We are working towards endorsement of this title for the Cambridge Pathway.
We are working towards endorsement of this title for the Cambridge Pathway.
We are working towards endorsement of this title for the Cambridge Pathway.
Accounting for Cambridge IGCSE™ and O Level
WORKBOOK
Third edition with Digital access
Sharon Elan-Puttick and Debbie Malpas
We are working towards endorsement of this title for the Cambridge Pathway.
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ISBN 978-1-009-81453-9 Workbook with Digital Access
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How to use this series
How to use this series
All the components in the series are designed to work together.
The coursebook is designed for students to use in class with guidance from the teacher. It offers complete coverage of the Cambridge IGCSE™, IGCSE (9-1) and O Level Accounting syllabuses (0452/0985/7707). The coursebook is divided into four sections, and contains in-depth explanations of accounting concepts, a variety of independent and group activities, as well as engaging new features and images to help students make real-world connections.
A digital version of the coursebook is included with the print version and is also available separately. It includes simple tools for them to use in class or for self-study.
The workbook provides further practice of all the skills presented in the coursebook and is ideal for use in class or as homework. It provides engaging exercises, worked examples and opportunities for students to evaluate sample answers so they can put into practice what they have learnt.
A digital version of the workbook is included with the print version. It includes simple tools for students to use in class or for self-study, as well as downloadable templates to complete some of the activities.
The digital teacher’s resource provides everything teachers need to deliver the course. It is packed full of useful teaching notes and lesson ideas, with suggestions for differentiation to support and challenge students, ideas for formative assessment, overcoming common misconceptions and language support.
The digital teacher’s resource contains downloadable resource sheets and worksheets. All answers are available on Cambridge GO.
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How to use this book
Throughout this workbook, you will notice recurring features that are designed to help your learning. Here is a brief overview of what you will find.
SAMPLE
LEARNING INTENTIONS
Learning intentions open each chapter. These help you to navigate through the workbook, and indicate the important concepts in each topic. The learning intentions also map to the content in the Accounting for Cambridge IGCSE™ and O level Coursebook.
Key skills activities
These are scaffolded exercises which support your progression through your course, and enable you to put into practice what you have learnt so far. The activities have been clearly linked to the key skills that you need for accounting.
You will need to download a template in order to complete some activities. Look out for the download icon.
SELF-ASSESSMENT
Self-assessment enables you to look back on your work and encourages you to think about your learning. You will reflect on and assess the process that you used to arrive at your answers.
Practice questions
Each chapter contains a set of multiple-choice practice questions that will help you prepare for assessment.
End-of-section practice questions
More demanding practice questions provide you with the opportunity to try out further questions on what you have learnt in each section.
WORKED EXAMPLES
Worked examples provide you with sample answers to help you understand how to respond to questions using key skills.
Improve this answer
This offers you an opportunity to evaluate a sample answer to a question. Advice and guidance are provided to help you assess the answer.
Your challenge
After completing Improve this answer, you are then asked to apply the advice to your own answer.
KEY TERMS
These provide a reminder of the key terms that you need to recall for each chapter topic.
TIPS
Tips are provided throughout this workbook to help with your learning. These offer you additional guidance and advice.
Introduction
This workbook is designed to help you develop your understanding of accounting, to build up your skills and to enable you to assess your progress. The workbook can be used in conjunction with the Cambridge IGCSE™ and O Level Accounting Coursebook, but it may also be used independently. Answers to all the questions in this workbook are provided in the accompanying Teacher’s Resource.
The introductory section of the workbook explores the skills that you will need as an accountant, and how you can develop these. It also contains some sample questions with examples from the authors of the stages you could go through when approaching these questions. It then guides you through full suggested answers and the way in which they should be presented.
The main chapters of the workbook contain key skills activities and multiple-choice practice questions that are directly linked to the topics covered in the coursebook. You can tackle the chapters in a section of the workbook when you have completed that section of the coursebook, or you can choose to work through all the sections towards the end of your course.
The end-of-section content in the workbook presents a mixture of structured practice questions. There are also worked examples presenting you with sample answer guidance from the authors. In addition, you are given the opportunity to evaluate sample answers to the practice questions. Advice and guidance are provided by the authors to help you assess the answers, which you can then apply and use to improve your own answers.
As with the coursebook, this workbook seeks to cover all the topics in the syllabus and to provide you with the skills you need in accounting, and to help strengthen your understanding along the way.
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Demonstrating skills in accounting
This section of the workbook looks at a range of accounting skills which you need to demonstrate when answering questions relating to the Cambridge IGCSE™, IGCSE (9–1) and O Level Accounting syllabuses (0452/0985/7707). It considers what the skills are, what they mean, and how you need to be able to recognise their importance to improve your accounting skills.
1.Command words
Command words typically appear at the beginning of a question to clarify which skills you need to show. The command words relevant to the Cambridge IGCSE™, IGCSE (9–1) and O Level Accounting syllabuses can be found in below table.
Look out for the command words and become familiar with them when answering questions. These should help you to recognise what you need to do.
