Pages From BPP CIMA C2 COURSE NOTE 2012 New Syllabus

Fundamentals of Financial
Accounting
Certificate Level Paper C2
Course Notes
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C2 Fundamentals of Financial Accounting
Study Programme
Page
Introduction to the paper and the course................................................................................................................. 4
1 The nature and objective of accounting (Study text chapter 1) ...................................................................... 9
2 An introduction to final accounts (Study text chapter 2) .............................................................................. 15
3 Sources, records and the books of prime entry (Study text chapter 3)......................................................... 27
4 Ledger accounting and double entry (Study text chapter 4)......................................................................... 41
5 From trial balance to financial statements (Study text chapter 5)................................................................. 57
6 Preparing accounts: concepts and conventions (Study text chapter 6)........................................................ 77
Checkpoint 1 (including Course Test 1) Additional Study Guidance 91
7 Tangible non-current assets (Study text chapter 8)...................................................................................... 97
8 Intangible non-current assets (Study text chapter 9).................................................................................. 129
9 Cost of goods sold and inventories (Study text chapter 11) ....................................................................... 135
10 Accounting for sales tax (Study text chapter 14) ........................................................................................ 169
11 Accruals and prepayments (Study text chapter 7)...................................................................................... 177
12 Bad debts and allowance for receivables (Study text chapter 10).............................................................. 195
13 Bank reconciliations (Study text chapter 12) .............................................................................................. 215
14 Accounting for payroll (Study text chapter 15)............................................................................................ 227
15 Control accounts (Study text chapter 13) ................................................................................................... 239
16 Correction of errors (Study text chapter 16) ............................................................................................... 259
17 Preparation of sole traders’ accounts (Study text chapter 17).................................................................... 273
18 Limited liability companies (Study text chapter 18) .................................................................................... 285
19 Incomplete records (Study text chapter 19)................................................................................................ 309
20 Interpreting company accounts (Study text chapter 25) ............................................................................. 329
21 Manufacturing accounts (Study text chapter 21) ........................................................................................ 341
22 Statements of cash flows (Study text chapter 24) ...................................................................................... 355
23 Income and expenditure accounts (Study text chapter 20) ........................................................................ 375
24 The regulatory system (Study text chapter 22)........................................................................................... 389
25 Internal and external audit (Study text chapter 23)..................................................................................... 399
26 Answers to lecture examples...................................................................................................................... 415
Prepare for and book your CBA!

You should plan to sit your CBA within the next couple of weeks while the knowledge from this course is still fresh in your
mind. In preparation use the Learning Media P&R Kit and i-Pass to test yourself on as many questions as you can,
revising from the Course Notes and Passcards any areas of the syllabus that cause you problems.
Contact your local BPP centre as early as you can to book your CBA and good luck!
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INTRODUCTION
Introduction to Paper C2 Fundamentals of Financial

Accounting
Overall aim of the syllabus
The main objective of this paper is the preparation of financial statements for single entities. These statements
are constructed within a conceptual and regulatory framework requiring an understanding of the various valuation
alternatives, the role of legislation and of accounting standards. Being able to apply accounting techniques and
systems enables the preparation of accounts for different types of operations and for specific transactions. There
is an introduction to measuring financial performance with the calculation of basic ratios. The need to understand
and apply necessary controls for accounting systems, looking at internal control and the nature of errors and
fraud, is also covered.
The syllabus
The broad syllabus headings and their relative weightings are:
Topic Study weighting

A Conceptual and regulatory framework 20%
B Accounting systems 20%
C Preparation of accounts for single entities 45%
D Control of accounting systems 15%
Links with other papers

Fundamentals of Financial Accounting provides the underpinning knowledge for all the financial accounting
issues and problems you will face both in your studies but also within the workplace. It is the first stage before
completing papers F1 and F2, and is assumed knowledge for both these papers.
Financial Management
(F2)
Financial Operations (F1)
Fundamentals of Financial
Accounting (C2)
Assessment methods and format of the paper

