Slide 1.1
PETTY CASH BOOK
The petty cash book lists all cash payments for small items, and occasional small receipts.
Most businesses keep a small amount of cash on the premises to make occasional small payments in cash – eg to pay the milkman, to buy a few postage stamps etc.
This is often called the cash float or petty cash account.
Petty cash can also be used for occasional small receipts, such as cash paid by a visitor to make a phone call or to take some photocopies.
There are usually more payments than receipts and petty cash must be 'topped up' with cash from the business bank account.
Slide 1.2
ADVANTAGES OF PETTY CASH BOOKa) The task of handling and recording small cash
payments can be given by the cashier to a junior member of staff.
• This person is known as the petty cashier
b) If small cash payments were entered into the main cash book, these items would then need posting one by one to the ledgers.
• However if a petty cash book is used , it would only be monthly totals for each period that need posting to the general ledger.
• When a petty cashier makes a payment to someone than that person will have to fill in a voucher showing exactly what the payment was for , they usually have to attach bills.
Slide 1.3
THE IMPREST SYSTEM Under what is called the imprest system, the amount
of money in petty cash is kept at an agreed sum or
'float' (say K500).
Expense items are recorded on vouchers as they
occur.
The imprest system is one where the cashier gives the
petty cashier enough to meet the petty cash needs for
the following period.
In other words the cashier tops up the amount
remaining in petty cash to bring it back up to the level it
was at when the period started.
This process is the imprest system and this topped up
amount is known as the petty cash float.
Slide 1.4
THE IMPREST SYSTEM For example
Period 1 K
The cashier gives the petty cashier 500
The petty cashier pays out in the period 420
Petty cash now in hand 80
The cashier now gives the petty cashier 420
Petty cash in hand at the end of period one 500
Period 2
Petty cashier pays out in the period 450
Petty cash now in hand 50
The cashier now gives the petty cashier 450
Patty cash in hand at the end of period 2 500
Slide 1.5
EXAMPLE PETTY CASH BOOK
Record the following transactions in the petty cash book of a Nursery School:
a) 1 September 2015 the head teacher gives K3,000 as a float to the petty cashier out of petty cash during September.
b) 2 September bought petrol for the school bus Voucher No. 1 amounting to K160
c) J.Bwalya – travelling expenses K230 Vouched NO. 2.
d) Paid for postage K120 Voucher No. 3.
e) D.Mulenga staff travelling expenses K320.
Slide 1.6
EXAMPLE PETTY CASH BOOKf) Paid cleaning expenses on 7 September 2015
amounting to K110 voucher number 5.
g) 9 September bought Petrol K210 for the school
bus voucher No. 6.
h) 12 September paid staff travelling expenses to
C.Katongo for K210 voucher No.7.
i) 14 September Paid for School bus petrol K130
Voucher No.8.
j) 15 September 2015 Paid staff travelling expenses
J.Bwalya K230 voucher No.9.
k) 16 September paid cleaning expenses K50
voucher no.15.
Slide 1.7
EXAMPLE PETTY CASH BOOKl) 18 September Paid petrol for school bus K110
voucher No.11.
m) 20 September paid postage K120 voucher no.12.
n) 22 September paid cleaning expenses K110
vouched no.13.
o) 24 September Paid C.Katongo K70 for staff
travelling expenses voucher no.14.
p) 27 September Settlement of C.Brown ‘s account in
the purchases ledger K130 voucher no.15
q) 29 September paid postage K120 vouched no16.
r) 30 The head teacher reimburses the petty cashier
the amount spent in the month
Slide 1.8
EXAMPLE PETTY CASH BOOK
All expenses and income listed above are exclusive
of Value Added Tax.
Required:
Record all the transactions in petty cash book and
balance off as at 30 September 2015 and restore the
Imprest float.
[Total: 15 marks]
Slide 1.9
THE GENERAL JOURNAL
The other items which do not pass through
these five other books are much less common
and sometimes much more complicated.
These transactions are entered in the General
journal commonly known as the Journal.
For each transaction the following entries are
required in the general journal:
a) The date
b) The name of the account (s) to be debited and
the amount (s).