Command word Meaning
Advise write down a suggested course of action in a given situation
Analyse examine in detail to show meaning, identify elements and the relationship between them
Calculate work out from given facts, figures or information
Compare identify/comment on similarities and/or differences
Define give precise meaning
Demonstrate show how or give an example
Describe state the points of a topic / give characteristics and main features
Discuss write about issue(s) or topic(s) in depth in a structured way
Evaluate judge or calculate the quality, importance, amount, or value of something
Explain set out purposes or reasons / make the relationships between things clear / say why and / or how and support with relevant evidence
Give produce an answer from a given source or recall/memory
Identify name/select/recognise
Justify support a case with evidence/argument
Prepare present information in a suitable format
State express in clear terms
Suggest apply knowledge and understanding to situations where there are a range of valid responses in order to make proposals / put forward considerations
We
2.Skills in accounting
There are three main skills needed in accounting:
• Knowledge and understanding
• Analysis
• Evaluation
We will consider each of these skills separately.
2.1 Knowledge and understanding
You should be able to:
Demonstrating
• demonstrate knowledge and understanding of facts, terms, concepts, policies, procedures and techniques
• apply this knowledge and understanding to a variety of accounting situations and problems, and present outcomes in an appropriate form.
The starting point when studying accounting is to acquire knowledge. Knowledge will be acquired as you study each section of the coursebook. This involves learning about the key terms used in accounting and the processes for recording financial information. It is important to learn about and be able to define the key terms in the subject and to understand what they mean.
Once that knowledge has been acquired, an understanding of the relevance of that knowledge will gradually develop. For example, you will be able to use that knowledge to record day-to-day financial transactions and to prepare financial statements.
The more you study the subject, the greater your knowledge about the subject will be and the more you will understand. The skills of knowledge and understanding take time. You need to learn the terms and processes and then develop an understanding of why these processes are carried out. Do not expect this learning process to happen quickly; your ability to know and understand will develop gradually. There is no substitute for practice in recording financial transactions and preparing financial statements. This is the best way to learn and understand. Knowledge and understanding together form the platform on which everything in accounting is based.
How to recognise when knowledge and understanding are required
Certain command words appear at the start of questions where knowledge and understanding are required. Seeing any of these command words should help you to recognise what you need to do.
Command words requiring knowledge and understanding include:
• calculate, define, describe, explain, give, identify, prepare and state.
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The following questions show you how these command words can be used to assess knowledge and understanding:
Calculate the rate of interest which was charged on drawings.
Define the term partnership.
Describe a partnership agreement.
Explain the purpose of an appropriation account.
Give two disadvantages of being a partner rather than a sole trader.
Identify two types of business people who may be interested in the financial statements of the partnership.
Prepare the appropriation account and partners’ current accounts.
State one advantage of being a partner rather than a sole trader.
How to demonstrate knowledge and understanding
Always read the question carefully. If you are required to explain or define terms, think about how you are going to express yourself. Plan what you are going to write and make sure you are not just repeating the information given without attempting to obey the command word. If you are required to prepare accounts, journal entries or financial statements, the requirement will be quite clear about what you have to do.
Again, think carefully before you start writing. Use your knowledge and understanding of the topic and apply this to the scenario given.
2.2 Analysis
You should be able to:
• select, calculate and interpret relevant data and information
• analyse financial accounting information
• communicate outcomes in the most appropriate form.
It is essential to have a thorough knowledge and understanding of basic accounting before attempting to apply the skill of analysis. As you develop your knowledge and understanding of the subject, so will you be able to begin analysing. This involves being able to select and present the most suitable accounting information. This skill requires practice and cannot be learned by rote. Each scenario is different so you must be able to apply your knowledge and understanding to a given scenario and analyse the relevant financial information.
How to recognise when analysis is required
TIP
The skill of knowledge and understanding includes definitions, basic concepts, the double entry system, books of prime entry, bank reconciliations, financial statements (including year-end adjustments) and simple calculations.
SAMPLE
Certain command words appear at the start of questions where analysis is required. Seeing any of these command words should help you to recognise what you need to do.
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Demonstrating skills in accounting
Command words requiring analysis include:
• analyse, compare, demonstrate, examine, explain, identify and suggest.
The following questions show you how these command words can be used to assess analysis:
Analyse one benefit to a business of carrying out an inter-firm comparison.
Compare the liquidity of both businesses in 20–8.
Demonstrate that the profit margin is 12%.
Examine how the trade receivables turnover has changed over time.
Explain why the trader’s return on capital employed is lower than that of a neighbouring business.
Identify two possible reasons for the change in the current ratio.
Suggest two ways in which the trader could improve their profit margin ratio.
How to demonstrate analysis
It is essential to make sure you know what is required. If you need to explain ratios or make suggestions for improving ratios in various situations, think carefully before you start writing. The answer must relate directly to the scenario described in the question and the ratios you have calculated. Simply listing possible solutions to a problem is not adequate – the answer must analyse the information in the question and make use of any calculations from a previous part of the answer.
