Financial Data Analysis

In this section, we will look at financial data analysis and the fundamental principles that underpin it. You will be introduced to the important rules of double entry and how to accurately analyse and record financial transactions in the books of accounts. This will help you to understand how business transactions affect the accounting equation by demonstrating changes in the values of assets, capital and liabilities; as well as how to record business transactions into the various day books and ledgers, balance off accounts and prepare a trial balance. This knowledge is crucial for further financial reporting and connects with various aspects of business management and decision- making.

KEY IDEAS

• Accounting equation is a formula that shows that the sum of a company’s liabilities and owner’s equity should be equal to its total assets thus Assets = Liabilities + Owner’s equity (capital).

• Assets are things owned by a business that hold value.

• Liabilities are what a business owes, so may be a debt or obligation to another person or organisation

• Owners’ equity or capital are the resources that belong to the owner and are supplied to the business.

• Resources are materials, or capabilities (e.g. human, financial etc.) that are available to be utilised by a business to achieve a set target or carry out operations.

• Transaction is an event or activity that involves the exchange of goods, services, or funds between two or more parties.

Before we look at the accounting equation, it is important to understand some key terminology.

Assets Assets are resources owned by an individual or a business that have economic value and can provide future benefits. Assets include cash, property, equipment, investments, and intellectual property. They are valuable because they can be used to generate income, provide benefits, or be converted into cash. They are essential for generating revenue and can be classified as:

Current Assets

A current asset is a type of asset that a company expects to change into cash, sell, or consume within one year or within its normal operating cycle. Current assets are important for maintaining daily operations and liquidity. Examples: Cash, accounts receivable, inventory, short-term investments, prepaid expenses.

Non-Current Assets (Fixed Asset)

Non-current assets, also known as long-term assets, are assets that a company intends to hold for a long period, typically more than one year. These assets are long-term and not expected to be converted into cash within a year. Non-current assets are important for the company's operations and are usually used to generate revenue over a period of time.

Examples: buildings, machinery, land, patents, trademarks, long-term investments.

Tangible Assets

Tangible assets are physical, measurable assets that a business owns and uses in its operations to generate income. They have a physical form and can be touched, seen, and felt. Examples: buildings, land, machinery and equipment, vehicles, furniture and fixtures, inventory, etc.

Intangible Assets

Intangible assets are non-physical assets that provide long-term value to a business. Unlike tangible assets such as machinery or buildings, intangible assets do not have a physical form but are valuable because of the rights, privileges, or competitive advantages they confer. Examples: Goodwill, trademarks, brand, patents, copyrights, etc.

It is important for businesses to be able to calculate the total value of all of their assets.

This can be done using the following formula.

Total Assets = current assets + non-current assets

Example

A company has the following assets:

Cash GH¢50,000

Account receivables GH¢20,000 Inventory GH¢35,000 Prepaid expenses GH¢6,000 Value of building GH¢230,000 Long term investments GH¢35,000 Intangible assets GH¢93,000.

It is useful to first categorise each asset as “current” or “non-current”.

Calculate the sum of each type of asset, then add the two figures together to find the total value of all assets as shown in Table 2.1.

Table 2.1

Current assets GH¢ Non-current assets GH¢ Cash 50,000 Account receivables 20,000 Building 230,000 Inventory 35,000 Prepaid expenses 6,000 Total 111,000 Long term Investments 35,000 Intangible assets 93,000 Total 3580,000 Total assets = 111,000 + 358,000 = 469,000 Liability A liability is a present obligation of a business arising from past events. A liability can also be a company’s obligation to pay money to other people or businesses in the future. It is the amount a business entity or company owes to other people. Types include:

Current Liabilities (short-term liabilities) These are obligations that are expected to be settled within one year.

Examples:

1. Accounts Payable: Money owed to suppliers for goods and services received.

2. Short-term Loans: Loans that need to be repaid within a year.

3. Accrued Expenses: Expenses that have been incurred but not yet paid, like wages or taxes.

Non-current liabilities (Long-term Liabilities) These are obligations that are due beyond one year.

Examples:

1. Long-term Loans: Loans that have a repayment period longer than one year, such as a mortgage.

2. Bonds Payable: Debt securities issued to investors that must be repaid at a future date.

3. Deferred Tax Liabilities: Taxes that are owed but not due until a future date.

Capital Capital (owners’ equity) is the amount of resources supplied by the owners of a business entity. Owner’s equity shows how much of the business the owner really owns after paying all liabilities. It is important because it helps to know business’s real worth and how much one has invested or gained over time.

Activity 2.1

Your teacher will lead a whole class discussion on the components of the accounting equation.

Record in your books the meaning of the following terms:

1. Asset

2. Liability

3. Capital

Activity 2.2 Components of Accounting Equation

1. Your teacher will arrange you in small groups of no more than five.

2. In your groups, identify any business enterprise in your community or on the school compound and note down the following:

a. Find out the resources that help the business to operate.

b. Categorise each of resource (e.g. asset, liability etc.)

c. Find out the resources of the business are financed.

d. Write down the resources you have identified and its sources on flash cards in the form of table below.