This paper is tested by computer-based assessment. It is a two hour assessment comprising 50 questions each
with one or more parts. The pass mark is 50%.
Objective test questions are used. The most common type being multiple choice, but there are a variety of other
objective question types that can be used. These include true/false questions, labelling diagrams and numeric
entry.
4 INFA21
INTRODUCTION
Learning Phase Aims

Achieving CIMA's Learning Outcomes
A Conceptual and regulatory framework (20%)

1(a) Explain the need for accounting records Chapter 1
1(b) Identify user groups and the characteristics of financial statements Chapters 1 & 2
1(c) Distinguish between financial and management accounts Chapter 1
1(d) Identify the underlying assumptions, policies and changes in accounting estimates Chapter 6
1(e) Explain capital and revenue, cash and profit, income and expenditure, assets and Chapters 2, 5 &
liabilities 7
1(f) Distinguish between tangible and intangible assets Chapters 7 and
8
1(g) Explain the historical cost convention Chapter 6
1(h) Identify alternative methods of valuing assets and their impact on profit measures and Chapter 7
statement of financial position values
2(a) Explain the influence of legislation on published accounting information for Chapters 1 & 18
organisations
2(b) Explain the role of accounting standards in preparing financial statements Chapter 6 & 24
2(c) Explain approaches to creating accounting standards Chapter 6 & 24
B Accounting systems (20%)

1(a) Explain the principles of double-entry bookkeeping Chapter 4
1(b) Prepare cash and bank accounts, and bank reconciliation statements Chapters 3 & 13
1(c) Prepare petty cash statements under an imprest system Chapter 3
1(d) Prepare accounts for sales and purchases, including personal accounts and control Chapters 3 & 15
accounts
1(e) Prepare nominal ledger accounts, journal entries and a trial balance Chapters 4 & 5
1(f) Prepare accounts for indirect taxes Chapter 10
1(g) Prepare accounts for payroll Chapter 14
1(h) Prepare a non-current asset register Chapter 7
2(a) Explain the need for accounting codes Chapter 5
2(b) Illustrate the use of simple coding systems Chapter 5
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INTRODUCTION
C Preparation of accounts for single entities (45%)

1(a) Prepare accounts using accruals and prepayments Chapter 11
1(b) Prepare accounts for bad debts and allowances for receivables Chapter 12
1(c) Prepare accounts using different methods of calculating depreciation and for Chapter 7
impairment values
1(d) Prepare accounts for inventories Chapter 9
1(e) Prepare manufacturing accounts Chapter 21
1(f) Prepare income and expenditure accounts Chapter 23
1(g) Prepare accounts from incomplete records Chapter 19
1(h) Prepare accounts for the issue and redemption of shares and debentures Chapter 18
2(a) Prepare financial statements from trial balance Chapter 5
2(b) Prepare a statement of cash flows Chapter 22
3(a) Calculate basic ratios Chapter 20
D Control of accounting systems (15%)

1(a) Identify the requirements for external audit and the basic processes undertaken Chapter 25
1(b) Explain the meaning of fair presentation Chapter 25
1(c) Distinguish between internal and external audit Chapter 25
2(a) Explain the purpose and basic procedures of internal audit Chapter 25
2(b) Explain the need for financial controls Chapters 1 & 25
2(c) Explain the purpose of audit checks and audit trails Chapter 25
3(a) Explain the nature of accounting errors Chapter 16
3(b) Prepare accounting entries for the correction of errors Chapter 16
4(a) Explain the nature of fraud Chapter 25
4(b) Explain the basic methods of fraud prevention and detection Chapter 25
6 INFA21
INTRODUCTION
Certificate in Business Accounting

On successful completion of all five of the Certificate level computer based assessments (or those for which you
have not been granted exemptions) you will be awarded the CIMA Certificate in Business Accounting.
The Certificate is considered by CIMA to be a qualification in its own right for those who do not wish to qualify
fully as a management accountant but who require a broad grounding in basic management accounting and
financial accounting issues. However, it is also the principal entry requirement for students aiming to attain the
Chartered Management Accountant qualification.
The knowledge content of the Certificate ensures that you understand:
 the fundamental underlying concepts of management accounting (FMA);
 the regulatory framework for financial accounting and reporting (FFA);
 quantitative statistical methods used in management accounting (FBM);
 the economic environment in which organisations operate (FBE); and
 how formal business relationships between organisations are established (FBLW).
The Certificate in Business Accounting clearly demonstrates to an employer that you have a thorough knowledge
of the basics of business accounting, and is a milestone in your career development!
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INTRODUCTION
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The nature and objective
of accounting
Syllabus Guide Learning Outcomes