2.3 Evaluation
You should be able to:
• interpret and evaluate accounting information and draw conclusions.
This is another skill which cannot be learned by rote. It requires a thorough appreciation of the knowledge, understanding and analysis skills, and it develops with practice. This requires you to apply the skills of knowledge, understanding and analysis to a given scenario and to offer advice as to whether or not a certain course of action should be taken.
How to recognise when evaluation is required
Certain command words appear at the start of questions where evaluation is required. Seeing any of these command words should help you to recognise what you need to do.
Command words requiring evaluation include:
• advise, discuss, evaluate and justify.
TIP
SAMPLE
The skill of analysis includes the correction of errors and profit correction, more complicated calculation of ratios, interpretation of ratios, and suggestions for improving various financial aspects of a business.
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The following questions show how these command words can be used to assess evaluation:
Advise the trader whether or not he should reduce the rate of trade discount he allows to customers. Justify your answer.
Discuss whether or not the trader should cease to sell on credit to his customers.
Evaluate whether or not the trader should take a long-term loan to expand his business.
How to demonstrate evaluation
Once again, read the question carefully and plan your answer before you start writing. Discuss the advantages and disadvantages of a course of action and consider the implications of putting a plan into effect. Having outlined the points for and against the situation, make a recommendation on whether or not the course of action should be embarked upon or whether the plan should be put into effect.
TIP
The skill of evaluation includes offering advice about the effects of a possible course of action or making recommendations about such a course of action.
We
Section 1
SAMPLE
We
towards
Chapter 1 Introduction to accounting
LEARNING INTENTIONS
By the end of this chapter, you will be able to:
• describe how book-keeping is different to accounting
• explain why businesses measure their profit and loss
• describe how accounting provides information which can be used to monitor progress and help with decision-making
• define assets, liabilities and owner’s equity, and use the accounting equation.
KEY TERMS
Key skills activities
Activity 1.1: The accounting equation
a Explain the difference between book-keeping and accounting.
b State the formula for the accounting equation.
c Complete the following table by filling in the missing values.
Rearrange the accounting equation to find the missing value.
Activity 1.2: Assets and liabilities
a Indicate whether each of the following is an asset or a liability by placing a tick (✓) in the appropriate column. The first one has been completed as an example.
i Equipment ✓
ii Trade payables
iii Cash
iv Motor vehicles
v Loan from bank
vi Trade receivables
vii Bank
viii Inventory
ix Loan to employee
x Bank overdraft
xi Machinery
b A business provided the following information:
i Calculate the value of the assets.
ii Calculate the value of the liabilities.
iii Use the accounting equation to calculate the capital.
Remember that assets are anything owned by or owing to the business. Liabilities are anything owed by the business. Capital is the total resources provided by the owner, and represents what the business owes the owner. We are working towards endorsement of this title for the Cambridge Pathway.
TIP
c State how each of the following transactions affect the assets and liabilities. The first one has been completed as an example.
Transaction Effect on assets Effect on liabilities
i Bought goods for cash Cash Decrease No effect Inventory Increase
ii Received a long-term bank loan
iii Paid a credit supplier by electronic funds transfer (EFT)
iv Received a payment from a credit customer
v Bought equipment on credit
vi Bought goods by cheque
TIP
Each transaction must have two entries using the double-entry system. The one entry must affect the debit side and the other entry affects the credit side of their respective accounts.
SELF-ASSESSMENT
How confident were you at deciding whether each item was an asset or a liability? Were there any which you struggled with? How did you decide?
Activity 1.3: Statement of financial position
a The statement of financial position of Jing at 1 January 20–6 is as follows:
On 2 January 20–6, the following transactions took place:
• Bought goods, $2 300, on credit
• Made a payment to a credit supplier, $3 500, by cheque
• Jing invested an additional $10 000 by cheque
• Bought equipment, $3 600, on credit
Prepare the statement of financial position of Jing on 2 January 20–6 after the transactions listed have taken place. Jing
Statement of financial position at 2 January 20–6
TIP
Your statement of financial position should still balance after all the transactions have taken place. If it does not balance, you have made an error.
b A statement of financial position of Mei Yang on 31 July 20–5 is as follows:
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On 1 August 20-5 the following transactions took place:
• Received a cheque from a credit customer for $1 400
• Bought goods on credit for $1 500
• Repaid $2 700 on a bank loan by EFT
• Paid a credit customer $450 in cash
Prepare the statement of financial position of Mei Yang on 1 August 20–5 after the transactions listed have taken place.
Mei Yang
Statement of financial position at 1 August 20–5 $
Assets
Capital and liabilities
Liabilities
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c Explain two advantages and two disadvantages of Mei Yang being a sole trader.
SELF-ASSESSMENT
How confident are you that you can record business transactions in the statement of financial position of a business?
Chapter 1 practice questions
1 Which statements about book-keeping and accounting are correct?
1 Book-keeping is performed daily rather than periodically.
2 Accounting uses information kept in the book-keeping records.
3 Book-keeping includes the preparation of financial statements.
4 Accounting involves the recording of financial transactions.
A 1, 3 and 4
B 2 and 4
C 1, 2 and 4 D 1 and 3
2 Amy provided the following information:
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How much capital does Amy have?
