ACCOUNTING PROCEDURES AND TECHNIQUES

Book Keeping
Book keeping defined as the process of recording business transactions (data) in a systematic
manner. It can also be defined as that part of accounting that is concerned with recording
data/transactions.

Book keeping is intended to record all the accounting data in such a way that one can make a
deduction based on it. The deductions could be such as:

 How much sales has been achieved over a given period of time, be it a day, a month, or a
year.
 How much is owed to the creditors.
 How much is available in the bank, among others.
The whole process of book keeping is in the form of a cycle i.e. the accounting cycle.

The Accounting Cycle

The accounting process can be perceived as a cycle which starts with the occurrence of a
transaction, recording of the transaction and finally the preparation of the financial statements.
Financial statements are reports on results of all the transactions that occur during the year and
the position of the business as at the last date of the accounting period. A transaction is an
activity which involves the exchange of goods and services for another thing of value e.g. when
the business purchases goods for sale, sells goods to customers on credit, pays for services e.g.
telephone.

A transaction is first recorded in the source documents e.g. the cash sale receipt, the invoices
received from creditors, debit and credit notes issued and received etc. The daybooks as the
name suggests they are filled daily showing all the transactions that occurred during the day.
Such information is obtained from the source documents.

The data in the day books is then filled in the ledger accounts and a trial balance extracted as the
end of the accounting period. Adjustments for prepayments and accruals are then made and an
adjusted trial balance is drawn reflecting these changes. From this trial balance, the final
statements are prepared i.e. the statement of comprehensive income which reveals whether the
company made a profit or loss from the transactions carried out in the year, and the statement of
financial position which tells of the financial position of the business in terms of its assets and
liabilities as at that closing date.

After these, the closing entries are made to prepare the accounts to receive the data for the
following financial period and a closing trial balance extracted.

For every transaction entered into the business enterprise, there is the primary book where it will
be initially recorded. This is known as books of original entry.

Source Documents
Source documents refer to internal documents containing crucial details regarding business
transactions. They prove that the recorded financial transactions occurred and are thus essential
for the accounting methods. Moreover, these documents are crucial for auditing procedures.
Since the paper trail of all transactions is easily available to auditors, it enhances the audit’s
validity and objectivity.

A source document usually includes the following details:

• The total value of a transaction
• Date of the transaction
• The deal’s explanation
• Moreover, such documents include one or multiple authorizing signatures.
Uses of source documents
• Businesses use them to prepare books of accounts.
• They help in auditing procedures by increasing transparency.
• One can use them to acquire authorization for any amount paid.
• They are tangible evidence of a business transaction.
• Businesses can utilize these documents to reconcile accounts.
• Such a document can prove that a business owns a certain property.
• Organizations can use them to rectify an undercharge or overcharge made in a customer’s
account.
Types
Some of the different types of source documents are as follows:
Delivery Notes: In most cases, these documents include a description of the goods delivered,
enabling customers to compare them with their order after receiving them.

Deposit Slips: When customers pay using cash or check, the seller prepares a bank deposit slip
and presents it to the bank with cash or check. The deposit slip includes a breakdown of the
check and cash amounts and the overall amount being deposited.

Quotations: A customer can choose to receive quotes from a seller for the goods they want to
purchase. Once the former places an order, the latter converts the document into a sales invoice.

Receipts: Vendors may give a receipt after the consumers pay the invoice. If the payment is in
cash, issuing a receipt to confirm the payment is good practice. Receipts are generally
automatically issued when buying goods from an online retailer or a store.

Sales and Purchase Invoices: Sellers produce a paper mentioning a sale’s specifics when they
sell an item. For example, they will mention how long the buyer will have to make the full
payment or whether paying any amount before the delivery of goods is necessary.

Orders: Organizations fill out orders if they need to buy something. The order form can be as
simple as a page from a duplicate book or one provided by sellers via their catalog or online
store. However, since a buyer might not know the cost when placing an order, it is unlikely for
the order forms always to include the cost.

Books of Original Entry

Books of original entry can be defined as the books in which we first record a transaction. These
books essentially record the following details of a transaction:

• date of the transaction

• the name of the person/ firm with whom the transaction took place
• the details of an item bought or sold e.g. a motor vehicle stock e.t.c
• details for cross referencing
• the amount (shown in monetary terms) of the transaction
Books of original entry are known as journals or daybooks. Both terms are used interchangeably.
The commonly used books of original entry are:
a. Purchases journal
This journal is used to record all purchases made on credit only.
Purchases Journal
Date Details Folio Amount (Sh)
1/12/2022 J. Chege PL 009 4,200
1/12/2022 A. Mbole PL 011 6,700
4/12/2022 J. Chege PL 009 9,200
5/12/2022 B. Gummo PL 010 2,100
8/12/2022 H. Njeri PL 014 4,100
8/12/2022 A. Mbole PL 011 10,400
9/12/2022 J. Chege PL 009 8,500
10/12/2022 A. Mbole PL 011 6,100
51,300
b. Sales Journal
A sales journal records credit sales only.
Example
Sales Journal

Date Details Folio Amount (Sh)

1/4/2022 J. Kamau SL 001 5,000
1/4/2022 P. Otieno SL 002 4,000
2/4/2022 E. Muteti SL 003 3,200
3/4/2022 P. Otieno SL 002 4,700
4/4/2022 J. Kamau SL 001 4,200
5/4/2022 A. Kioko SL 005 6,700
6/4/2022 J. Kamau SL 001 2,800
30,600
c. Return Outwards Journal
It records goods returned by the business to the suppliers for the reason that they are either
tampered with, are not of the kind ordered for, are damaged, or are in excess of the amount
ordered.