Having studied this chapter you will be able to:
 Explain the need for accounting records
 Identify user groups and the characteristics of financial statements
 Distinguish between financial and management accounts
 Explain the influence of legislation on published accounting information for organisations
 Explain the need for financial controls
Chapter Context
This chapter introduces the subject of accounting and provides an understanding of why we prepare financial accounting
information. It is basic information which will be required throughout your financial accounting training with CIMA.
Questions in this area will focus on the users of financial statements and their needs as well as the different
characteristics of the three types of business entity.
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1: THE NATURE AND OBJECTIVE OF ACCOUNTING
Overview
Users of financial
information
Bookkeeping Accounting Accounting
Terminology
The nature and objective of

accounting
Types of business
Sole trader Partnership Companies
Concept of separate entity
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1. Introduction
1.1 This chapter is designed to enable you to explain the need for the preparation of financial
information and describe the needs of different users of financial information.
Accounting – a definition
1.2 'The provision of financial information (i.e. accounting for what has happened) concerning
the results of a business for a period of time'.
1.3 The main objective of accounting is to provide useful information to investors.
2. Users of financial information
Lecture Example 1
Why do the following individuals require financial information about a business?
Solution
(a) Managers
(b) Owners/shareholders
(c) Providers of finance
(d) HM Revenue & Customs
(e) Suppliers
(f) Financial analysts
(g) Government
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3. Terminology
3.1 Bookkeeping is the recording of monetary transactions in a business. All businesses need
to keep financial records to keep their business running smoothly and these records must be
complete, accurate and valid to produce the necessary financial information.
3.2 Financial accounting is concerned with providing financial information to external users.
This information has to be prepared in accordance with generally accepted accounting
principles which include accounting standards and legal requirements.
3.3 Management accounting is primarily concerned with providing financial information to help
managers in running the business. Since it is for internal use it does not have to adhere to
accounting standards.
4. Types of business
4.1 Businesses fall into three main categories:
(a) Sole trader
(b) Partnership
(c) Companies
5. The concept of separate identity

5.1 It is a fundamental concept that a business is considered to have a separate identity from its
owner.
5.2 Personal transactions of the owner should never be mixed with business transactions.
5.3 When considering a limited company this distinction is laid down in law – separate legal
entity.
5.4 In preparing accounts, any type of business is treated as a separate identity from its
owner(s).
12 INFA21
6. Chapter summary
The Nature and Objective of Accounting
The financial information of an organisation is used by a range of different users who may
be either internal or external. They will each be using the information to make decisions and
the information they require will depend upon what decisions they are taking.
Financial accounting and management accounting have different primary users.
There are three main types of businesses, sole trader, partnerships and companies.
While it is important to treat the business as separate from the owners (separate identity
concept), only a company is a separate legal entity.
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Overview
 The provision of
financial information  The provision of
to external users. It financial information
Users of financial  The recording of to help managers in
monetary has to be prepared
information in accordance with running the
transactions in a business.
business. GAAP.
 Managers
 Owners/Shareholders Bookkeeping Accounting Accounting
 Providers of finance
 HM Revenue & Customs
 Suppliers
 Financial analysts
 Government
Terminology
The nature and objective of

accounting
Types of business
Sole trader Partnership Companies
'An individual sets up business on 'More than one individual enter into 'A separate legal entity from the owners'
their own' business together'  The company bears the risks and
 All the risks and rewards are  Risks and rewards are shared rewards
borne by the sole trader between the partners  The owners have limited liability
Concept of separate entity
 A business is a separate entity from its owner

 Personal transactions must be recorded separately (drawings)
END OF CHAPTER
14 INFA21
An introduction to
final accounts

