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Business Processes & Accounting Systems · Week 02

Accounting Process, Double Entry & Primary Entry Journals

What accounting is, the entity concept, stakeholders and their needs, the Conceptual Framework (objective, qualitative characteristics, elements, recognition, measurement), debit and credit rules, the accounting equation, T-accounts and balancing, source documents, and the four day books.

ITE36224 videos · 95 min📄 Introduction to accounting processes.pdf📄 Accouting processes - Primary Entry journals.pdf📄 Conceptual framework for financial reporting from Delotte.pdf📄 Practice questions (2 papers)

▶Lecture videos

Click any timestamp — here or inside the notes — to jump the video to that moment. Your position is remembered.

Accounting Process – Part I

Accounting process lecture, part 1.

00:02Introduction: double-entry system01:16What a T-account is02:19Asset accounts: debit increases03:22Liability accounts: credit increases04:31Owner's equity accounts05:29Real example with T-accounts09:53The accounting equation: equal impact on both sides11:44What double-entry bookkeeping is12:17Receiver debit, giver credit12:47Key characteristics of double entry14:29Worked transactions and the accounting equation21:55The final balanced equation and summary

Accounting Process – Part II

Part 2.

00:03Introduction01:09The accounting cycle, step by step01:41Transaction → journals → ledger → trial balance → statements06:52Source documents08:24Source-document examples10:15The cash book as a book of prime entry11:34Types of cash book: single, two-column, three-column14:21Cash receipt journal format15:50The petty cash book16:34Advantages of a petty cash book20:59The imprest system22:44Imprest example23:54Petty cash payment journal format

Accounting Process – Part III

Part 3.

00:05Introduction01:07Purchase journal: credit purchases of goods only03:36Source document: purchase invoice04:32Returns: reasons (quality, damage, wrong goods)09:10Return outwards journal and the debit note11:47Sales journal13:53Sales journal format14:48Return inwards journal and the credit note17:00The general journal (journal proper)20:39Opening entries21:21Purchase of non-current assets on credit22:40Capital introduced in kind24:10Sale of non-current assets on credit26:20Drawings of assets other than cash26:58Correction of errors and adjusting entries

Accounting Process – Part IV

Part 4.

00:02Introduction and lecture outcomes01:09Capital vs revenue expenditure03:14Capital expenditure: examples and characteristics06:21Revenue expenditure: characteristics and examples09:12Ledger accounts11:00The trial balance11:36Purposes of a trial balance16:43Limitations of a trial balance17:58Summary

1What is accounting?

Definitions
  • American Accounting Association (1974): "Accounting is the process of identifying, measuring and communicating information to permit informed judgements and decisions by users of the information."
  • Course definition: accounting is the process of collecting and recording business transactions and events, summarising them, and communicating the results to interested parties to support economic decision-making.
CollectingRecordingClassifyingSummarisingAnalysingInterpretingCommunicating to stakeholders

The accounting entity concept

The business is separate from its owner. The business's accounts record only the business's transactions. The owner's personal spending isn't business expense, and the owner's investment is capital (a claim of the owner on the business).

Objectives of accounting

  1. Control and protect the business's resources.
  2. Find the operating profit or loss and the financial position.
  3. Support rational decision-making.
  4. Provide the required information to stakeholders.

2Stakeholders and what they need

A stakeholder is a person or entity with an interest in the economic performance of the business.

Stakeholder Needs information to…
(a) Investors (providers of risk capital) Assess risk and return; decide whether to buy, hold or sell; assess the ability to pay dividends
(b) Employees Assess stability and profitability; the ability to provide pay, retirement benefits, jobs
(c) Lenders Decide whether loans and interest will be repaid when due
(d) Suppliers and trade creditors Decide whether amounts owed will be paid when due (a shorter-term interest than lenders, unless the entity is a major customer)
(e) Customers Assess the continuance of the entity, especially with long-term involvement or dependence
(f) Government and agencies Regulate, set taxation policy, produce national income statistics
(g) Public Contribution to the local economy: jobs, use of local suppliers

3The Conceptual Framework for financial reporting

The framework covers:

  • the objective of financial reporting
  • the qualitative characteristics of useful information
  • the definition, recognition and measurement of the elements
  • the concepts of capital and capital maintenance