S/N RESOURCE CATEGORY OF RESOURCE

Building Asset (non-current asset) How business resources are financed

3. Share and compare the results of your findings with another group for discussion.

The Accounting Equation

The accounting equation is the backbone of accounting. It shows the relationship between what a business owns, owes, and the owner’s stake in it. Think of it as a balance scale. On one side, you have assets — the things your business owns, like cash, equipment, or inventory. On the other side, you have liabilities — what your business owes to others, such as loans or unpaid bills — and owner’s equity, which is the owner’s share or stake in the business.

The accounting equation is a formula that shows that the sum of a company’s liabilities and owners’ equity should be equal to its assets. This equation provides a clear summary of how a business’s assets are funded and is a way of demonstrating that credits and debits will be equal. This underpins the double entry principle of accounting.

This helps business owners and accountants track exactly how much the business owns, owes, and how much the owner has invested. It helps to understand and record every financial activity in a way that keeps the books accurate and balanced.

The accounting equation can be rearranged to allow you to calculate one of the values if the other two are known. For example:

1. Assets = Capital + Liabilities

2. Liability = Assets – Capital

3. Capital = Assets – Liabilities Initially, a business requires resources; these could come from its owners or other individuals. When the owner personally provides all the necessary resources, the accounting equation is:

Assets = Capital (Owner’s Equity) In this case, the total assets of the business are equal to the owner’s equity (capital), showing that everything the business owns is funded solely by the owner’s contribution.

When a business receives resources from sources other than the owners, the accounting equation is:

Assets = Liabilities This means that all the assets the business owns are financed through debts or obligations to external parties, rather than the owner’s own funds.

However, the accounting equation is essentially a formula showing that a company's total assets equal the sum of its liabilities and owner’s equity:

Assets = Capital (owner’s equity) + Liabilities This means that everything the business owns is financed either through what the owner invests or through debts owed to others.

Activity 2.3 The Accounting Equation

1. In groups, study the table below which shows the end of year values of the capital, assets and liabilities of Mr. Osei Agyin who operates a cold store.

2. Use your knowledge of the accounting equation to calculate the missing values.

3. Share your answers with another group.

Year Capital Assets Liabilities

2010 GH¢4,500 ? GH¢2,800 2011 ? GH¢5,500 GH¢3,000 2012 GH¢3,550 GH¢4,060 ?

2013 GH¢5,100 GH¢6,800 ?

2014 ? GH¢7,900 GH¢2,000 2015 ? GH¢8,800 GH¢1,300 2016 GH¢7,700 GH¢10,200 ?

2017 GH¢7,900 ? GH¢4,800 2018 ? GH¢10,530 GH¢2,100 2019 GH¢9,000 ? GH¢4,980 2020 GH¢9,700 ? GH¢1,400 Importance of the Accounting Equation ₁. Fundamental principle: The accounting equation is key in accounting because it highlights the double-entry system. It ensures that every financial transaction keeps the balance between a company’s assets and liabilities, maintaining accuracy and consistency.

2. Decision making: It offers valuable information about a company’s financial position, supporting decisions related to budgeting, investments, and strategic planning.

3. Financial analysis: Maintaining the balance in the equation allows stakeholders like investors, creditors, and management to assess the company’s financial health and stability effectively.

4. Error detection: Any imbalances in the accounting equation show potential recording mistakes, making it an essential tool for identifying errors.

5. Accountability: It promotes transparency and responsibility by clearly illustrating how assets are funded through equity and liabilities, as well as how resources are distributed within the business.

Activity 2.4 Importance of the Accounting Equation

1. Find a partner to work with. In your pairs, discuss three reasons why the accounting equation is important.

2. Record your explanations in a table such as the one below.

3. Share your answers with another pair for feedback.

Importance of Accounting Equation

Every time a business conducts a transaction, it affects the accounting equation and hence, the statement of financial position.

Table 2.2 illustrates how each transaction affects the three components of the accounting equation, breaking down their individual effects.

Table 2.2

Transaction Effect on Accounting Equation

Assets Liabilities Capital

1 Started business with cash Increase in assets (cash) Increase in capital 2 Bought machinery on credit from APC Increase in asset (machine) Increase in liability to APC 3 Deposited cash at bank Increase in asset (Bank) Decrease in asset (Cash) 4 Bought motor van paying in cash Increase in asset (motor van) Decrease in asset (Cash) 5 Owner takes money out of business bank account for his own use Decrease in assets (bank) Decrease in capital 6 Owner pays suppliers from personal accounts Decrease in liability (creditors) Increase in capital 7 Pays suppliers by cheque Decrease in assets (bank) Decrease in liabilities (creditors) 8 Owner deposits more personal money into the business bank accounts Increase in assets (bank) Increase in capital 9 Withdraw cash from bank and placed it in cash box Increase in asset (cash) Decrease in asset (bank) 10 Obtained loan from bank Increase in asset (bank) Increase in liability (loan) 11 Owner invests GH¢10,500 in cash into the business.

Increase in assets by GH¢10,500 (Cash) Increases in capital by GH¢10,500 (owner’s equity) 12 Purchases equipment for GH¢5,000 in cash Increase in assets by GH¢5,000 (Equipment) Decrease in assets by GH¢5,000 (Cash) 13 The business takes out a loan of GH¢15,000 Increase in assets by GH¢15,000 (Cash) Increase in liabilities by GH¢15,000 (Loan Payable) 14 Receives GH¢1,000 in cash from a customer for services rendered Increase in assets by GH¢1,000 (Cash) Equity increases by GH¢1,000 15 Pays GH¢3,000 for operating expenses Assets decrease by GH¢3,000 (Cash) Decreases in capital GH¢3,000 (owner’s equity)

Activity 2.5 Effects of business transactions on the accounting equation

1. Turn to the person sat next to you and in your pair, study the accounting transactions in each of the scenarios below.