A $41 660
B $27 680
C $16 480
D $22 680 [1]
3 Which of the following is an example of an asset?
A Trade payable
B Bank loan
C Trade receivable
D Bank overdraft [1]
Chapter 2
Double entry book-keeping –
Part A
LEARNING INTENTIONS
By the end of this chapter, you will be able to:
• explain the double entry system of book-keeping and use it to process accounting data
• balance ledger accounts
• prepare and interpret ledger accounts and their balances
• record transactions using ledger accounts
• describe how ledger accounts can be maintained using a computer.
KEY TERMS
Key skills activities
Activity 2.1: Ledger accounts
a Complete Ali’s transactions for April 20–4 by filling in the account to debit and account to credit. The first one has been completed as an example. Date
20–4
April 15 Paid heat and light by bank transfer, $150 Heat and light Bank
16 Purchased groceries for resale for $1 270
17 Received $560 by debit card for the sale of groceries
18 Purchased equipment for store use, $1 390
19 Paid wages of $1 400 to his workers
20 Increased his bank loan to $3 500
b Complete Ali’s ledger accounts for the transactions listed. (Complete this question using the ledger account template – you will need to create a bank account, heat and light account, purchases account, sales account, equipment account, wages account and bank loan account.)
TIP
The bank account is affected by each transaction as money is either being received or spent. If money is received, the bank account is affected on the debit side. If money is spent, the bank account is affected on the credit side.
Assets and expenses increase on the debit side of an account. Liabilities and income increase on the credit side of an account. We are working towards
Activity 2.2: Balancing ledger accounts
Balance the following accounts for Ali.
To balance a ledger account, add up each side of the account and find the difference between the two sides. Enter this difference (usually on the last day of the month) on the side which is smaller in money, with the word ‘balance c/d’. Total each side of the account. Make the double entry (usually on the first day of the next month) by writing the amount of the balance on the opposite side of the account with the words ‘balance b/d’.
TIP
TIP
SELF-ASSESSMENT
How confident were you at balancing Ali’s accounts?
Activity 2.2 is designed to help you understand how to balance accounts. In what ways do you find this activity helpful?
Activity 2.3: Complete ledger accounts
The following transactions took place in the first two weeks of July 20–4 at Khan’s Groceries. The opening balances for 1 July 20–4 are:
$2 680 Bank
Trade receivables:
Azlan
Zainab
Trade payables:
Raji’s Wholesalers
Rohaan
Shayan
$7 432
$1 028
$2 783
$5 630
$4 810
$3 946
TIP
If the bank balance is brought down on the credit side it means this is a bank overdraft.
July 1 Ali Khan paid Raji’s Wholesalers $2 640 by debit card
2 Cash sales of $673
3 Bought a new motor vehicle for delivery purposes, $8 630, and paid by bank transfer
3 Received payment from Azlan for $690 via bank transfer
4 Paid for stationery $68 by cash
5 Cash sales of $720
5 Purchased goods from Raji’s Wholesalers on credit for $3 768
6 Paid cash into the bank account, $650
6 Paid Shayan $2 600 by debit card
7 Received payment from Zainab, $1 300 by bank transfer
7 Paid Rohaan by cheque, $3 700
7 Paid wages, $1 940 by cash
8 Zainab bought goods on credit to the value of $462
9 Returned goods to Shayan, $320
10 Bought goods on credit from Shayan, $1 750
11 Withdrew cash for own use, $510
12 Paid Raji’s Wholesalers, $1 480 by cheque
13 Returned damaged goods to Raji’s Wholesalers worth $360
14 Rohaan returned goods to Khan’s Groceries to the value of $120
Record the transactions in the nominal ledger accounts and balance the accounts.
(Complete this question using the ledger account template – you will need to create Raji’s Wholesalers account, Rohann account, Azlan account, Shayan account, Zainab account, bank account, cash account, motor vehicles account, stationery account, purchases account, sales account, wages account, purchases returns account and drawings account.)
TIP
Open each account by first entering the opening balances. We
Activity 2.4: Running balance method
a Use the following information to write up the account of Azlan for Khan’s Groceries for August 20–4. Prepare the account in the three-column running balance format.
Aug 1 Azlan owes Khan’s Groceries $450
6 Azlan purchased goods, $1 200, on credit from Khan’s Groceries
10 Azlan returned goods, $50, to Khan’s Groceries
14 Azlan paid $250 to Khan’s Groceries in cash
20 Azlan purchased goods, $590, on credit from Khan’s Groceries
26 Azlan paid $1 000 by cheque to Khan’s Groceries
Khan’s Groceries Azlan
Details
b State one advantage of using the three-column running balance format for ledger accounts.
SELF-ASSESSMENT
How confident are you that you can record business transactions in the ledger of a business?
How would you explain the difference between a nominal ledger account and a running balance account to another student who is finding this difficult to understand?