Slide 1.10
THE GENERAL JOURNAL
c) The name of the account (s) to be credited and
the amount(s).
d) A description and explanation of the
transaction (this is called the narrative).
e) The folio.
f) The details column.
Slide 1.11
FORMAT THE GENERAL JOURNAL
THE JOURNAL
Date Details Folio DR CR
The name of the account to be
debited
The name of the account to
be cerdited
Slide 1.12
TYPICAL USES OF THE JOURNAL
Some of the main uses of the journal are listed
below.
1. The purchase and sale of fixed assets on credit.
2. Writing off bad debts.
3. The correction of errors in the ledger accounts.
4. Opening entries to open up new sets of books.
5. Adjustments to any of the entries in the ledger.
• The list is not exhaustive but is only a guide.
• There is an indent before the credit entry to make
it obvious it is a credit part of the double entry.
Slide 1.13
THE PURCHASE AND SALE ON CREDIT OF
FIXED ASSETS
A milling machine is bought on credit from Tool
makers Ltd for K10,550 on 1 July 2014.
The effect of the transaction is to increase an
assets and reduced a liability.
The journal can be prepared as follows before
posting to the ledger :
Slide 1.14
THE PURCHASE AND SALE ON CREDIT OF FIXED ASSETS
A sale of machinery no longer required
for K3,000 on credit to K .Lamb on 2 July
2014.
Prepare a journal clearly showing the
narrative and accounts affected and post
to the ledger.
Slide 1.15
WRITING OFF BAD DEBTS
A debt of K78,000 owing owing to us from H
.Mander is written off as a bad debt on 31 August
2014.
Required prepare the journal entry and post to the
ledger.
Slide 1.16
OPENING ENTRIES FOR A BUSINESS
J . Brew after being in business for some years
without keeping proper records ,now decides to keep
a double entry set of books.
On 1 July 2014 he establishes that his assets and
liabilities are as follows:
Assets : Van K37,000 ,Fixtures K18,000 , Stock
K4,200 ,Debtors – B .Young K9,500 , D.Blake K4,500 ,
Bank K8,600 , Cash K6,500.
Liabilities : Creditors – M .Quinn K12,900 , C.Walters
K4,100.
Required prepare a Journal and post to the respective
accounts?
Slide 1.17
ADJUSTMENTS TO ANY OF THE ENTRIES IN
THE LEDGER
These can be of many types and it is impossible
to write out a complete list.
Several examples are shown below :
Example 1:
K .Young a debtor owed K20,000 on 1 July
2014. He was unable to pay his account in cash
,but offers a five year car in full settlement of the
debt. The offer is accepted on 5 July 2014.
Prepare the Journal and post to the relevant
accounts.
Slide 1.18
ADJUSTMENTS TO ANY OF THE ENTRIES IN THE
LEDGER
Example 2:
T.Jones is a creditor .On 10 July 2014 his business
is taken over by A .Lee to whom the debt of
K15,000 is now to be paid.
Prepare a Journal and post to the relevant
accounts.
Slide 1.19
ADJUSTMENTS TO ANY OF THE ENTRIES IN THE
LEDGER
Example 3 : We had not yet paid for a printer we
bought on credit for K3,100 because it was not
working properly when installed. On 12 July
2014 we returned it to the supplier ,R.S. Ltd. An
allowance of K3,100 was offered by the supplier
and accepted.
Prepare the journal entry and post to the
necessary accounts.
Slide 1.20
THE TRIAL BALANCE AND ERRORS
Just because a trial balance is balancing does
not mean that all the entries in the accounts
are accurate.
It just means that certain type of errors have
not been made such as forgetting to enter the
credit side of a transaction.
There are several types of errors that do not
affect the balancing of the trial balance.
Below is a list of errors that are not revealed
by the trial balance.
Slide 1.21
ERRORS NOT REVEALED
a) Errors of omission:
• If both the debit and the credit entries for a
transaction have been omitted, the trial balance
will not be affected and will not therefore reveal
the error.
• The transaction will simply not exist as far as
the books of the business are concerned.
b) Transposition error :
• Where a wrong sequence of individual
characters within a number is entered.
Slide 1.22
ERRORS NOT REVEALED • For example K142 ,000 entered instead of K124,000.