Scenario 1 Ama has a small business running a food stall at a local market. She:

a. Buys ingredients for GH¢150, paying cash

b. Purchases goods from suppliers for GH¢250 on credit to be repaid the following week

c. Pays business expenses of GH¢20 in cash

d. Earns GH¢400 in sales for the week in cash

e. Repays her supplier GH¢100 in cash Scenario 2 The following transactions relate to Mr. Cachito, a sole trader for the month of March 2024. March 1ˢᵗ: Started business with GH¢1,000 2ⁿᵈ: Bought goods worth GH¢520 on credit from Kwaku Acheampong Ventures 4ᵗʰ: Contracted a loan of GH¢600 and deposited it in his bank account 5ᵗʰ: Bought motor vehicle GH¢400 paying by cheque 6ᵗʰ: Cash purchases GH¢270 7ᵗʰ: Paid Kwaku Acheampong Ventures GH¢520 cash 8ᵗʰ: Withdrew GH¢200 for private use from the bank 9ᵗʰ: Bought goods on credit from Atanga Enterprise GH¢300 11ᵗʰ: Sold goods for GH¢3,550 and the money banked.

13ᵗʰ: A supplier was paid cash of GH¢1,000.

17ᵗʰ: One of the receivables gave a cheque for GH¢2,800.

20ᵗʰ: Bought office equipment, paying by cheque, for GH¢8,500.

24ᵗʰ: Bought goods on credit from Edzisem to the total of GH¢500.

27ᵗʰ: Repaid Edzisem by cash.

2. For each scenario, prepare a table to show the effect (increase or decrease) of the transactions on assets, capital (owner’s equity) and liabilities.

3. Compare and discuss your answer with another pair.

You may use the table below for your work.

Date (N/A for scenario 1) Transaction Effect on Accounting Equation Assets Liabilities Capital March 1 2 4 5 6 7 8 9 11 13 17 20 24 27

Activity 2.6

1. Practise using the accounting equation to calculate an organisation’s assets, liabilities and capital and analyse scenarios to identify how these are affected by different transactions. Examples have been provided below but your teacher may provide you with additional scenarios to work through.

2. Present your solutions to the class on flip chart paper.

Example 1

Use your knowledge of the accounting equation to complete the following table Asset Capital Liabilities A ? GH¢5,200 GH¢1,550 B GH¢7,750 ? GH¢2,225 C GH¢6,400 GH¢5,050 ?

D ? GH¢10,420 GH¢7,850 E GH¢5,550 ? GH¢3,250 F GH¢9,775 GH¢3,250 ?

Example 2

Akua is a baker who runs a small business called "Akua's Artisan Bakes" from a market stall. In the first month of business Akua records the following transactions:

a. Akua transfers GH¢10,000 from her personal bank account into a new business bank account to purchase a professional-grade mixer.

b. She buys a bulk order of flour and sugar from a supplier for GH¢2,000 on credit, with the full amount due in 60 days.

c. A customer pays GH¢3,500 in cash for a large celebration cake.

d. Akua pays her market stall rental fee of GH¢900 in cash.

Explain how each transaction affects Akua’s assets, liabilities, and capital.

Justify your answers.

Ledger A ledger is the main record book where all the financial transactions of a business are recorded and summarised. Every transaction that happens—whether a sale, purchase, or payment—is first recorded in a journal. Then, these journal entries are transferred to the ledger, which groups all similar transactions into specific accounts. For example, all cash transactions go into the cash account, while sales are recorded in the sales account.

This organised system helps accountants and business owners easily track how much money is coming in and going out, what the business owns, and what it owes. The ledger also provides the basis for preparing important financial statements like the balance sheet and income statement. It ensures that every financial activity is properly recorded and that the overall financial position of the business is clear and easily understood.

The ledger is divided into two - personal and impersonal.

Personal ledger A personal account is a type of account that records transactions related to individuals, firms, or organisations with which a business interacts. It reflects the relationships between the business and the people or entities involved in its financial activities.

Personal accounts help track the financial dealings a business has with other individuals and entities, making transactions clear and organised.

For example, personal accounts include accounts of customers, suppliers, or any other stakeholders. When the business receives money from a customer, or pays a supplier, these transactions are recorded in their respective personal accounts.

The personal ledger is subdivided into two – receivables and payables.

Receivables: These are the persons, companies or partnerships that owe the business.

That is, the firm has sold goods to these people on credit, and they have not paid.

Payables: They are the persons, companies or partnerships to whom the business owes. That is, they are the suppliers of the firm. The firm has purchased goods from them on credit and has not paid.

Impersonal ledger An impersonal account is a type of personal account that does not belong to any particular individual or organisation directly. Instead, it represents a specific obligation, benefit, or a general relationship with an entity. For example, accounts like prepaid expenses or accrued income are impersonal accounts. They represent certain benefits or obligations that relate to some person or organisation but are not tied to any specific individual. These accounts act as placeholders for specific transactions or balances that will finally be settled or transferred.