TIP
The debit column increases the balance whereas the credit column decreases the balance.
Chapter 2 practice questions
1 On 1 June, Minaal purchased goods on credit from Hansil. On 8 June, some of these goods were returned. How did Hansil record the transactions of 8 June? [1]
Account debited
Account credited
A Minaal Purchases returns
B Minaal Sales returns
C Purchases returns Minaal
D Sales returns Minaal
2 Dhruv transferred his private motor vehicle to his business. How did he record this? [1]
Account debited
Account credited
A Capital Motor vehicle
B Drawings Motor vehicle
C Motor vehicle Capital
D Motor vehicle Drawings
3 At the end of the month, a retailer had a total of $24 310 on the debit side of his bank account and a total of $21 360 on the credit side. What was the trader’s closing bank balance?
A $2 950 credit
B $2 950 debit
C $2 590 debit
D $2 590 credit [1] We are working towards endorsement of this title for the Cambridge Pathway.
Chapter 3
The trial balance
LEARNING INTENTIONS
By the end of this chapter, you will be able to:
• explain why a trial balance is required and its limitations
• prepare a trial balance from ledger accounts and from a list of balances
• correct a trial balance which contains errors
• explain the errors which do not affect the balancing of a trial balance.
Key skills activities
Activity 3.1 Preparing a trial balance
The following balances have been extracted from the books of Lai’s business at 31 March 20–6:
TIP
Reading and revising double entry bookkeeping in Chapter 2 in the coursebook will help you understand the accounts used in a trial balance.
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a Complete the table, and for each account:
i state the type of account
ii insert a tick (✓) to indicate whether the account has a debit or a credit balance.
The first account has been completed for you.
b Prepare a trial balance for Lai at 31 March 20–6.
Trial balance at 31 March 20–6
SELF-ASSESSMENT
When answering Activity 3.1, how did you decide whether an account had a debit or credit balance? Explain to another student how you made your decisions.
Most accounts will always have debit balances or will always have credit balances. Outline a method that you could use to help yourself learn which accounts have debit balances and which accounts have credit balances.
Activity 3.2 Correcting errors that affect the balancing of a trial balance
A book-keeper has prepared the trial balance for Anil at 30 September 20–7. It does not balance.
TIP
The accounts listed in a trial balance can be set out in any order. However, you may find it useful to put the accounts in the same order as the contents of the financial statements (see Chapters 8 and 9 in the coursebook).
a What errors have occurred in the trial balance?
b Prepare a corrected trial balance for Anil. (Complete this question using the trial balance template.)
TIP
If you have drawn up a trial balance and it does not balance, the simplest thing to check first is the arithmetic. Start by checking that the debit and credit columns of the trial balance have both been added up correctly.
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c Explain why the bank loan has a credit balance but the bank account has a debit balance.
SAMPLE
TIP
Think carefully to avoid putting the balance of the bank account in the wrong column. It is a common mistake. Remember that if there is money in the bank account, it is an asset and will have a debit balance. However, if there is a negative bank balance, the business owes money to the bank. This is called an overdraft. A bank overdraft is a liability and will have a credit balance.
Activity 3.3 Errors that can occur when a trial balance balances
There are six types of error that can occur even when the debit and credit totals in the trial balance agree. These errors are listed in the table.
Fill in the gaps to complete the table.
Type of error Explanation
Error of omission A transaction has not been recorded in the accounts. There has not been a ……… or credit entry for the transaction.
Error of ……… A transaction is entered in the wrong account, but the account is of the correct type, such as an asset or liability.
Error of principle A transaction is entered in the wrong account. This wrong account is of the ……… type.
Error of ………. entry A wrong ……… is entered in the accounting records.
Error of complete reversal The account that should have been debited has been credited, and the account which should have been ……… has been ……… .
……… errors ……… or more errors that have the effect of cancelling each other out.
Activity 3.4 Different types of error
State which type of error has occurred in each of the following situations.
Type of error
TIP
1 New computers for employee use have been debited to the office expenses account instead of the office equipment account.
2 The sale of goods for $250 has been recorded in the accounts as $25.
3 Payment for insurance has been recorded in the wages account instead of the insurance account.
4 New furniture has been bought for employees to use at work. It has not been recorded.
5 The balances on the loan account and the purchases account were both $300 too low (understated).
6 Payment for rent has been credited to the rent account and debited to the bank account.
Chapter 3 practice questions
1 What is a purpose of a trial balance?
A Classifies accounts into assets and liabilities
B Corrects errors of original entry
C Creates compensating errors
D Helps find arithmetical errors in the accounts
2 What is a limitation of a trial balance?
A Delays payments for expenses
B Errors can still exist even if the trial balance balances
C Replaces the need for ledger accounts
D Used to prepare financial statements
3 Office equipment has been bought. The book-keeper did not realise that it was an asset and entered it into the office expenses account.
What type of error has occurred?