• This is quite a common error and is very difficult to
spot when the error has occurred in both the debit
and the credit side, as the trial balance would still
balance.
c) Compensating errors:
• These occur where two or more errors, by chance,
cancel each other out.
• For example, if one account is over-debited by K2,000
and another account is over-credited with K2,000 or
two accounts are over-credited with K1,000 each.
Slide 1.23
ERRORS NOT REVEALED
d) Errors of commission:
• These occur where the amount has been entered in the books in the right type of account, but not in the correct individual account.
• For example, A Jones, a customer, sends K6,500 to settle his account.
• This is correctly debited in the cashbook, but the credit entry is made in the account of A R Jones, also a debtor of the business.
• The trial balance will agree because a debit and credit entry have been made.
• Overall, the debtor's figure will be correct, but when this is broken down, A Jones' and A R Jones' accounts will both be incorrect.
Slide 1.24
ERRORS NOT REVEALED
e) Errors of original entry :
• If the original entry in the day book is made wrongly, the entire record for that transaction will be wrong.
• This will mean double entry being done on the wrong figure.
f) Errors of principle:
• These are errors involving posting an entry to the wrong type or class of account –
• for example, debiting the purchase of a fixed asset to the purchases account instead of the asset account.
Slide 1.25
ERRORS NOT REVEALEDg) Errors of complete reversal of entries:
• Where the correct accounts are used but each
item is shown on a wrong side of the account.
• For example if a cheque is paid to D.Wiliams for
K2,000 the double entry required is Dr
D.Williams and Cr Bank.
• In error if it is entered as Cr D.Williams and Dr
Bank account.
• The trial balance total will still agree.
Slide 1.26
TYPES OF ERROR REVEALED BY THE
TRIAL BALANCE
a) The entering of debits on the credit side and
vice versa
b) The omission of balances
c) Incorrect amounts entered
d) Errors in addition, including errors in
balancing
e) Failure to complete the double entry–a debit
entered but not the corresponding credit, or
a credit entered without the debit.
Slide 1.27
CORRECTION OF ERRORS
• We make corrections through double
entry to accounts after preparing journal
entries. We should:
1.Show the corrections by means of
journal entries, then
2.show the corrections in the double entry
set of accounts, by posting these
journal entries to the ledger accounts
affected.
Slide 1.28
EXAMPLE:ERROR OF OMMISSION
• A sale of K59,000 worth of goods to E.George
on 1 July 2014 has been completely omitted
from the books.
• Prepare the Journal and the entries to the
ledger.
Slide 1.29
EXAMPLE ERROR OF COMMISSION
A purchase of K44,000 worth of goods
from C.Simons on 4 September 2014
was entered in error in C.Simpson ‘s
account.
The error was found on 30 September
2014.
Prepare the Journal and correct the error
in the accounts:
Slide 1.30
ERROR OF PRINCIPLE
The purchase of a machine by cheque
on 1 September 2014 for ,K200,000 is
debited to the purchases account instead
of being debited to a machinery account.
This error is discovered on 4 September
2014.
Show the journal and carry out a double
entry into the ledger.
Slide 1.31
COMPESANTING ERROR
The sales account is overcast by K20,000 as
also is the wages account. This error is
discovered on 4 September 2014
Show the necessary entries and posts to the
ledger to correct this error.
Slide 1.32
ERROR OF ORIGINAL ENTRY
A sale of K38,000 to A.Smiles was entered
in the books as K28,000 on 1 September
2014. This error is discovered on 4
September 2014.
Prepare a journal and enter the details in
the ledger accounts.
Slide 1.33
ERROR OF COMPLETE REVERSAL
A payment of cash of K16,000 to
M.Dickson ON 1 September 2014 was
entered on the receipts side of the Cash
Book in error and credited to M.Dickson ‘s
account. This error was discovered on 4
September 2014.
Prepare and journal and enter the
corrections in the ledger accounts.
Slide 1.34
ERROR OF COMPLETE REVERSAL
This is somewhat more difficult to adjust.
First must come the amount needed to
cancel the error, then comes the actual
entry itself.
Because of this the correcting entry is
double the actual amount first recorded.
Slide 1.35
ERROR OF COMPLETE REVERSAL
Overall when corrected the K16,000 debit
and K32,000 credit in the cash account
means there is a net credit of K16,000.