Objective of general-purpose financial reporting

  • Primary users: present and potential investors, lenders and other creditors, deciding whether to buy, sell or hold equity or debt and whether to provide or settle loans.
  • What they need:
  • information to assess future net cash inflows
  • stewardship: how efficiently management used the resources
  • Reports can't give users everything; they also use other sources.
  • Regulators are not primary users.
Information about… Reported in
Economic resources and claims (strengths, liquidity, solvency, need for financing) Statement of financial position
Changes from financial performance (accrual accounting) Statement of comprehensive income
Past cash flows (how cash is obtained and spent: borrowing, repayments, dividends) Statement of cash flows
Changes not from performance (issuing equity, distributions to owners) Statement of changes in equity

Qualitative characteristics

Fundamental

  • Relevance: capable of making a difference to decisions, through predictive and/or confirmatory value. Materiality is an entity-specific aspect of relevance, based on the nature or size of an item.
  • Faithful representation: complete, neutral, free from error.

Information must be both relevant and faithfully represented to be useful.

Enhancing

  • Comparability: across entities and across periods
  • Verifiability: independent, knowledgeable observers could reach consensus
  • Timeliness: available in time to influence decisions
  • Understandability: classified, characterised and presented clearly and concisely, for users with reasonable knowledge who study it diligently

Enhancing characteristics can't rescue information that is irrelevant or unfaithful.

  • Cost constraint: reporting costs must be justified by the benefits.
  • Underlying assumption, going concern: the entity is assumed to continue operating indefinitely. If not, it needs disclosure and a different basis.

The five elements

Element Definition
Asset A resource controlled by the entity as a result of past events, from which future economic benefits are expected to flow to it
Liability A present obligation arising from past events, whose settlement is expected to cause an outflow of resources
Equity The residual interest in assets after deducting all liabilities: Equity = Assets − Liabilities
Income Increases in economic benefits (inflows or enhancements of assets, or decreases of liabilities) that increase equity, other than owner contributions. Includes revenue (sales, fees, interest, dividends, royalties, rent) and gains
Expense Decreases in economic benefits (outflows or depletions of assets, or new liabilities) that decrease equity, other than distributions to owners. Includes ordinary expenses (cost of sales, wages, depreciation) and losses
  • Financial position elements: assets, liabilities, equity.
  • Performance elements: income and expenses.
  • Profit = income − expenses.

Recognition & measurement

Recognise an item when:

  1. it meets the definition of an element, and
  2. future economic benefits flowing to or from the entity are probable, and
  3. its cost or value can be measured reliably.

Measurement bases: historical cost (the most common), current cost, net realisable (settlement) value, present value.

4Debit & credit rules and the accounting equation

Double entry (Luca Pacioli): each party receives something and gives something. What is received is a debit; what is given is a credit.

Account type Increase Decrease
Assets Debit Credit
Expenses Debit Credit
Liabilities Credit Debit
Income Credit Debit
Capital Credit Debit
Memory hook: "DEAD CLIC"

Debit increases Expenses, Assets, Drawings · Credit increases Liabilities, Income, Capital.

Assets = Capital
Assets = Capital + Liabilities
Assets = Capital + Profit + Liabilities
Assets = Capital + (Income − Expenses) + Liabilities
Assets + Expenses = Capital + Income + Liabilities ← debit side = credit side
🧪 Try it — Double-entry simulator (Mr. Isuru's business)
The notes' three transactions
  1. Mr. Isuru starts the business with Rs 50,000. Dr Cash 50,000 / Cr Capital 50,000. (Asset up, capital up.)
  2. Bank loan of Rs 500,000. Dr Cash 500,000 / Cr Bank loan 500,000. (Asset up, liability up.)
  3. Buys a motor vehicle for Rs 250,000 cash. Dr Motor vehicle 250,000 / Cr Cash 250,000. (One asset up, another down.)

Try these three in the simulator.

5The T-account & balancing

  • A T-account has a title.
  • The left side is the debit (Dr): what is received.
  • The right side is the credit (Cr): what is given.

