the month of June 2010, then post the information into their relevant ledger accounts.

• June 3: Returned goods worth Shs 400 that had been bought from Nairobi Stores, credit note no 56
• June 8: Returned goods of Shs 1,200 to Matayos Store, credit note no 148
• June 19: Had some purchases returned to the following; Njoka Enterprises Shs 700, credit note no 205; Nairobi Stores Shs 600, credit note no 58; Matayos Store Shs 1,000, credit note no 191
• June 26: Returned goods worth Shs 1,800 to Njoka Enterprise, credit note no 210
• June 30: Returned goods worth Shs 1,020 to Matayos Store, credit note no 200

Cash Receipt Diaries

This is used to record all cash and cheques received in the business. When there are many transactions, posting directly in the cash book may be tedious, so they are first recorded here. Its totals are posted to the cash and bank accounts in the general ledger (Dr), while individual accounts are credited in their respective ledger accounts. It uses cash receipts issued and bank slips received as source documents. It takes the following format:

Cash receipt journal

Cash Payment Journals

This is used to record cash and cheques issued to creditors or out of the business. Its totals are credited (Cr) in the cash and bank accounts, and individual accounts are debited (Dr) in their respective accounts. It uses cash receipts received and bank slips issued as source documents. It takes the following format:

Cash payment journal

For example:

Record the following transactions into their relevant day books of Onyango Traders, then post the entries to their respective ledger accounts and balance them off:

• May 1, 2011: Cash sales amounting to Ksh 3,000, receipt no 0112
• May 2: Paid the following creditors by cheque after deducting a cash discount of 10% in each case; H. Mwangi Ksh 1,500, J. Mwaniki Ksh 1,600, N. Mugo Ksh 1,200
• May 3: Received the following cheques from debtors in settlement of their debts after deducting 5% cash discount in each case; Lucy Ksh 22,800 cheque no 0115, Otieno Ksh 8,550 cheque no 0011, Martha Ksh 1,330 cheque no 0016
• May 5: Paid for repairs in cash Ksh 16,000, receipt no 0251
• May 10: Paid Juma in cash Ksh 9,500, receipt no 0295
• May 14: Cash sales Ksh 17,000, receipt no 02714
• May 15: Banked Ksh 6,000 from the cash till
• May 15: Received cash from Mary of Ksh 13,500, receipt no 0258
• May 16: Cash sales of Ksh 26,400 was directly banked, bank slip no 40152
• May 20: Cash purchases of Ksh 8,920, receipt no 117
• May 22: Cash purchases of Ksh 15,200 was paid for by cheque, cheque no 512

Cash receipt journal

(Post the totals and the entries to their respective accounts)

Cash Payment journal

(Post the totals and the entries to their respective accounts)

The Petty Cash Book

This is used to record money that has been set aside to make payments that do not require large amounts, such as cleaning, staff tea, posting letters, etc. It is always kept by the petty cashier, under the supervision of the main cashier. The amount received by the petty cashier is always debited, while the payments made from the same are credited. The credit side also contains analytical columns for various items of expenditure. The amount credited is also extended to the analysis column for the specific item. At the end of the stated period, the petty cash book is balanced, and the totals are posted to their individual accounts. The individual accounts are debited with the totals of the analytical columns, while the cash account is credited by the main cashier for the total that was spent in the petty cash book.

Petty cash book can also be operated on an imprest system, where the petty cashier receives a given amount of money at intervals (imprest) to spend, and reports back to the main cashier at the end of the period on how the money has been spent and the balance still remaining for re-stocking (reimbursed). Only the amount spent can be reimbursed so that at the beginning of the period the petty cashier will always have the full amount (cash float).

For example:

A petty cashier of Sina Chuki Traders operates a petty cash book on an imprest of Ksh 2,500 on a monthly basis. On 1^st February 2010, she had cash in hand of Shs 150 and was reimbursed the difference by the main cashier to restore her cash float. The following payments were made during the month of February 2010:

• Feb 1: Travelling expenses Ksh 110
• Feb 2: Correcting fluid Ksh 200
• Feb 3: Sugar for staff tea Ksh 180
• Feb 4: Stamps Ksh 255
• Feb 10: Telephone Ksh 255
• Feb 15: Entertainment Ksh 130
• Feb 18: Postage stamps Ksh 100
• Feb 20: Bread for staff tea Ksh 148
• Feb 25: Fare Ksh 200
• Feb 26: Duplicating ink Ksh 250
• Feb 27: Entertainment Ksh 400
• Feb 28: Telephone Ksh 100
• Feb 28: Atieno, a creditor, was paid Ksh 150

Required:

Prepare a petty cash book from the above information and post the totals to the relevant ledger accounts.