Similarly Dickson’s account shows
K32,000 debit and K16,000 credit , a net
debit of K16,000.
The final (net) answer is the same as
what should have been entered originally
the error is now corrected.
Slide 1.36
TRANSPOSITION ERROR
A credit purchase from P.Maclaran on 1
September 2014 costing K56,000 was entered
in the books as K65,000.The error was
discovered on 4 September 2014.
Prepare the journal and enter the transactions
in the ledger.
Slide 1.37
CASTING
Casting in accounting is a term used to
mean adding up.
Overcasting means incorrectly adding up
a column of figures to give an answer
which is greater than it should be.
Under casting means incorrectly adding
up a column of figures to give an answer
which is less than it should be.
Slide 1.38
ERRORS AND THE TRIAL BALANCE
• Many errors will mean that the trial
balance totals will not be equal.
• These include:
Incorrect additions in any account.
Making an entry on only one side of the
accounts.
Entering a different amount on the debit
side from the amount on the credit side
Slide 1.39
SUSPENSE ACCOUNT
We should try very hard to find errors
when the trial balance totals are not
equal.
When they cannot be found, the trial
balance totals can be made to agree with
each other by inserting the amount of the
difference between the two sides in a
suspense account.
This is demonstrated below:
Slide 1.40
SUSPENSE ACCOUNTTrial Balance as at 31st December 2014
Dr Cr
K’000 K’000
Totals after all the
accounts have been listed100,000 99,960
Suspense 40
100,000 100,000
Slide 1.41
SUSPENSE ACCOUNT CONTINUEDTo make the two totals the same, a figure
of K40,000 for the suspense account has
must be shown on the credit side of the
trial balance.
A suspense account is opened and the
K40 000difference is also shown there on
the credit side.
Slide 1.42
SUSPENSE ACCOUNT AND THE
BALANCE SHEET
If the errors are not found before the financial
statements are prepared, the suspense
account balance will be included in the
balance sheet.
Where the balance is a credit balance, it
should be included on the capital and
liabilities side of the balance sheet.
When the balance is a debit balance it should
be shown on the assets side of the balance
sheet.
SUSPENSE ACCOUNT AND THE BALANCE
SHEET
If Suspense entry is
a debit balance
Enter
On statement of
financial position
with
ASSETS
If Suspense entry is a credit balance
Enter
On statement of financial position
with
CAPITAL AND
LIABILITIES
Slide 1.44
CORRECTION OF ERRORS
When the errors are found they must be
corrected using double entry.
Each correction must first have an entry
in the journal describing it, and then be
posted to the accounts concerned
Slide 1.45
CORRECTION OF ERRORS-ONE ERROR ONLY
Example 1:
Assume that the error of K40,000 shown above is
found the following year on 31 March 20135.
The error was that the sales account was undercast by
K40,000.
Correct the error and show required entries in the
accounts.
Slide 1.46
CORRECTION OF MORE THAN ONE ERROR
• The trial balance at 31st December 2014 showed a difference of K77,000,being shortage on the debit side.
• A suspense account is opened ,and the difference of K77,000 is entered on the debit side of the account.
• On 28 February 2015 all the errors from the previous year were found
a. A cheque of K150,000 paid to l Kent had been correctly entered in the cash book, but had not been entered in Kent’s account.
Slide 1.47
CORRECTION OF MORE THAN ONE ERROR
b. The purchase account had been
undercast by K20,000
c. A cheque of K93,000 received from K.
Sand had been correctly entered in the
cashbook, but had not been entered in
Sand ‘s account.
• Show journal entries and post them in
them ledger accounts
Slide 1.48
EFFECTS OF ERRORS ON PROFITS Some errors will have meant that original profits will be wrong .
Other errors will have no effect upon profits.