How to balance an account:

  1. Foot (total) the larger side.
  2. Put that total on both sides.
  3. The difference is the balance carried down (c/d) on the smaller side, then brought down (b/d) on the opposite side.
Balancing the cash account
Dr (Cash) Rs Cr (Cash) Rs
3,750 850
4,300 1,400
2,900 700
2,900
Balance c/d 5,100
Total 10,950 Total 10,950
Balance b/d 5,100
  • Debit side = 3,750 + 4,300 + 2,900 = 10,950
  • Credit side = 850 + 1,400 + 700 + 2,900 = 5,850
  • Balance = 10,950 − 5,850 = 5,100 Dr: the cash on hand

6Source documents & primary books

Transactions & eventsSource documentsPrimary books (journals)LedgerTrial balanceFinancial statements
Source document Prepared by → sent to Recorded in
Sales invoice Business → customer (credit sale) Sales journal
Purchase invoice Supplier → business (credit purchase) Purchase journal
Debit note Business (buyer) → supplier when returning goods Purchase return journal
Credit note Business (seller) → customer when accepting returned goods Sales return journal
Receipt and payment voucher (PV) For cash received or paid Cash book
Journal voucher Internal, for other entries General journal
Careful: who issues the credit note?

The PDF says the credit note is "prepared by the customer". In practice, the seller (the business) issues the credit note to the customer to confirm it will reduce what the customer owes. The buyer issues a debit note to the supplier when returning goods. The double entries below are correct either way.

7The four day books (primary entry journals)

Journal Records Not recorded here Source document Double entry (from the totals)
Purchase journal Credit purchases of goods for resale Cash purchases; credit purchases of fixed assets Purchase invoice Dr Purchases / Cr Creditors
Purchase return journal (return outwards) Goods returned to suppliers — Debit note Dr Creditors / Cr Purchase returns
Sales journal Credit sales of goods Cash sales; credit sales of fixed assets Sales invoice Dr Debtors / Cr Sales
Sales return journal (return inwards) Goods returned by customers — Credit note Dr Sales returns / Cr Debtors

Reasons goods are returned:

  • defective or faulty production
  • wrong specification or type selected
  • poor quality
  • damaged goods
  • goods other than those ordered

Format of each journal:

Date Invoice / note no. Supplier / customer Description Qty Unit price Value L/F Total

L/F (ledger folio) is the reference to the ledger page where the entry is posted.

🧪 Try it — Which book does it go in?
Exam focus

Expect:

  • Define accounting
  • Stakeholders and their information needs
  • The Conceptual Framework: objective, qualitative characteristics (fundamental vs enhancing), the 5 elements' definitions, recognition criteria, measurement bases, going concern
  • Debit/credit rules and the accounting equation
  • Balancing T-accounts
  • Source documents and which journal records what, with the double entry
  • Practice: prepare the purchase, sales and returns journals from a list of transactions and post their totals

8Practice questions (course paper)

Worked answers to both Week 2 practice papers. Try each one first, then check.

Double entry system

Q1: Araliya Enterprises (Mr. Kumara), January 2019

Capital Rs. 100,000 cash. Then: loan 600,000 (Jan 2) · insurance paid 7,000 (8) · loan repaid 150,000 (10) · cash purchases 60,000 (15) · cash sales 100,000 (20) · extra capital 200,000 (25) · drawings 10,000 (30).

Date Debit Credit Rs.
Jan 1 Cash Capital 100,000
Jan 2 Cash Loan 600,000
Jan 8 Insurance expense Cash 7,000
Jan 10 Loan Cash 150,000
Jan 15 Purchases Cash 60,000
Jan 20 Cash Sales 100,000
Jan 25 Cash Capital 200,000
Jan 30 Drawings Cash 10,000

Closing balances: Cash 773,000 · Capital 300,000 · Loan 450,000 · Sales 100,000 · Purchases 60,000 · Insurance 7,000 · Drawings 10,000.

Check: Cash 773,000 = Capital 300,000 + Loan 450,000 + profit (100,000 − 60,000 − 7,000 = 33,000) − Drawings 10,000 ✓

Q2: Mrs. Kalyani's retail business, April 2019

Capital: Rs. 500,000 cash + a Rs. 700,000 motor vehicle.