A Commission
B Compensating
C Complete reversal
D Principle
Remember that if the debit and credit column totals in a trial balance are different, we know there is at least one error. However, do not assume that everything is correct if the debit and credit totals in a trial balance are the same. It is still possible that the trial balance contains errors.
Double entry book-keeping –
Part B
LEARNING INTENTIONS
By the end of this chapter, you will be able to:
• explain that the ledger is divided into sections – the sales ledger, the purchases ledger and the nominal (general) ledger
• enter transactions and process accounting data in the cash book
• define and record cash discount
• explain that the cash book can be treated as both a book of prime entry and also as a ledger account for bank and cash
• record payments and receipts made using a range of payment methods.
KEY TERMS
Key skills activities
Activity 4.1: Division of ledgers
a State one reason why the ledger is divided into specialised areas.
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b Complete the following table and indicate in which ledger of a trader the following accounts would be recorded by placing a tick (✓) in the appropriate column. The first has been completed for you as an example.
Account Sales ledger Purchases ledger Nominal (general) ledger
i Wages ✓
ii Chen, a trade payable
iii Inventory
iv Drawings
v Wang, a trade receivable
vi Sales
c Shije is a trader who buys and sells on cash and credit terms. He provided the following information for May 20–9:
May 1 Jun, a credit customer, owed Shije $3 600.
7 Jun purchased goods on credit from Shije, list price $2 400.
13 Jun returned some of the goods purchased on 7 May, list price $250.
21 Jun paid the balance owed to Shije at 1 May by credit transfer and was allowed 5% cash discount.
i Prepare the account of Jun in the ledger of Shije for May 20–9. Balance the account and bring down the balance on 1 June 20–9.
Remember to show the discount as part of the transaction, otherwise it will look like that amount is still owed.
ii Identify which of Shije’s ledgers would contain the account of Jun.
SELF-ASSESSMENT
After completing the ledger account, do you feel confident in your understanding of how this ledger functions and what its purpose is?
TIP
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Activity 4.2: Two-column cash book
a Explain the meaning of a contra entry when used with cash books.
b The balances on Peng’s cash and bank accounts on 1 April 20–8 were: $ Cash 380 Bank 6 400
The following transactions took place during the month:
April 3 Paid Li Stores $2 120 by bank transfer
9 Cash sales, $860
14 Paid $130 for stationery in cash
18 Received a cheque, $1 460, from Bo Ling
19 Paid $500 cash into bank
21 Peng withdrew $800 from the bank for his own use
25 Paid heat and light, $1 400, by direct debit
30 Purchased equipment, $4 800, and paid by cheque
Record the transactions for April in Peng’s cash book and bring down the balances on 1 May 20–8. (Complete this question using the cash book template.)
c Explain why a bank account can have a credit balance, but a cash account cannot.
d Explain how the cash book forms part of the double entry system.
e State whether the final cash balance and bank balance in Peng’s cash book at the end of April 20–8 represent assets or liabilities.
The debit side of the cash book is to record money received by the business. The credit side of the cash book is to record money being spent by the business.
TIP
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Activity 4.3: Three-column cash book
a Define the term bank overdraft.
b Juan’s financial year ends on 31 October. The balances in his cash book on 1 October 20–4 were as follows: $ Cash 260 Bank overdraft 3 140
The following transactions took place in October 20–4:
October 3 Cash sales, $1 750
7 Paid wages, $1 300, in cash
10 Received a cheque, $120, from Panda Express
12 Paid a cheque to Red Lantern in settlement of their account of $850 less 2% discount
13 The bank returned Panda Express’ cheque as dishonoured 18 Received a cheque from Golden Dragon in settlement of their debt of $2 500 less 4% discount
22 Withdrew $500 cash for personal use
25 Paid rent, $1 800, by cheque
Record the transactions for October 20–4 in Juan’s three-column cash book. Balance the cash and bank columns and bring down the balances on 1 November 20–4. (Complete this question using the three-column cash book template.)
c Explain why a cash discount may be offered.
d Define the term ‘dishonoured cheque’.
e Explain how the totals of the discount allowed and discount received columns in the cash book are treated at the end of the month.
TIP
Remember to total the discount columns. They are not balanced against each other as they represent different types of discount.
Activity 4.4: Three-column cash book, ledger accounts and trial balance
Yixuan is a trader. On 1 September 20–2, she had the following balances on her books:
TIP
Remember when entering the opening balances, to check whether the bank balance should be on the debit or credit side.