Impersonal accounts help in accurately recording and managing resources or obligations that are not directly linked with a particular individual but are important for financial reporting and examination.

The impersonal ledger is also divided into two - real and nominal accounts.

Real accounts: These contain transactions in property and material objects that are tangible. It includes the accounts of buildings, cars, cash, machines, etc. They are permanent accounts that carry forward balances from one accounting period to the next.

Basically, they represent things the business owns or controls.

Nominal accounts: These are used to record losses, expenses, income and gains.

For example, rent and rates, salaries and wages, insurance, etc. They are temporary accounts that are closed at the end of each accounting period to determine the net profit or loss.

The diagram below shows the divisions of the ledger.

Account An account is a record used to organise and track all the financial transactions related to a specific group of items in a business.

Think of it as a labelled folder where all activities — like sales, expenses, assets, or liabilities — are recorded.

For example, there could be an account for cash, one for inventory, or one for salaries.

Every time money is received or spent related to that category, it’s recorded in the respective account.

This helps in keeping detailed and organised information about each part of the business’s finances. An account helps business owners and accountants see how much they have, owe, or earn in each area. It makes the process of managing finances clearer and manageable, ensuring accuracy and easy reference.

Activity 2.6 The Ledger

1. Arrange yourself in small groups of no more than five.

2. In your groups,

a. explain what is meant by a ledger.

b. identify examples of the different types of ledgers and discuss how they are used.

3. Share your responses with other groups in your class.

Activity 2.7 Types of Account

1. Copy the table below in to your workbook and complete it to identify which type of account (real, nominal or personal) each of the following transactions should be credited or debited to within a ledger.

Transaction Personal Real Nominal

Purchased land for cash.

Hired a bulldozer and paid cash.

Allowances of workers paid by cash.

Postage bill paid by cash Interest on investment received by cheque.

Received cheque from a debtor Received dividend by cheque.

Purchase office machine on credit.

Paid electricity bill to VRA by cheque.

2. Compare your answer with a colleague for feedback. Do you agree? If not discuss your rationales and seek guidance from your teacher if you are still unsure.

The Double Entry Principle

The double-entry principle is a primary accounting rule which states that every business transaction must be recorded twice—as a debit and as a credit. This means for every debit entry; there must be a corresponding credit entry and vice versa.

Often called the ‘Golden Rule of Accounting,’ this principle ensures the accuracy of financial records. When accounts are balanced correctly, the total amount of debits should always equal the total amount of credits, maintaining the accounting equation.

The double-entry system not only helps in maintaining balanced books but also provides a complete view of a company's financial position, making it a basic concept in accounting practice.

Rules of Entry in the Ledger

An account is divided into two parts. The left part is called the debit side while the right part is called the credit side.

Below is a sample of a ledger (also known as a T – account) Debit side Credit side Date Details Amount - GH¢ Date Details Amount - GH¢ 01/07/20X1 Sales XXX 01/08/20X1 Cash XXX A debit entry represents

1. an increase in the value of an asset

2. an increase in an item of expenditure

3. a decrease in the amount of liability A credit entry represents:

1. a decrease in the value of an asset

2. an increase in an item of income

3. an increase in the amount of liability This can be broken down for each type of account within the ledger.

For personal accounts, the rule is Debit – the receiver of value, Credit – the giver of value For example, paid Ven by cheque:

Debit Credit

Ven’s account Bank account For real accounts, the rule is Debit- what comes into the business, Credit- what goes out of the business.

For example, purchase of a building by cheque:

Debit Credit

Building account Bank account For nominal accounts, the rule is Debit- all expenses and losses, Credit- all incomes and gains.

For example, discount received from Baba Co. Ltd:

Debit Credit

Baba Co Ltd. account Discount received account

Activity 2.8 The Double Entry Principle

1. Your teacher will arrange you in small groups.

2. In your groups, agree and write down in your workbooks the principle of the double entry rule of accounting.

3. Use the discussion with your peers to ensure you are clear on the meaning of “credit” and debit” in the context of the double entry principle.

4. If you are unsure, speak to your teacher to clarify.

Activity 2.9 Recording Transactions Part 1

1. In your groups, draw a template ledger, or “T account” on a piece of flip chart paper.

2. Review the following business transactions for MFS Enterprise.

a. Started business with GH¢2,000 cash.

b. Purchased a cargo truck with GH¢500 cash.

c. Bought furniture for GH¢120 cash.

d. Purchased goods worth GH¢2,500 by cheque.

e. Sold goods worth GH¢900 receiving cash.

f. Purchases inventory valued at GH¢2,000 on credit

g. Sells products worth GH¢5,000 in cash.

h. Pays GH¢3,000 in salaries to employees.

i. Takes a loan of GH¢10,000 from a bank.

j. Pays GH¢500 for utility expenses.

3. Record each transaction in the format of the T account.

4. Compare your answers with another group for feedback.

5. Present your findings to your teacher.

Activity 2.10 Recording Transactions Part 2

1. You will now have the chance to apply your understanding of the double entry principle to practice recording transactions.

2. Choose a partner to work with and attempt each of the examples below.

Example 1

Kwame is starting a new business. Record the following transactions in the appropriate accounts for his venture:

a. Started business with GH¢1,000 cash.

b. Bought a motor van with cash GH¢200.

c. Purchase of raw materials GH¢100 by cash.

d. Bought inventory by cheque GH¢3,500.

e. Sold goods worth GH¢780 by cash.