 Identify user groups and the characteristics of financial statements
 Explain capital and revenue, cash and profit, income and expenditure, assets and liabilities
Chapter Context
This chapter introduces you to financial statements. Whilst you will not have to prepare financial statements at this level
you will be tested on their main features. Higher level exams will require the preparation of financial statements so it is
important to understand this topic both for Certificate level and also for your future studies.
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2: AN INTRODUCTION TO FINAL ACCOUNTS
Overview
An introduction to
final accounts
Statement of financial Income statement

position
Assets Liabilities Capital

Trading Expenses
account
Non-current Current
16 INFA21
1 Introduction
1.1 This chapter is designed to enable you to prepare and present financial statements.
2 The statement of financial position

2.1 An individual could prepare a list of everything they own and everything they owe.
Lecture Example 1
Make a list of the typical things a person may own or owe. Include values where appropriate.
Solution
Own Owe
2.2 For a business, this list is formalised as a STATEMENT OF FINANCIAL POSITION.

(a) An asset is a resource controlled by the enterprise as a result of past events and from
which future economic benefits are expected to flow to the enterprise.
(b) A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow of resources embodying
economic benefits.
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Proforma statement of financial position – sole trader

2.3 Statement of financial position as at 31 December 20X1:
$ $ $
ASSETS
Non-current assets
Land and buildings 100,000
Office equipment 50,000
Motor vehicles 30,000
Furniture and fixtures 20,000
200,000
Current assets
Inventories 50,000
Trade receivables 30,000
Less: allowance for doubtful debts (2,000)
28,000
Prepayments 5,000
Cash in hand and at bank 7,000
90,000
Total assets 290,000
$ $
CAPITAL AND LIABILITIES
Capital
Capital 170,000
Profit 45,000
Less: drawings (25,000)
190,000
Non-current liabilities
Bank loans 40,000
Current liabilities
Bank overdraft 16,000
Trade payables 40,000
Accruals 4,000
60,000
Total capital and liabilities 290,000
Key features
2.4 (a) Always date a statement of financial position.
(b) Non-current assets – assets held and used in the business over the long-term (i.e.
more than one year).
(c) Current assets – not non-current assets! Conventionally listed in increasing order of
liquidity (i.e. closeness of assets to cash).
18 INFA21
(d) Capital – what the business owes the proprietor/owner. In this case the sole trader
owns all of the business, i.e. its total net worth.
 CAPITAL = ASSETS – LIABILITIES
= NET ASSETS
The equation can be re-written to follow the Statement of financial position format:
ASSETS = CAPITAL + LIABILITIES
(e) Don't include a caption (item heading) if there isn’t a value for it.
The statement of financial position is a snapshot of the business at one point in time.
3 Profit
Example
3.1 Suppose the business buys three books for $10 each. Then it sells them for $15 each:
$
Sales 45 Income
Cost of sales (30) Expenditure
Gross profit 15
Profit is the excess of total income over total expenditure.
NOTE :The business may have other expenses such as rent, telephone bills, etc. to take off
before the ‘true’ profit is shown.
Purpose
3.2 Income statement – summarises all those trading activities over a period of time.
Think of it as a DVD!
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Proforma income statement – sole trader

