Accounting Notes for Grade 9

Type of Purchase of Goods

• Goods Purchased for Cash

  • Accounts Affected:
  • Purchases Account: Debited
  • Cash Account: Credited
  • Transaction Entry:
  • Example: Bought inventory paying cash $400

• Goods Purchased by Cheque

  • Accounts Affected:
  • Purchases Account: Debited
  • Bank Account: Credited
  • Transaction Entry:
  • Example: Bought inventory paying by cheque $300

• Goods Purchased on Credit from Supplier

  • Accounts Affected:
  • Purchases Account: Debited
  • Supplier's Account: Credited
  • Transaction Entry:
  • Example: Bought inventory on credit from Bombastic Ltd $670
  • Example: Paid Bombastic Ltd $670 cash

Books of Original Entries

These are the first books where transactions are recorded before they are entered into ledger accounts, also known as books of prime entry or subsidiary books. There are six main types:

1. Purchases Journal (Purchases Book)

   • Records all credit purchases of goods.
   • Written from invoices.

2. Sales Journal (Sales Book)

   • Records all credit sales of goods.
   • Written from invoices.

3. Sales Returns Journal (Return Inwards Book)

   • Records returns inwards.
   • Written from copies of credit notes sent to customers.

4. Purchases Return Journal (Returns Outwards Book)

   • Records all purchases returns.
   • Written from credit notes received from suppliers.

5. Cash Book

   • Records all cash and cheque transactions.
   • Functions as both a book of original entry and a ledger account.

6. General Journal (Journal)

   • Used for irregular entries like error corrections, depreciation provisions, and opening entries.

Why Use Journals Before Ledgers?

• Provides a prime entry for certain transactions like non-current asset purchases or error corrections.
• Reduces risk of omission, errors, and fraud.

Advantages of Using Books of Prime Entry

• Reduces number of entries in the ledger.
• Acts as aid for posting to the ledger.
• Gathers and summarizes accounting info, aiding in preparation of control accounts.
• Groups similar transactions together.
• Divides work between multiple accountants for efficiency.

Purchases Journal Benefits

• Fewer transactions recorded in the purchases account.
• Allows bookkeeping to be spread out.
  • Analyzed into products or departmental areas.
• Identifies credit purchases for comparison.
• Provides data for the purchases ledger control account.

Advantages of Double Entry Accounting

1. Less risk of errors
2. Less risk of fraud
3. Easier to refer to previous transactions
4. Financial position easily ascertainable
5. Simpler preparation of financial statements
6. Facilitate better business decisions
7. Easier to compute accounting ratios

Business Documents in Accounting

Recognize and Understand:

• Invoice
  • Details: Supplier and customer info, goods sold, prices, total amount.
• Credit Note
  • Details: Used for returned goods.
• Debit Note
  • Details: Used to inform suppliers of overcharges/returns.
• Statement of Account
  • Summarizes transactions, reminders of owed amounts.
• Cheque
  • Used for payments, includes details of payee and amount.
• Receipt
  • Confirming payments received.

Advantages of Prime Entry Books

1. Simplifies data summaries
2. Reduces ledger entries
3. Allows segregation of transaction types

Types of Expenditure

• Capital Expenditure: Spending for fixed assets, provides long-term benefit; shown in balance sheet.
• Revenue Expenditure: Daily operational costs; reflected in profit/loss accounts.
• Capital Receipts: Non-recurring income from sales of fixed assets, loans, etc.
• Revenue Receipts: Regular income through core activities; benefits short-term only.

Final Accounts Preparation

Purpose of Financial Statements:

• Gross and net profit calculation.
• Assess financial standing of business.

Income Statement Key Metrics

1. Net Revenue = Total Revenue - Sales Returns
2. Cost of Goods Sold
   • Formula: Opening Inventory + Purchases - Closing Inventory
3. Gross Profit
   • Net Revenue - Cost of Goods Sold
4. Net Profit
   • Gross Profit + Income - Expenses

Formats for Financial Statements

• Income Statement
• Statement of Financial Position

Example Entries in Statements:

• Revenues, purchases, expenses, assets, liabilities, and equity.

Understanding Depreciation

• Definition: Allocation of an asset's cost over its useful life.
• Causes: Wear and tear, obsolescence, time factors, and depletion.
• Importance: Accurate profits representation and asset valuation.
• Methods: Straight-line, reducing balance, revaluation.

Partnership Essentials

• Defined roles of partners in profit sharing, salaries, interest, and agreements.
• Current and capital accounts management.

Manufacturing Accounts Overview

• Purpose: Calculate production costs for goods manufactured; similar to income statements but specific for manufacturers.
• Includes direct material costs, labor, and factory overheads in compiling financial statements.

Adjustments for Inventory and Production**

• Consider work in progress and adjustments made for both direct and indirect costs in financial reports.