Example 2

Ama starts a new mobile money vending business and has listed the following transactions for her first month:

a. Starts the business by depositing GH¢5,000 of savings in to her bank account

b. Purchased a small kiosk from which she can run her business for GH¢2,000.

She paid by cheque.

c. Bought GH¢1,500 worth of inventory on credit

d. A customer withdrew GH¢300 on which Ama received GH¢5 commission in cash.

e. Paid a supplier GH¢500 by bank transfer

3. Record your answers on flip chart paper and be prepared to present your work to the class for discussion and feedback.

Daybooks A daybook is a book in which daily financial transactions are first recorded in the order in which events happen. The daybook, also known as book of original entry or prime book, records important information about each transaction including the date, description and amount involved. It serves as a source document for the recordings in the ledgers.

Types of Day Books

There are different types of day books and these include.

1. Sales Day Book

The sales daybook, also known as sales journal is used to record all credit sale transactions made by a business. It serves as a detailed record of sales activities, typically including information such as the date of the sale, customer details, items sold, quantities, prices, and total amounts.

The sales day book helps in maintaining accurate records for accounting purposes and facilitates the preparation of financial statements.

The source document used for recording transactions in the sales day book is the sales invoice. Table 2.3 shows the format of a sales daybook or journal and outlines the information to be recorded in each column.

Table 2.3

S/N Date Particulars Ledger

Folio Invoice

number Amount – GH¢ Details Net amount 1 Date of sale Name of customer and details of goods sold Reference number Detailed calculations Net amount of the invoice 2 3

2. Purchases Day Book

The purchases daybook, also known as purchases journal is used to record all credit purchase transactions made by the business. It serves as a subsidiary book that helps in organising and summarising purchase transactions before they are posted to the ledger account. Typically, the purchases day book records details such as the date of purchase, supplier’s name, invoice number, description of goods, and the amount.

This organised way of recording helps keeps track of credit purchases accurately, makes it easier to match accounts, and helps manage the company's buying activities efficiently. The source document used for recording transactions in the purchase’s day book is the purchase invoice. Table 2.4 shows the format of a purchases daybook or journal and outlines the information to be recorded in each column.

Table 2.4

S/N Date Particulars Ledger

Folio Invoice

number Amount – GH¢ Details Net amount 1 Date of purchase Name of supplier and details of goods bought Reference number Detailed calculations Net amount of the invoice 2 3

3. Return Inwards Day Book

The return inwards day book is also known as the sales returns journal. It is used to record the goods which are returned to a business by a customer. It ensures that the total sales figures are corrected to reflect actual revenue, providing a true picture of the company's income, helps in tracking the volume and reasons for returns, helping better inventory management and quality control.

The source document used for recording transactions in the sales return (return inwards) day book is the credit note. Table 2.5 shows the format of a return inwards day book or sales return journal and outlines the information to be recorded in each column.

Table 2.5

S/N Date Particulars Ledger

Folio Credit note number Amount – GH¢ Details Net amount 1 Date of sale Name of customer who returned the goods Reference number Detailed calculations Net amount on the invoice 2 3

4. Return outwards day book The return outwards day book is also known as the purchases returns journal. It is used to record the goods which are returned to a supplier by the business.

This record is important because it ensures that the business can easily track what has been sent out, verify transactions, and maintain accurate financial records. It also helps in reconciling accounts and provides audit path for future reference.

The source document used for recording transactions in the purchase return (return outwards) day book is the debit note. Table 2.6 shows the format of a return outwards day book or purchases return journal and outlines the information to be recorded in each column.

Table 2.6

S/N Date Particulars Ledger

Folio Debit

note

number Amount – GH¢ Details Net amount 1 Date of purchase Name of supplier to whom goods were returned Reference number Detailed calculations Net amount on the invoice 2 3 Discount A discount is a reduction in the selling price of goods or services offered by a seller to a buyer. It is a way to encourage purchases, reward loyalty, or clear inventory. The amount of discount will affect how you record figures in both daybook and cashbooks Discounts can be given for various reasons and can be of different types:

A trade discount is a reduction in the price of goods offered by a seller to a buyer, typically a retailer or distributor, as a part of business-to-business transactions. It is usually given at the time of sale and is not recorded separately in the accounting books.

The trade discount is deducted directly from the invoice amount, and the buyer pays the net price.

A cash discount is a reduction offered to a buyer if they pay their invoice promptly, often within a specified period. The primary purpose is to encourage early payment.

Unlike trade discounts, cash discounts are recorded separately in accounting records as an incentive for quick settlement of accounts receivable.

Activity 2.11 Daybooks

1. Your teacher will lead a discussion to introduce the different types of day book.

2. Study the format of each type and in your workbook record two purposes of:

a. Sales day book

b. Purchases day book

Activity 2.12 Recording Transactions in Day Books

1. Study the formats of the sales, return inwards, purchases and return outwards day books.

2. Create a template for each of the daybooks in your workbook for you to refer to.

3. Your teacher will arrange you in small groups of no more than five. Read through the following transactions and record each one in the relevant template on flip chart paper.

NaCCA Company Limited deals in general merchandise. Listed below are the transactions for the month of May, 20X1.