3.3 Income statement for the year ended 31 December 20X1:
$ $
Sales 200,000
Less: Cost of sales
Opening inventories 40,000
Purchases 110,000
Carriage inwards 20,000
170,000
Closing inventories (50,000)
(120,000)
Gross profit 80,000
Sundry income 5,000
Discounts receivable 3,000
88,000
Less: Expenses
Rent 11,000
Carriage outwards 4,000
Telephone 1,000
Electricity 2,000
Wages and salaries 9,000
Depreciation 7,000
Bad and doubtful debts 3,000
Motor expenses 5,000
Discounts allowable 1,000
(43,000)
Net profit 45,000
Key features
3.4 (a) Headed it up with the period for which the income and expenses are being included.
The top part records the trading activities (buying and selling) of the business to
calculate the gross profit as follows:
$
Sales 200
Cost of sales (120)
Gross profit 80
(b) Sundry income includes items like bank account interest.
(c) Do not include nil value captions.
20 INFA21
4 Financial statements
4.1 Comprise:
(a) Statement of financial position – shows the assets and liabilities of the business at
a point in time.
(b) Income statement – shows the trading activities of the business over a period of
time.
4.2 The accounting period is the period for which the income statement was prepared. It is
usually a year.
A typical set of financial accounts, then, will have:
(a) Statement of financial position at start of the year.
(b) Statement of financial position at end of the year.
(c) Income statement for the intervening year.
5 Chapter summary
An Introduction to Final Accounts
The statement of financial position is a list of the things a business owns (assets), items the
business owes (liabilities) and what the business owes to the owner (capital).
The income statement can be separated into the trading account and a list of the remaining
income and expenditure.
The trading account identifies the gross profit as sales less cost of sales. Cost of sales is
identified as opening inventory plus purchases less closing inventory.
A statement of financial position shows the financial position of a business at one point in
time – a picture.
The income statement summarises the transactions for a period of time – a DVD.
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Overview
An introduction to
final accounts
Statement of financial Income statement

position
 Shows the assets and liabilities of  Shows the income and expenses for
the business at a point in time a business over a period of time,
usually a year
Assets Liabilities Capital

 ‘things we  ‘things we  What the Trading Expenses
own’ owe’ business owes account
the owner
Sales X
Cost of Sales
Opening Inventory X
Non-current Current Purchases X
Closing Inventory (X)
 Used in the  Listed in order of
business for increasing liquidity (X)
more than one (ie closeness of Gross Profit X
year assets to cash)
22 INFA21
Chapter 2: Questions
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2: QUESTIONS
2.1 The following are all current assets; trade receivables, inventories, prepaid expenses and bank deposit
account.
If they are placed in order of increasing liquidity, their order will be:
A inventories, trade receivables, prepaid expenses, bank deposit account
B trade receivables, bank deposit account, prepaid expenses, inventories
C bank deposit account, prepaid expenses, trade receivables, inventories
D prepaid expenses, bank deposit account, trade receivables, inventories
24 INFA21
Chapter 2: Answers
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2: ANSWERS
2.1 A
END OF CHAPTER
26 INFA21
Sources, records and the
books of prime entry

 Prepare cash and bank accounts, and bank reconciliation statements
 Prepare petty cash statements under an imprest system
 Prepare accounts for sales and purchases, including personal accounts and control accounts
Chapter Context
This chapter gives you an understanding of books of prime entry and memorandum legers and forms the basis for
understanding future chapters although books of prime entry are also a regular exam question in their own right.
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3: SOURCES, RECORDS AND THE BOOKS OF PRIME ENTRY
Overview
Sources, records and

the books of prime entry
Memorandum ledgers
Books of prime entry
Cash book Sales day book Purchase day Petty cash book Journal book
book
Imprest system
28 INFA21
1 Introduction
1.1 This chapter is designed to enable you to describe methods of maintaining records of
financial transactions and demonstrate how these are prepared.
Issue
1.2 Number and variety of transactions:
Ultimately these must be summarised in financial statements.
1.3 A business needs accounting records to achieve the following:
Assorted transactions
Categorised
Summarised
FINANCIAL STATEMENTS
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2 Books of prime entry

2.1 Step 1:
(a) Categorise the transactions.
(b) Done by listing by type in books of prime entry.
Main books of original entry
Cash book
2.2 (a) Receipts and payments into and out of the bank.
(b) For exam purposes often assumed to be two books, one for receipts, one for
payments.
Cash book (receipts)

2.3 Example
Date Narrative Total Capital Cash sales Receivables

$ $ $ $
2.1.X6 F. Bloggs 4,000 4,000
5.1.X6 J. Spalding 200 200
6.1.X6 J. Smith 500 500
4,700 4,000 500 200
total cash type of receipt

received
Cash book (payments)
2.4 Example
Cash Petty
Date Narrative Total Purchases Van Rent Payables Cash Drawings
$ $ $ $ $ $ $
6.1.X6 Manley & Co. 350 350