SAMPLE
The following transactions took place during September 20–2:
September 2
Sold goods on credit to Chopstick House, $370
8 Paid for vehicle repairs, $710, by cheque
11 Bought goods on credit from Lotus Garden, $1 050
15 Cash sales, $2 700
18 Paid $400 for office expenses by cheque
20 Purchased goods, $350, on credit from Lotus Garden
21 Paid motor vehicle expenses, $120, in cash
22 Received a cheque from Chopstick House in settlement of their account on 1 September 20–2, less 5% cash discount
23 Paid $300 cash into the bank
25 Paid Lotus Garden a cheque to settle their account from 1 September 20–2 less 5% cash discount
26 Purchased equipment worth $2 800, paid by bank transfer
28 Chopstick House returned goods, $100
30 Purchased a motor vehicle, $3 600, and paid by bank transfer
a Enter the balances in the appropriate accounts on 1 September 20–2. (Complete this question using the three-column cash book and ledger account templates, you will need to create a sales ledger for Chopstick House, a purchases ledger for Lotus Garden, and nominal (general) ledger accounts for capital, motor vehicles, purchases, equipment, sales, sales returns, motor vehicle repairs, office expenses, motor vehicle expenses, discount allowed and discount received.)
b Enter the transactions as listed in the books of Yixuan. Balance the cash book and ledger accounts as necessary on 30 September 20–2 and bring down the balances on 1 October 20–2. Post the totals of the discount columns to the nominal ledger on 30 September 20–2.
TIP
Only items bought or sold on credit are entered into the purchases or sales ledger. Items where money is exchanged are entered into the cash book.
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c Draw up a trial balance on 30 September 20–2. (Complete this question using the trial balance template.)
SELF-ASSESSMENT
After completing the cash book, ledgers and trial balance, how confident are you with these accounting records? Were you able to get your trial balance to balance the first time or did you have to go back and correct errors before it balanced?
If you had to correct errors, how did you go about finding your errors and correcting them?
Chapter 4 practice questions
1 On 20 August, Manav purchased goods on credit from Nadja for $2 800. Nadja offered a 5% cash discount if payment was made by 31 August. Manav paid for the goods on 29 August. What amount did Manav pay for the goods?
A $140
B $2 660
C $2 800
D $2 688
2 A customer was allowed a cash discount by Gretha. How did the customer earn this discount?
A paid the account in cash
B purchased a bulk order
C paid the account within a stated time
D paid immediately when purchasing the goods
3 Which transaction represents a contra entry?
A cash from the till paid into the bank account
B the owner taking cash for personal use
C cash from the till used for general expenses
D cash received from a customer for sales [1]
Chapter 5
Petty cash books
LEARNING INTENTIONS
By the end of this chapter, you will be able to:
• explain why a business maintains a petty cash book
• explain and apply the imprest system of petty cash
• prepare a petty cash book from a given list of transactions and post transactions from the petty cash book to the ledger.
KEY TERMS
petty cash book imprest system analysis columns
Key skills activities
Activity 5.1: Petty cash book
a State three advantages of maintaining a petty cash book.
b Explain the purpose of a petty cash voucher.
c Farah is a sole trader. She operates a petty cash book using the imprest system with a balance of $150 at the beginning of each month. The imprest was restored on 31 July so there is an opening balance of $150 on 1 August. Details of petty cash vouchers presented during August were as follows:
Write up Farah’s petty cash book for August. Use analysis columns for stationery, refreshments, postage, transport and cleaning. Total and balance the book on 31 August 20–4.
TIP
The total of all the analysis columns added together should be the same as the total of the total paid column.
Farah Petty cash book
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d Explain one benefit and one limitation of keeping cash at the business property.
SAMPLE
Activity 5.2: Petty cash book
a Explain the imprest system.
b State two advantages of using the imprest system.
c Aryan keeps an analysed petty cash book using the imprest system. The amount of the imprest is $200. He provided the following information:
Prepare Aryan’s petty cash book for the month of February 20–3. The petty cash book should have analysis columns for stationery, refreshments, transport, cleaning and ledger accounts. Balance the petty cash book on 28 February and carry down the balance. Make the entry on 1 March 20–3 to restore the petty cash imprest amount from the bank. (Complete this question using the petty cash book template.)
Every transaction which involves a payment must be entered in two columns. The payment is always entered in the total paid column and its relevant analysis column.
TIP
Activity 5.3: Petty cash book and ledger accounts
Nur maintains a petty cash book using the imprest system. The petty cash book operates with an imprest of $220.
On 1 August 20–5, Nur had $51 in her petty cash box. She provided the following information for the first month of August 20–5.
Aug 1 Petty cashier received cash from the bank to restore the imprest
3 Bought stationery, $23
9 Paid H Ellis, a trade payable, $34
14 Paid for vehicle fuel, $27
20 Paid cleaner’s wages, $26
25 Purchased postage stamps, $4
30 Received cash from C Mackenzie, a trade receivable, $28
a Prepare Nur’s petty cash book for August 20–5. Use analysis columns for travel, stationery, cleaning, postage and ledger accounts. Balance the petty cash book at 31 August 20–5 and bring down the balance at 1 September 20–5. Restore the petty cash to the imprest amount. (Complete this question using the petty cash book template.)
b Post the analysis columns to the appropriate accounts in Nur’s ledgers. (Complete this question using the ledger account template.)
c State where the double entry will be found for the restoration of the imprest amount on 1 September 20–5.
d Identify the section of Nur’s statement of financial position at 31 August 20–5 in which petty cash would appear. State the amount of petty cash which would appear.