Sina Chuki Traders

Petty Cash Book

For month of Feb. 2010

The totals in the analytical columns are debited in the individual accounts, with the petty cash book totals being credited in the cash account.

The General Journal/Journal Proper

This is used to record purchases or sales of fixed assets of the business on credit. These assets do not form part of the stock since the business does not deal in them; however, the business may decide to buy or sell them for one reason or another.

In this journal, the account to be debited begins at the margin, while the account to be credited is indented from the margin, with a narration below them put in brackets. The narration explains the nature of the transaction that has taken place. The individual entries are then posted to their respective accounts by either debiting or crediting depending on the transactions. It takes the following format:

General journal

For example:

Journalise the following transactions which took place in the business of J Opuche during the month of March 2005:

• March 5: Purchased office furniture on credit for Shs 25,000 from Miugiza Furniture Limited
• March 10: Sold old duplicating machine for Shs 15,000 to Samba Academy on credit
• March 15: Bought a new motor vehicle for Shs 800,000 from Explo Motors Ltd, paying Shs 300,000 in cash and the balance to be settled later
• March 18: Sold old vehicle to Mara Secondary School for Shs 500,000 on credit
• March 25: The owner converted personal electronic calculator valued at Shs 9,000 into business asset
• March 27: Sold old computers valued at Shs 20,000 for Shs 15,000 on credit to Mara Secondary School
• March 30: Sold old dining chairs worth Shs 10,000 to Maendeleo for Shs 15,000 on credit

General journal

The entries are then transferred to their respective accounts in the ledger, with the ones debited in the journals being debited and the ones credited being credited.

The journal proper can also be used to show the opening entries and the closing entries.

Opening entries

The opening entries are the entries of the assets and liabilities at the beginning of the trading period to facilitate the opening of different accounts for them. They are the balance b/d for the assets and liabilities of the business.

The assets to be debited are recorded first, followed by the liabilities and capital to be credited. In case the capital is not given, it can be calculated using the bookkeeping equation, that is A = C + L. The narration then follows the entries.

The opening entries are necessary when:

• A business that did not keep complete accounting records would like to start keeping
• Opening up new sets of accounting books, after closing the old ones
• Starting accounting records for a business which has been bought, though was in full operation

For example:

The following balances were extracted from Martine’s Store that did not keep complete records and would like to start keeping on 1^st January 2011. Prepare for them their relevant subsidiary book to show the balances.

Shs

• Motor vehicles 230,000
• Machinery 40,000
• Creditors 10,000
• Debtors 5,000
• Cash in hand 20,000
• Stock 10,000
• Insurance prepaid 5,000
• Bank 25,000
• Premises 335,000
• Capital 660,000

Martine’s Store

General journal

On 1^st January 2011

Closing entries

At the end of the trading period, the business assesses how it carried out its trade and the amount of profit it made by preparing the Trading Profit and Loss Account and the Balance Sheet to show its financial position. These are prepared using information obtained from the ledgers. All the nominal accounts (sales, purchases, expenses, and revenue accounts), both opening and closing stocks, are transferred to the Trading Profit and Loss Account through the trial balance and general journals, while the rest are taken to the balance sheet.

Uses of general journal

• To record purchases of fixed assets on credit
• To record sales of fixed assets on credit
• To correct errors by checking the balances
• To record the opening and closing entries
• To write off bad debts
• To record inter-ledger transfers
• To issue shares and debentures in companies
• To make end-of-year adjustments for the final accounts

In the table below, indicate the books of original entry that the information obtained from the given source documents are used to prepare:

Uses of Journals

• To relieve ledger of many details
• To record more details about the transaction that are not found in the ledger
• To facilitate tracing of errors
• To facilitate the preparation of control accounts
• To curb fraud and promote efficiency, since they are prepared by different people from those handling ledgers

Assignment:

(Exercise 1B pages 50 and 51, Nos 16 and 18 in Inventor Book 4, KLB Students Book)