May 1: Sold goods to Joshua GH¢10,000 less 10% trade discount.

May 4: Purchased from Koranteng the following:

150 iron rods at GH¢30 each, 100 filters at GH¢25 each, invoice subject to 15% trade discount.

May 6: Purchased from Anaman Ltd. 10 bottles of gin at GH¢35 each.

May 7: Returned 40 iron rods purchased on 4ᵗʰMay, to Koranteng.

May 9: Sold the following to Mary: 250 bags of cement at GH¢20 each, less 20% trade discount, 200 tins of targets at G H ¢15 per ton.

May 18: Mary returned 30 bags of cement bought on the 9ᵗʰof May.

May 20: Sold to Amoah Frempong: 80 iron rods at GH¢50 each; 110 bags of cement at GH¢16 each 250 Filters at GH¢35 each; invoice subject to 15% trade discount.

May 21: Amoah Frempong was allowed 25% reduction on the total invoice price for goods damaged in transit.

May 30: Purchased from Afia Nyamekye: 120 bags of cement at GH¢15 each, 50 gallons of oil paint at GH¢20 each, 300 metal sheets at GH¢18 each.

4. Share your results in a class discussion with your colleagues.

General Journal

The general journal is used to record any transaction which does not pass through a book of prime entry. This is a book in which entries are made before they are posted into the ledgers. The general journal maintains a detailed and orderly record of all financial transactions, ensuring transparency and checking. The detailed entries in the general journal make it easier to identify and correct errors before posting to the ledger.

Example of transactions which are recorded through the general journal are correction of errors and records of non-cash transactions.

The table below shows the format of a general journal.

Date Particulars/ Details of transaction Debit GH¢ Credit GH¢

Activity 2.13 General Journal

1. Arrange yourself in small groups to discuss the purpose of the general journal.

2. Use the information below from the books of Gyasi, a sole trader to prepare a general journal.

GH¢ Cash in hand 150,000 Furniture and fitting 450,000 Debtors:

Ahmed 110,000 Tuffour 95,000

Stock 125,000 Plant and machinery 380,000 Bank overdraft 60,000 Creditors:

Dzifa 50,000 Atiah 30,000

Land and building 450,000

3. Record your answers on flip chart paper and compare your responses with another group. Discuss any discrepancies between your two results and seek clarification from your teacher as needed.

Cash Book

A cash book is used to record details of cash, bank and discount transactions. It is used to record all cash receipts and payments, including bank deposits and withdrawals. It serves as a primary record for cash transactions and helps in maintaining accurate cash flow management. The cash book is typically used by businesses to track their cash position and ensure proper accounting of all cash-related activities.

The source documents for the recording of transactions in the cash book are receipts, pay-in slips, cheques, etc.

The four types of cash books are:

1. Single column

2. Double column

3. Three or triple column

4. Petty cash book Transactions that are entered on both sides of the cashbook, in the cash and bank column, are known as contra entries. Essentially this is where two entries offset each other – a contra entry does not affect a business’s financial position.

Single Column Cash Book

A single column cash book has only one amount column on each of the debit and credit sides. It is either a cash column only or a bank column only. All receipts are entered on the debit side and all payments are entered on the credit side. It functions as both a journal and a ledger, providing a clear record of cash inflows and outflows within a specific period.

This format is typically used by small businesses or for simple cash transactions where only cash receipts and payments are involved, without the need for multiple columns for different types of transactions.

Format of a single column cash book Debit Date Details Ledger Folio Amount GH¢ Credit Date Details Ledger Folio Amount GH¢ Double Column Cash Book The double-column cash book (also known as a two-column cash book) has two columns on both the debit and the credit sides. One to record cash transactions and the other to record bank transactions, allowing for tracking of both cash and bank balances. This format helps in maintaining accurate and organised financial records, facilitating easier understanding and financial analysis.

Format of a double column cash book Debit Date Details Ledger Folio Cash GH¢ Bank GH¢ Credit Date Details Ledger Folio Cash GH¢ Bank GH¢

Activity 2.14 Cash Book

1. Work in pairs and, use the internet or a business dictionary to research the meaning of a cashbook in the context of business accounting.

2. In your workbooks, write down the different types of cashbooks.

3. Explain the uses of each type of cashbook and the source documents for recording information.

4. Create a template for a single and double column cash book that you can refer back to.

Activity 2.15 Cash Books – Recording Transactions

1. Your teacher will arrange you in small groups to analyse financial transactions and record these either in single or double column cash books.

2. Use the templates you have recorded for each type of cash book to record your answers.

Note

Your teacher may assign you one or both of the following examples.

Example 1

Mama Lucy started a business with GH¢50,000 cash on January 2, 20X3.

The following transactions took place during the month of January.

GH¢ Jan 3. Paid rent by cash 2,000 Jan 5. Made cash purchases of 20,000 Jan 6. Sold goods for cash 25,000 Jan 8. Obtained a cash loan from Abena Manu 40,000 Jan 9. Paid transport expenses by cash 1,000 Jan 10. Bought a motor vehicle on credit from Nimako Motors 150,000 Jan 12. Paid motor expenses by cash 3,000 Jan 12. Made cash sales 33,000 Jan 20. Cash purchase 25,000 Jan 22. Paid electricity bill by cash 1,000 Jan 23. Paid wages and salaries by cash 2,500 Jan 24. Took cash for personal use 1,500 Jan 25. Cash sales made 15,000 Prepare a single column cash book for Mama Lucy.