6.1.X6 Petty Cash 50 50
8.1.X6 Digby Co 1,000 1,000
1,400 1,000 350 50
total cash type of

payment payment
30 INFA21
Sales day book

2.5 Lists all sales made on credit, i.e. each individual invoice raised.
2.6 Example
Date Customer $
3.1.X6 J. Spalding 200
5.1.X6 G. McGregor 400
TOTAL 600
Purchase day book

2.7 Lists all purchases made on credit, i.e. each individual invoice received.
2.8 Example
Date Supplier $
1.1.X6 Tewson Co 400
4.1.X6 Manley and Co 350
TOTAL 750
Petty cash book

2.9 (a) Records the movement of physical cash (kept on the premises) in and out of the petty
cash tin.
(b) Used for small incidental expenses.
2.10 Example
Receipts Payments
Date Narrative Total Date Narrative Total Stationery Travel

$ $ $ $
6.1.X6 Cheque 50 7.1.X6 City 10 10
cashed Stationers
8.1.X6 F. Bloggs 2 2
Metro fare
12 10 2
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Controlling petty cash – the imprest system

An imprest system acts as an accounting control by having a set amount of petty cash.
2.11 (a) Pre-set limit, say $50.
(b) Voucher filled in when money is taken out to pay expenses.
(c) At any time, vouchers + cash = pre-set limit.
(d) At the end of the week/month, the petty cash book is filled in from the vouchers.
(e) The amount needed to bring the balance back up to the preset limit = money spent.
Journal book
2.12 Certain transactions do not ‘fit’ in the main books, e.g.
(a) Period end adjustments
(b) Correction of errors
The journal book lists these sundry transactions.
3 Memorandum ledgers
Types of memorandum ledgers
3.1 There are two such ledgers kept by the business:
(a) Receivables (or sales) ledger.
(b) Payables (or purchase) ledger.
Purpose of memorandum ledgers

3.2 These ledgers are kept so that the business can see at a glance how much is:
(a) Owed by individual customers (debtors/receivables).
(b) Owed to individual suppliers (creditors/payables).
Use of the day books for this analysis would be too time consuming.
Writing up memorandum ledgers

3.3 The entries in the ledgers are made from original invoices and credit notes . Each time an
invoice or credit note is entered into a day book it is also entered into an individual customer
or supplier account.
The memorandum ledgers therefore contain the same information as the day books – just
arranged by customer rather than date of transaction.
32 INFA21
Receivables (sales) ledger

3.4 Example
J. Spalding
Date Narrative $ Date Narrative $
3.1.X6 Invoice 1032 200 5.1.X6 Cash received 200
8.1.X6 Invoice 1101 400 Balance c/d 400

600
600
Balance b/d 400
G. McGregor
5.1.X6 Invoice 1033 400

14.1.X6 Invoice 1129 300
Balance c/d 700
700 700
Balance b/d 700
Payables (purchase) ledger

3.5 Example
Tewson Ltd
Balance c/d 400 1.1.X6 Invoice A112 400

400 400
Balance b/d 400
Manley & Co.
6.1.X6 Cash paid 350 4.1.X6 Invoice 063 350

Balance c/d 200 16.1.X6 Invoice 097 200
550 550
Balance b/d 200
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4 Chapter summary
Sources, Records and the Books of Prime Entry
Business transactions can be categorised into either cash, credit, period end or correction
of errors. Each type of transaction is input into the accounting system by use of a book of
prime entry.
The main books of prime entry are cash book, sales day book, purchase day book, petty
cash book and journal.
Memorandum ledgers are not books of prime entry. They are a detailed breakdown of
credit transactions, either purchases or sales, and show how much is owed to a supplier or
from a customer.
34 INFA21
Overview
Sources, records and

the books of prime entry
Memorandum ledgers
 Receivables (sales) ledger:

– amount owed by a particular customer
 Payables (purchase) ledger:
– amount owed to a particular supplier
Books of prime entry
'Categorise similar transactions together'
Cash book Sales day book Purchase day Petty cash book Journal book
book
 Cash receipts  Credit sales  Credit purchases  Small cash transactions  Correction of errors
into the bank made via the petty cash tin and period end
 Cash adjustments
payments from
the bank
Imprest system
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36 INFA21
Chapter 3: Questions
INFA21 37
3: QUESTIONS
3.1 The following are books of prime entry:

True False
Sales Day Book
Cash book
Sales ledger
Journal
3.2 Which of the following is the best description of the function of books of prime entry in a standard double
entry bookkeeping system?
A Books of prime entry are used to record cash transactions
B Books of prime entry are used to list similar transactions with the totals being posted to the
nominal ledger
C Books of prime entry record amounts owed to/from individual suppliers and customers
D Books of prime entry are used to summarise credit transactions
38 INFA21
Chapter 3: Answers
INFA21 39
3: ANSWERS
3.1 True False

Sales day book 
Cash book 
Sales ledger

Journal 
3.2 B
END OF CHAPTER
40 INFA21
Ledger accounting and
double entry

 Explain the principles of double-entry bookkeeping
 Prepare nominal ledger accounts, journal entries and a trial balance
Chapter Context
This chapter gives you a good grounding in ledgers and double entry which are the basis of financial accounting. Your
understanding of double entry will be crucial to passing the exam and achieving success in your higher level studies.
Whilst an individual question may not ask you to produce a double entry it will be fundamental to getting the correct
answer. For example, a question may ask you to derive the income statement expense for electricity where amounts
need to be accrued at the year end. You will only get this right if you understand the double entry for recording
expenses and accruals. A question could ask you to describe a transaction and ask you to identify the correct double
entry to record this.
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4: LEDGER ACCOUNTING AND DOUBLE ENTRY
Overview
Ledger accounting
and double entry
Double entry Ledger accounts
Debit Credit
Balancing off
42 INFA21
1 Introduction
1.1 This chapter is designed to enable you to explain the principles of double entry and apply
these principles to the preparation of accounting records within the nominal/general ledger.
1.2 Following on from the previous chapter where transactions were categorised in books of
prime entry, the next step is to summarise the information in a format nearer to that of the
final financial statements.
The nominal ledger

1.3 (a) Each item in the statement of financial position or income statement will have an
'account' (which might be a page in a book or a record on a computer).
(b) All the accounts are collected together in the nominal ledger.
(c) The books of prime entry are totalled up and two entries will be made in these
accounts with each of these totals – this is called Double Entry.
The dual effect

1.4 The method used stems from the fact that every transaction affects two things e.g.
(a) A sole trader pays $6,000 in the business bank account:
Cash increases by $6,000
Capital increases by $6,000
(b) A sole trader purchases goods on credit for $400:
Purchases increase by $400
Trade payables increase by $400
2 Ledger account (T-Accounts)

2.1 Debit Capital Credit
$ $
DEBITS CREDITS
We make two entries from each total extracted from the books of prime entry, and call one
Debit (DR), and the other one Credit (CR).
TOTAL DEBITS = TOTAL CREDITS
INFA21 43
Principles of double entry bookkeeping

2.2 The cash account is a good starting point:
DR CASH CR
$ $
CASH IN = DEBIT CASH OUT = CREDIT
General rules
2.3 Debits Credits
increase increase
Expenses Liabilities
Assets Income
Drawings Capital
decrease decrease
Liabilities Assets
DEAD CLIC
Lecture Example 1
Required
What is the double entry for each of the following?
Explain each entry in terms of the general rules above.
Transaction Debit Credit

(a) Sales for cash
(b) Sales on credit
(c) Purchase for cash
44 INFA21
Transaction Debit Credit
(d) Purchase on credit
(e) Pay electricity bill
(f) Receive cash from a customer
(g) Pay cash to a supplier
(h) Borrow money from the bank
INFA21 45
3 Flow of information
3.1 Totals from books of original entry are posted to the nominal ledger using double entry.
3.2
Lecture Example 2 Question longer than would be required in an exam
Douglas had the following transactions during January:

(1) Introduced $5,000 cash as capital
(2) Purchased goods on credit from Richard, worth $2,000
(3) Paid rent for one month, $500
(4) Paid electricity for one month, $200
(5) Purchased car for cash, $1,000
(6) Sold half of the goods on credit to Tish for $1,750
(7) Drew $300 for his own expenses
(8) Sold goods for cash, $2,100
Required
(a) Post transactions (1) to (8) to the relevant ledger accounts
46 INFA21
Solution
Cash
$ $
Capital
$ $
Purchases
$ $
Trade payables
$ $
Rent
$ $
INFA21 47
Electricity
$ $
Car
$ $
Trade receivables
$ $
Sales
$ $
Drawings
$ $
48 INFA21
4 Balancing off the accounts

4.1 Required steps
(a) Add up the debit and credit sides separately.
(b) Fill in the higher of the two totals on both sides.
(c) Literally 'balance' the account. Work out what number we need and on which side to
make the two sides equal. This is balance c/d.
(d) Complete the 'double entry' – balance b/d on opposite side.
Lecture example 3
The next step towards producing a set of accounts is to balance off every account.
Required
Consider the following cash account as an example:
Solution
DR Cash CR
$ $
2/1 Sales 500 1/1 Purchases 300
10/1 Sales 500 25/1 Telephone 50
Lecture example 4
Douglas
Refer to lecture example 2
Required
Balance off the ledger accounts for Douglas
Solution
Complete in the solution space for lecture example 2
INFA21 49
5 Chapter summary
Ledger Accounting and Double Entry
An organisation will make two entries for each transaction it puts into its financial records.
One transaction will be a debit and one will be a credit. Debits are shown on the left hand
side of a 'T' account, while credits will be shown on the right hand side.
At the end of a period it is possible to calculate the balance on each account by balancing
off. This process is where you add up the debit and credit sides of an account, fill in the
higher of the two balances on both sides and literally balance the account by inserting the
required figure; you complete the double entry by b/d the calculated figure.
50 INFA21

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Fundamentals of Financial

Improving study material and removing errors

Prepare for and book your CBA!

Introduction to Paper C2 Fundamentals of Financial

Topic Study weighting

Links with other papers

Financial Operations (F1)

Assessment methods and format of the paper

Learning Phase Aims

A Conceptual and regulatory framework (20%)

B Accounting systems (20%)

C Preparation of accounts for single entities (45%)

D Control of accounting systems (15%)

Certificate in Business Accounting

Syllabus Guide Learning Outcomes

The nature and objective of

Sole trader Partnership Companies

Concept of separate entity

2. Users of financial information

(c) Providers of finance

(d) HM Revenue & Customs

(f) Financial analysts

5. The concept of separate identity

The nature and objective of

Sole trader Partnership Companies

Concept of separate entity

 A business is a separate entity from its owner

Syllabus Guide Learning Outcomes

Statement of financial Income statement

Assets Liabilities Capital

2 The statement of financial position

2.2 For a business, this list is formalised as a STATEMENT OF FINANCIAL POSITION.

Proforma statement of financial position – sole trader

Proforma income statement – sole trader

Statement of financial Income statement

Assets Liabilities Capital

Syllabus Guide Learning Outcomes

Sources, records and

Books of prime entry

Ultimately these must be summarised in financial statements.

1.3 A business needs accounting records to achieve the following:

2 Books of prime entry

Main books of original entry

Cash book (receipts)

Date Narrative Total Capital Cash sales Receivables

total cash type of receipt

6.1.X6 Manley & Co. 350 350

total cash type of

Sales day book

Purchase day book

Petty cash book

Date Narrative Total Date Narrative Total Stationery Travel

Controlling petty cash – the imprest system

Purpose of memorandum ledgers

Writing up memorandum ledgers

Receivables (sales) ledger

3.1.X6 Invoice 1032 200 5.1.X6 Cash received 200

8.1.X6 Invoice 1101 400 Balance c/d 400

5.1.X6 Invoice 1033 400

Payables (purchase) ledger

Balance c/d 400 1.1.X6 Invoice A112 400

6.1.X6 Cash paid 350 4.1.X6 Invoice 063 350

Sources, records and