Date Debit Credit Rs.
Apr 1 Cash 500,000; Motor vehicle 700,000 Capital 1,200,000
Apr 3 Purchases Cash 50,000
Apr 5 Cash Capital 300,000
Apr 10 Cash Sales 150,000
Apr 13 Drawings Cash 5,000
Apr 16 Insurance 8,000; Rent 4,000 Cash 12,000
Apr 23 Purchases Creditor – Nimal 80,000
Apr 28 Cash Sales 150,000
Apr 30 Cash Rent income 40,000

Closing balances: Cash 1,073,000 · Vehicle 700,000 · Capital 1,500,000 · Nimal 80,000 · Sales 300,000 · Purchases 130,000 · Rent income 40,000 · Expenses 12,000 · Drawings 5,000.

Check: assets 1,773,000 = capital 1,500,000 + Nimal 80,000 + profit 198,000 − drawings 5,000 ✓

Primary entry books

Q1: Purchase journal (Araliya Enterprises, January 2018)
Date Supplier Inv. Gross Trade discount Net
Jan 5 Kumara: sugar 13,000 + salt 3,000 + tea 16,000 100 32,000 10% = 3,200 28,800
Jan 7 Naleen: T-shirts 25,000 + shirts 80,000 101 105,000 5% = 5,250 99,750
Total → Purchases a/c (Dr) 128,550

The 4 tables (Jan 15) aren't for resale, so they don't go in the purchase journal. Use the general journal: Dr Furniture 80,000 / Cr Saman Enterprises 80,000.

Ledger: Kumara Cr 28,800 · Naleen Cr 99,750 · Purchases Dr 128,550.

Q2: Purchase returns journal (returns outwards)
Date Supplier Goods Gross Less trade discount Net
Jan 6 Kumara Sugar 40 kg × 130 + salt 30 kg × 60 7,000 10% 6,300
Jan 10 Naleen (DN 1000) T-shirts 10 × 500 + shirts 5 × 800 9,000 5% 8,550
Total → Returns outwards (Cr) 14,850

Ledger: Dr Kumara 6,300 (balance 22,500) · Dr Naleen 8,550 (balance 91,200).

Q3 and Q4: February 2018

Purchase journal: Kamal 50,000 · Sudath 80,000 less 10% = 72,000 · Sunil 150,000 → total 272,000. The cash purchase from Nimal (20,000) goes in the cash book, not the purchase journal.

Purchase returns journal: Kamal 20,000 · Sudath 30,000 → total 50,000.

Balances: Kamal 30,000 · Sudath 42,000 · Sunil 150,000.

Q5 and Q6: Sales journal and sales returns journal (April 2018)
Customer Calculation Gross Trade discount Net
Gayan (Inv 60) 200 × 500 + 250 × 700 275,000 10% 247,500
Kumari (Inv 70) 500 × 300 + 1,000 × 500 650,000 5% 617,500
Sales journal total 865,000

The cash sale to Sudath (50,000) goes in the cash book.

Returns inwards: Gayan 50 × 500 + 100 × 700 = 95,000 less 10% = 85,500 · Kumari 60 × 300 = 18,000 less 5% = 17,100 → total 102,600.

Q7: Credit sales and returns (July 2018)
X Y Z Total
Sales journal 100 200 300 600
Returns inwards journal 10 20 30 60
Debtor balance 90 180 270 540

9Quick revision sheet

Concept Remember it as
Accounting (AAA) Identify, measure, communicate information for decisions
Entity concept Business separate from owner
Stakeholders Investors, employees, lenders, suppliers, customers, government, public
Primary users Investors, lenders, other creditors
Fundamental QCs Relevance (predictive/confirmatory, materiality) + faithful representation (complete, neutral, error-free)
Enhancing QCs Comparability · verifiability · timeliness · understandability
Constraint and assumption Cost; going concern
Elements Asset · liability · equity · income · expense
Recognition Definition + probable benefits + reliable measurement
Measurement Historical cost · current cost · NRV · present value
Dr/Cr Dr increases assets, expenses, drawings; Cr increases liabilities, income, capital
Equation A + E = C + I + L
Balancing Total the larger side; balance c/d; b/d on the opposite side
Journals Purchase (invoice) · purchase return (debit note) · sales (invoice) · sales return (credit note)
Not in the day books Cash transactions (cash book) · fixed assets on credit (general journal)

?Self-check quiz

11 questions on this week. Answer them all, then press Check my answers. Your best and latest scores are saved and shown on the subject page.

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