Example 2

SUMASUM Ltd. Recorded the following transactions that took place in May 20X5 May 1: Started business with cash GH¢13,000.

2: Andy lent GH¢5,000 to FRANSMART Ltd. paid by cheque 5: Deposited GH¢5,000 cash into the bank 6: Paid rent by cash GH¢1,000 8: Cash sales GH¢1,900 9: Paid Paul GH¢1,000 by cheque 10: Cash purchases of GH¢1,500 14: Cash sales to Amponsah, GH¢1,950 paid into the bank account 16: Cash sales paid directly into the bank GH¢1,350 18: Paid Bentil GH¢2,500 by cheque 20: Paid wages GH¢3,600 by cheque 22: Paid Andy (loan) GH¢5,000 by cheque 24: Cash sales GH¢1,000 25: Paid motor expenses with cash GH¢1,200 27: Purchased goods from Gyimah GH¢3,000 29: Paid advertising by cash GH¢1,600 30: Paid Gyimah his amount due with cash 31: Withdrew cash of GH¢500 from the bank for business use Prepare a double column cash book for SUMSASUM Ltd.

3. Record your cash book entries on flip chart paper and present your answers to the class for discussion and feedback.

Triple/Three Column Cash Book

A triple/three-column cash book is one in which there are three columns on both the debit and credit side. The first column is used to record cash transactions, the second column is used to record transactions through the bank and the third column is used to record discounts received and allowed.

This format allows for a broad and organised recording of cash transactions, assisting easier tracking of cash inflows and outflows, as well as discounts.

The triple column cash book is particularly useful for businesses that frequently deal with discounts and need detailed cash transaction records for accurate financial analysis.

Discount Received

Discounts received are a reduction on the original price of a product or service, usually given by a supplier. For example, if you buy something worth Gh¢100 and get a 10% discount, you only pay Gh¢90 that is Gh¢100

- Gh¢10 (10% * 100 = 10).

Discount Allowed

Discount allowed are when the supplier of goods or a service grants a payment discount to a customer. This is a reduction in the amount a customer has to pay. For example, if you sell goods worth Gh¢1,200 to a customer and grants a 5% discount, the customer only pays Gh¢1,140 thus Gh¢1,200 - Gh¢60 (5% * 1,200 = 60) Format of a triple column cashbook Debit Credit Date Details Ledger Folio Cash GH¢ Bank GH¢ Discount allowed GH¢ Date Details Ledger Folio Cash GH¢ Bank GH¢ Discount received GH¢

Activity 2.16 Triple/Three Column Cash Book

1. In small groups, list the column headings of a three-column cash book.

2. Explain the differences between a two-column cashbook and a three- column cash book.

3. Describe what is recorded in each of the columns.

You can use the table below to record your answers in your workbook.

s/n Column heading Description A Date This column records the date on which the transaction takes place. It helps in keeping track of when each transaction occurred, providing a sequential order to the entries.

B C D E F

Activity 2.17 Recording Transactions

Working in your groups create a template for a three-column cashbook. You may want to copy this in to your workbook so that you can refer back to it later.

1. Using the template, you have created, prepare a three-column cash book for the month of June, 20X4.

On June 1, KAAKYIRE started with the following balances:

Cash: GH¢5,000

Bank: GH¢10,000

During June, the following transactions occur:

June 3: Sold goods for GH¢2,000, for which you receive GH¢1,000 in cash and the rest by bank transfer.

June 5: Paid GH¢500 by cheque to a supplier.

June 10: Received GH¢200 cash discount for early payment to a creditor.

June 12: Paid rent of GH¢1,000 in cash.

June 15: A customer pays you GH¢3,000 by bank transfer and you allow discount of GH¢50.

June 20: Withdrew GH¢2,000 from the bank for office use.

June 25: Paid salaries of GH¢1,500 in cash.

June 30: Received GH¢500 cash from a customer, allowing a discount of GH¢20.

2. Present your work on flip chart paper to the whole class for discussion.

Petty Cash Book

A petty cashbook is a small ledger used to record minor expenses like postage, stationery and refreshments. The person who manages the petty cashbook and handles these small expenses is known as the petty cashier.

At the start of a period, a fixed amount of money is given to the petty cashier to cover petty expenses. This fixed amount is called an imprest or cash float. The petty cashier uses this money to pay for small expenses of the business. All expenditures are recorded in the petty cashbook to keep track of where the money is going. At the end of a period, the petty cashier is given back the money spent on these petty expenses.

The fund always maintains the same fixed amount, ensuring control and easy tracking of petty expenses. This is known as the imprest system.

The individual expenses in the petty cash column are posted to the correct accounts in the general ledger to complete the double entry.

Example format of a petty cashbook Receipt Date Details Folio Total Postage Stationery Traveling Cleaning Ledger Advantages of the Petty Cash Book

1. Efficiency: it simplifies the management of small financial transactions, allowing businesses to quickly pay for minor expenses without needing difficult processes or approvals.

2. Accountability: helps maintain transparency and accountability by requiring the petty cashier to keep detailed records of all expenditures.

3. Budget Control: assists organisations in monitoring their spending on minor expenses, ensuring they stay within budget and identify any unusual expenditures.