SELF-ASSESSMENT
In Activity 5.3 you restored the imprest at the start of the month and the end of the month. Do you understand the imprest system, how to record it and why it is used in business? If you are still struggling with this concept, consider ways to improve your understanding.
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Activity 5.4: Cash book and petty cash book
Ahmed is a trader. His financial year ends on 31 October.
Ahmed maintains a three-column cash book and a petty cash book. The petty cash book operates with a monthly imprest of $150. Petty cash is used to make all payments under $70.
On 1 October 20–8, Ahmed had a petty cash balance of $35, a bank balance of $1 045 and a cash balance of $290.
Ahmed had the following transactions in October 20–8:
Oct 1 Petty cash imprest restored from the business bank account
2 Paid employee’s travel expenses, $38
6 Paid wages, $270
10 Paid M Parsons, $63
14 Cash sales, $360
18 Purchased stationery, $17
21 Paid office expenses, $120 cash
25 Received $230 from M Bester, after deducting $20 cash discount
27 Paid postage cost, $26
28 Bought equipment, $1 300, and paid by electronic bank transfer
Prepare the books by recording these transactions in the three-column cash book and petty cash book. Balance the books and bring down the balances on 1 November 20–8. Use analysis columns for travel, postage and stationery, and ledger accounts for the petty cash book. (Complete this question using the cash book and the petty cash book templates.)
SELF-ASSESSMENT
Having completed Activity 5.4, how has your understanding improved on the difference between a cash book and a petty cash book, and why the two books are required for accounting records?
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Chapter 5 practice questions
1 A trader maintains a petty cash book using the imprest system. The imprest amount is $140. The petty cash transactions during the month of November were: $ Payments: Postage 15 Cleaning 30 Travel 48 Payment to a supplier 32
Receipt from a customer 20
How much was given to the petty cashier on 1 December to restore the imprest?
A $15
B $105
C $35
D $140
2 Which transaction would not belong in a petty cash book?
A payment for postage
B payment for tea
C payment for loan interest
D payment for cleaning
3 What is an advantage of the imprest system of petty cash?
A Petty cash expenditure can be controlled.
B The amount reimbursed is the same each month.
C It ensures fraud cannot take place.
D Petty cash vouchers are not required. [1]
Section 1 practice questions
1 Bayani is a trader. The balances on Bayani’s cash and bank accounts on 1 April 20–5 were: $ Bank 760 Cash 240
The following transactions took place in April 20–5:
April 2 Paid rent, $560, by direct debit
4 Bought goods on credit from Joshua, list price $240
5 Sold goods on credit to Joselito, list price $120
8 Received $130 cash for the sale of old equipment
11 Returned goods to Joshua, list price $40. These goods were purchased on 4 April
12 Paid $100 to Joshua by bank transfer
15 Paid office expenses in cash, $53
18 Cash sales, $90
21 Purchased goods on credit from Joshua, $320
24 Joselito paid by cheque for the goods he purchased on 5 April, after deducting cash discount of 5%
27 Sold goods on credit to Joselito, $140, offering him a discount of 2% if he paid within 21 days
29 Paid Joshua $304 by credit transfer, in full settlement of the purchases made on 21 April
a Prepare Bayani’s cash book. Balance the cash book and bring down the balances on 1 May 20–5. (Complete this question using the cash book template.) [11]
b Prepare the ledger account of Joshua for April 20–5. Balance the account and bring down the balance on 1 May 20–5. The balance on 1 April 20–5 was $135. (Complete this question using the ledger account template.) [4]
Bayani is considering whether he should pay his trade payables in time to receive the cash discount, or if he should wait to receive his payments from trade receivables before he pays his trade payables.
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c Advise Bayani on whether he should pay his trade payables and receive the discount, or wait until he has received his payments from the trade receivables. Justify your answer.
Section 1 practice questions
20]
Improve this answer
This is a sample answer to practice question 1b.
Your challenge
See whether you can improve this answer. It has not taken the discount into account in the compilation of the ledger account.
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2 Khalid maintains a petty cash book using the imprest system. The petty cash book operates with an imprest of $180.
On 1 June 20–7, Khalid had $36 in her petty cash box. She provided the following information for June 20–7:
June 1 Petty cashier received a cheque to restore the imprest
4 Paid travel expenses, $14
10 Paid office cleaning, $26
16 Paid for stationery, $8
21 Paid T Erasmus, a trade payable, $37
27 Purchased vehicle fuel, $29
29 Received cash from M Louw, a trade receivable, $18
30 Paid cleaner’s wages, $34
a What type of financial transactions are recorded in the petty cash book?
b Prepare Khalid’s petty cash book for June 20–7. Use analysis columns for travel, stationery, cleaning, and ledger accounts. Balance the petty cash book at 30 June 20–7 and bring down the balance at 1 July 20–7. Restore the petty cash to the imprest amount. (Complete this question using the petty cash book template.) [12]
c Where are the balances of the petty cash book transferred to at the end of the period?
d Post the analysis columns to the appropriate accounts in Khalid’s ledgers. (Complete this question using the ledger account template.) [5]
[Total: 20]
[1]
[2]