Preparing the Financial Statements

Preparing the Financial Statements

After checking for Mathematic errors, the financial statements will be prepared

Checking the Accounts

Trial Balance

After recording the transactions in the journal and posting them to the ledgers accordingly, the business will prepare a Trail Balance, which is a summary of the balance of each ledger account in the General Ledger. It is also used to check for any Mathematical errors made

Identifying and Recording of Transactions

Recording Business Transactions

A business needs to record down the source documents in an orderly manner and not keep a stack of it. Business transactions are recorded at their original cost stated in the source documents

 

Source Documents

A source document has financial information like the date, the description, the value etc. of the transaction

Source documents are important because the source documents has information of the transaction. So this can be

1. An evidence that the transactions take place
2. An accurate information
3. Parties involved involve in the transaction are clear about the details of the source documents including the value, the reason etc. of the transaction

Invoices contains information about credit purchases and sales. An invoices would be issued to the buyer when the seller sell goods or provide services to the buyer and the buyer will pay the money at a later date. The invoice states the amount of money the buyer will pay at a later date to the seller. The seller would issue the buyer a copy of the invoice. The buyer will keep a copy of the invoice while the seller will keep the original invoice

 

Credit note contains information about credit purchases and sales. A credit note would be issued to the buyer when the buyer refund the goods after the credit sales. The credit note states the amount of money reduced from the invoice issued previously during the sale. The buyer will pay a lower sum of money to the seller. The seller would issue the buyer a copy of the credit note. The buyer will keep a copy of the credit note while the seller will keep the original credit note

 

Debit note contains information about credit purchase and sales. A debit note would be issued to the buyer when the buyer paid lesser money than the actual price after the credit sales. The debit note states the amount of money added on to the invoice issued previously during the sale. The buyer will pay a higher sum of money to the buyer. The seller would issue the buyer a copy of the debit note. The buyer will keep a copy of the debit note while the seller will keep the original debit note

 

Receipt contains information about cash purchase and sales. A receipt would be issued to the buyer when the seller sell goods or provide service to the buyer and the buyer pays the money during the purchase. The buyer can pay the seller by cash, cheque or electronic bank transfer. The seller would always issue a receipt to the buyer and the buyer would keep the original copy of the receipt while the seller would keep a copy of the receipt

 

Remittance advice, payment voucher and receipt contains information about the payments for the credit purchases and the collections for credit sales. The business will prepare a payment voucher and a cheque when the buyer pays the money at a later date. The payment voucher contains a remittance advice which states the amount of money owed and money paid. The payment voucher is kept in the business while the cheque and remittance advice are given to the seller. The buyer can also pay by electronic bank transfers besides cheque. The buyer issue the remittance advice and cheque if they pay by cheque. The seller deposit the cheque into the bank account and keep the remittance advice. It is not necessary to issue a receipt because the bank records for payment are evidence of the payment

 

Bank Statement contains other information of collections and payments. The business keeps most of the money in the bank. A bank statement would be issued to the business either weekly or monthly. The bank statement states the deposits and the payments from the bank account and remaining amount of money in the bank account. It also states the electronic transfers in and out of the bank account, bank charges, interest income, interest expense etc. The business uses the bank statements to record the amount of money collected or paid by electronic bank transfer as well as bank charges, interest income and interest expenses.

 

Journals

Business transactions are first recorded in journals which records all business transactions that happened during a period of time, like a diary

Special Journals consist of

1. Purchase Journal which records all credit purchase of goods. Original invoices from the suppliers are the necessary source documents
2. Purchase Returns Journal which records all the refund of goods bought on credit. Original credit notes from the suppliers are the necessary source documents
3. Sales Journal which records all credit sales of goods. A copy of the invoice sent to the customer are the necessary source documents
4. Sales Returns Journal which records all refund of goods sold on credit. A copy of credit notes sent to the customers are the necessary source documents.

Cash Book records all cash and cheques that are received or paid. A copy of the receipt issued to customers, remittance advice from credit customers, bank statements, payment vouchers, original receipts from suppliers and bank statements are the necessary source documents

 

General Journals are all-purpose journal used to record transactions not recorded in the Special Journals and the Cash Book. The followings are transactions recorded in the General Journal

1. Non-cash assets contributed by the owner
2. Non-cash assets taken by the owner
3. Purchases and sales of non-current assets on credit terms
4. Uncollectible debts
5. Dividends when they are declared
6. Adjusting entries at the end of the financial period
7. Correcting accounting errors
8. Closing entries.
9. Transfer profit or loss from the profit and loss account to the capital or retained earning accounts

Business transaction recorded in the General Journal is recorded in chronological order. Each journal has a brief description or explanation of the transaction  known as narration

 

Ledgers

Ledgers keep the business transaction grouped based on the account. The transactions in the journals are posted to the ledgers where the transactions are recorded in the ledgers. There are 2 type of ledgers

1. General Ledger consist of all the ledger account except individual trade receivables and individual trade payment ledger account. Purchase Journal, Purchase Returns Journal, Sales Journal, Sales Return Journal, Cash Book and General Journal are related to the General Ledger
2. Subsidiary Ledgers consist of Trade Receivable Ledger and Trade Payable Ledger

• Trade Receivable Ledger consist of all the individual trade receivable ledger accounts. Sales Journal, Sales Return Journal, Cash Book and General Journal are related to the Trade Receivable Ledger
• Trade Payable Ledger consist of all the individual trade payable accounts. Purchase Journal, Purchase Returns Journal, Cash Book and General Journal are related to Trade Payable Ledger