Disadvantages of the Petty Cash Book

1. Time consuming: it can be time consuming to maintain as the expenses are often small and repetitive.

2. Sufficiency of funds: there is a risk that the cash float is not sufficient to cover the expenses in a given period.

3. Risk of theft or loss: these expenses are administered in cash so there is an increased risk of theft or loss.

Activity 2.18 Petty cash book

1. In pairs, identify the uses of the petty cashbook.

2. Discuss the imprest, or float, system and record its purpose in your workbooks.

3. Create a template for a petty cash book in your workbook that you can refer to later on.

Activity 2.19 Recording Transactions

Arrange yourself in small groups to study the following scenario:

Akosua Dokua Enterprise operates a petty cash system with a float of GH¢2,000.

Reimbursement is made at the end of every fortnight (i.e. 15ᵗʰand at the end of each month). The transactions below took place in the month of November, 20X3.

20X3 November 1 Petty cashier was given her first imprest.

GH¢ November 2 Postage 150

November 3 Wages 100

November 5 Cleaning 200

November 5 Stationery 100

November 7 Postage 150

November 8 Electricity 100

November 10 Postage 200

November 12 Cleaning 100

November 13 Postage 150

November 14 Paid for wages 300 November 16 Electricity 100 November 18 Cleaning 50 November 20 Stationery 100 November 20 Postage 100 November 21 Wages 250 November 24 Wages 100 November 25 Cleaning 100 November 26 Stationery 200 November 27 Electricity 100 November 27 Stationery 150 November 30 Cleaning 50

1. Record each of these transactions in the format of a petty cash book on flip chart paper.

2. Share your answer with another group for feedback.

A trial balance is a financial statement showing the closing balances of all accounts in the general ledger of a business at a point in time.

The trial balance has got two columns; a debit column and a credit column. The debit column shows all the debit balances, and the credit shows all credit balances in the different ledger accounts. The total of the two columns should be equal so the total of the debit column should be the same as the total of the credit column.

The trial balance helps to check that all the money recorded in the company's accounts is balanced. This means that the total amount of money recorded as debits (what the company owns or spends) should equal the total amount of money recorded as credits (what the company owes or earns).

Format of a Trial Balance

TRIAL BALANCE AS AT 31st DECEMBER, 20X1

DETAILS DR GH¢ CR GH¢

Capital xxx Purchases xxx Sales xxx Rent & Rates xxx General Expenses xxx Drawings xxx Receivables xxx Payables xxx Motor Vehicle xxx Furniture & Fittings xxx Allowance for receivable xxx Bank xxx Cash xxx Stationery xxx Discount Allowed xxx Discount Received xxx Total XXX XXX Uses of the trial balance

1. It tests the correctness of all entries made in the books of accounts.

2. It provides a summary of all the balances in the ledgers.

3. It ensures that the double entry principle has been correctly applied

4. It serves as a starting point for creating other important financial documents like income statements and balance sheets.

Activity 2.20 Trial Balance

1. Write the meaning of a trial balance on a sticky pad.

2. Exchange your response with a colleague.

3. Discuss the uses of trial balance with the colleague you exchanged your responses with.

Activity 2.21 Preparing a Trial Balance

Your teacher will arrange you in small groups of no more than five to prepare a trial balance based on given sets of financial data.

In your groups, work through one of the examples below to prepare a trial balance for the end of each accounting period.

Record your answers on flip chart paper. Be prepared to share your answers with another group or the wider class for discussion and feedback.

Example 1

Kofi started a business on 1st March, 20X5, with a capital of GH¢120,000. During March, the following transactions took place:

March GH¢

2nd: Purchased office equipment by cash 18,000 3rd: Paid for business registration by cash 1,500 5th: Purchased goods on credit 45,000 10th: Bought goods for cash 28,000 16th: Cash sales 55,000 20th: Sold goods on credit 32,000 22nd: Paid for transportation by cash 2,500 26th: Paid supplier by cash 30,000 29ᵗʰ: Paid electricity bill by cash 1,800 31st: Paid salaries by cash 8,000

Example 2

MFS Consult Limited started business with GH¢50 cash and GH¢150 in the bank account on May 1, 2022. During the month of May 2022, the following transactions were carried out:

May 2: Rented a store and paid rent for a year of GH¢60 with a cheque.

May 3: Bought goods for resale with cash of GH¢40, and a cheque GH¢60.

May 4: Cash sales GH¢80.

Bought goods of GH¢300 on credit from Materiality Concept.

May 6: Sold goods and received a cheque of GH¢250.

May 8: Sold goods of GH¢80 to Duality on credit.

May 15: Cash sales of GH¢190.

Paid Materiality Concept less a cash discount of 4% with cash (50%) and cheque (50%).

May 17: Purchased goods of GH¢150 from Prudence on credit.

May 20: Purchased furniture and fittings with a cheque GH¢50 May 22: Sold goods of GH¢100 to Going Concern on credit.

May 25: Paid general expenses of GH¢20 with cash May 26: Duality and Going concern settled their account with cash less 5% cash discount.

Paid Prudence with cash less 4% cash discount.

May 27: Periodicity Concept took cash of GH¢10 and a cheque of GH¢15 for his personal use.

May 31: Paid all cash into bank except a balance of GH¢3.