EXAMPLE
K Davis Trading and Profit and loss account for the year
ending 31 December 2014
K’000 K’000
Sales 180,000
Less: Cost of sales
Opening stock 15,000
Add: Purchases 92,000
107,000
Less :Closing stock (18,000)
Cost of sales (89,000)
Gross profit 91,000
Slide 1.49
EFFECTS OF ERRORS ON PROFITS CONTINUEDK’000 K’000
Gross profit 91,000
Add: Discounts received 1,400
Total income 92,400
Less: Expenses
Rent 8,400
Insurance 1,850
Lighting 1,920
Depreciation 28,200
Total expenses (40,370)
Net profit 52,030
Slide 1.50
EFFECTS OF ERRORS ON PROFITS CONTINUEDStatement of financial position as at 31st December 2014
K’000 K’000
Non-Current assets
Equipment 62,000
Less: Depreciation to date (41,500)
20,500
Current assets
Stock 18,000
Debtors 23,000
Bank 19,000
60,000
Less: current liabilities
Creditors (14,000) 46,000
Suspense 80
66,580
Slide 1.51
EFFECTS OF ERRORS ON PROFITS CONTINUED
K’000
Capital
Balance as at 1 January 2014 46,250
Add: Net profit 52,030
98,280
Less: Drawings (31,700)
66,580
Slide 1.52
EXAMPLE1 : ERROR WHICH DO NOT AFFECT
PROFITS CALCULATIONS
• If an error affects items only in the statement of
financial position, then the original calculated
profit will not need altering.
• Assume the K80,000 debit balance on the
suspense account was because on 1st
November 2014 we paid K80,000 to a creditor
• T Monk. It was correctly entered in cash book
but not entered anywhere else. The error was
discovered on 2 June 2015.
• Show the journal required to correct the error.
Slide 1.53
EXAMPLE1 : ERROR WHICH DO NOT AFFECT PROFITS
CALCULATIONS
Both of the accounts appeared in the
statement of financial position only with
T.Monk as part of accounts .
The net profit of K52,030,000 does not
have to be changed.
Slide 1.54
EXAMPLE 2:ERROR WHICH AFFECTS
THE PROFIT CALCULATIONS
• If the error is in one of the figures shown in the trading and profit and loss account, then the original profit will need altering.
• Assume that the K80,000 debit balance was because the rent account was added up incorrectly.
• It should be shown as K8,480,000 instead of K8,400,000.
• The error was found on 1 June 2015.
• Prepare the journal entries and a statement of corrected profits.
Slide 1.55
EXAMPLE 2:ERROR NOT AFFECTING THE
PROFIT CALCULATIONS
Statement of corrected Net profit for the year
ending 31 December 2014
K’000
Net profit per the financial statements 52,030
Less:Rent understated (80)
Corrected net profit for the year 51,950
Slide 1.56 EXAMPLE 3: WHERE THERE HAVE BEEN
SEVERAL ERRORS
Assume that the K80,000 found in K.Davis ‘s
ledger accounts on 31 March 2015 was as a
result of the following four errors:
a. Sales overcast by K90,000
b. Insurance under cast K40,000
c. Cash received from a debtor , E.Silva entered
in the cash book only K50,000
d. A purchase of K59,000 is entered in the books
,debit and credit as K95,000.
Prepare the journal entries and the adjusted
net profit? Net profit K52,030,000
Slide 1.57
CORRECTION OF ERRORS
Only those errors which make the trial
balance totals different from each other
can be corrected via the suspense
account.
Slide 1.58
CLASS EXERCISE The trial balance of Mary Harris a sole trader as at 31 December 2014 showed a difference which was posted to a suspense account.
Draft final accounts for the year ended 31 December 2014 were prepared showing a net profit of K47, 240,000.The following errors were subsequently discovered:
i. Sales of k450, 000 to C.Thomas had been debited to Thomasson Manufacturing Ltd.
ii. A payment of K275, 000 for telephone charges had been entered on the debit side of the telephone account as K375,000.
iii. The sales journal had been under cast by K2, 000,000.iv. Repairs to the machine amounting to K390,000 had been
charged to Machinery account.
Slide 1.59
CLASS EXERCISEi. A cheque for K1, 500,000 being rent received from Atlas
Ltd had only been entered in the cash book.
ii. Purchases from P .Brooks amounting to K765,000 had
been received on 31 December 2014 and included in the
closing stock at that date but the invoice had not been
entered in the purchases journal.
Required
a) Give the journal entries without narratives necessary to
correct the above errors.
b) Show the effect of each of these adjustments on the net
profit in the draft accounts and the correct profit for the
year ended 31st December 2014