Example
Return Outwards Journal
Date Details Folio Amount (Sh)
9/12/2022 A. Mbole PL 011 1,100

d. Return Inwards Journal

This journal is used to record all the goods that are returned to the business by the customers
because they were not the kind ordered for or were in excess e.t.c

Example
RETURN INWARDS JOURNAL
Date Details Folio Amount (Sh)
8/4/2022 J. Kamau SL 001 800
9/4/2022 A. Akiko SL 005 500
1,300
e. Cash Book
This is a book of original entry that is used to record all cash received or paid out by the business
via the cash till or via the business’ bank account. A cash book is a unique journal since it acts
both as a book of original entry as well as a ledger account where all transactions affecting cash
are recorded. The cash book will be discussed later in the module

f. General Journal: (Also Referred to as The Journal Proper)

All other transactions not falling into any of the above journals are recorded in this journal. In the
general journal the following details relating to the transaction are included; date, the name of the
account to be debited, the name of the account to be credited and a brief narration or description
of the transaction as illustrated below.

Date Details (Particulars) Debit (Dr.) Credit (Cr)

_/_/_ Account to be Debited XXX

Account to be Credited XXX
A brief narrative to describe the transaction

A general journal has the following uses:

• Recording the purchase or sale of fixed assets on credit
• Correction of errors in the ledger accounts
• Adjustment of ledger entries
• Writing off of bad debts
Double Entry Concept
The accounting equation is the basis of financial accounting. Transactions are recorded using the
double entry system of book keeping showing the two-fold effect that is done to maintain
equality of the equation. The double entry system requires the use of an account.

An Account is the most basic accounting record. It summarizes the increases and decreases in a
particular asset, liability, revenue, expense or a capital item. An account is divided into two
sides; the left being the debit and the other the credit side. To debit therefore will mean to enter
an amount on the left hand side of an account and vice-versa.

The double entry concept states that “for every debit entry, there is a corresponding credit entry”.
The basic double entry rules for accounts are:

Accounts To record Entry in the account

Assets Increase Debit

Decrease Credit
Liabilities Increase Credit

Decrease Debit

Capital Increase Credit

Decrease Debit

Incomes/Revenue Increase Credit

Expenses Increase Debit

Posting
When all transactions have been entered into the specific journals, they are then entered into their
respective accounts in the ledger in a process referred to as posting. An account is a place where
all details relating to a particular asset, liability or capital, is recorded. There could be an account
for motor vehicles, another for buildings, another one for a specific creditor and yet other
separate accounts for each debtor etc.
Accounts can be divided into two:
• Personal accounts
• Impersonal accounts.
Personal accounts are accounts dealing with customers and suppliers i.e. debtors and creditors.
Impersonal accounts on the other hand can further be divided into:
a. Real account used for recording possessions like land, motor vehicles, buildings,
furniture and fittings.
b. Nominal account used for recording capital, income and expenses.
All accounts are prepared in a ‘T’ format and thus generally referred to as T- accounts. The T-
accounts have two sides; the debit side on the left and the credit side on the right of the account
as shown below.

Name of Account
DR CR

Date Details Folio Amount Date Details Folio Amount

Every transaction in a business affects two accounts. One of the accounts is debited while the
other is credited by the same amount giving rise to double entry book keeping i.e. for each entry
recorded in the journals there will be a debit and a credit entry in two separate accounts in the
ledger.

Generally a transaction either increases or decreases an asset, liability or capital. This is reflected
in the accounts as follows:
i. When we increase an asset we make a debit entry to the asset account
ii. When we decrease an asset we make a credit entry to that account
iii. When we increase our liabilities or capital, we make a credit entry
iv. When we decrease our liability or capital we make a debit entry to that account.

THE LEDGER
The ledger is a book in which various accounts are kept. There are three main types of ledgers:
i. Sales ledger
ii. Purchases ledger
iii. General ledger
i. Sales Ledger
After all transactions have been recorded in the sales journal, the next step is to post these
transactions using double-entry book keeping into the various ledgers. The sales ledger is made
up of individual accounts of the debtors i.e. customers who have purchased from us on credit.

To maintain double entry, the sales ledger is posted as follows:

a. For all the customers in the sales journal, debit their individual accounts in the sales
ledger.
 b. Make the corresponding credit entry in the sales account which is in the general ledger.
To avoid having too many entries in the sales account, we sum up all the individual debtors
account and post the total to the credit side of the sales account in the general ledger. This total
should equal to the total as reported in the sales journal i.e. the first book in which the all the
credit sales were initially recorded before being posted to the ledger accounts. The two totals will
however be equal if and only if double entry concept was adhered to in the posting process.

Example

Refer to the sales journal above. Post the entries in the sales ledger

Dr J. Kamau Cr

Date Details Amount Date Details Amount

1/4 Sales 5000

4/4 Sales 4200
6/4 Sales 2800

Dr E. Muteti Cr

Date Details Amount Date Details Amount

2/4 Sales 3200

Dr P. Otieno Cr

Date Details Amount Date Details Amount

1/4 Sales 4000

Sales 4700
3/4
Dr A. Kioko Cr

Date Details Amount Date Details Amount

5/4 Sales 6700

ii. Purchases Ledger

After all the transactions have been entered on the purchases journal, the entries are then posted
in the purchases ledger. The purchases ledger is made up of individual creditors’ account. Every
credit purchase made by customers is recorded on the credit side of their individual account in
the purchases ledger. The totals of this ledger are then posted to the debit side of the purchases
account in the general ledger, again to avoid having too many individual creditors’ entries in the
purchases account. This total should equal the total of the purchases journal, if the posting
process was done correctly.

Example

Refer to the purchases journal above. Post the entries in the purchases ledger

Dr J. Chege Cr

Date Details Amount Date Details Amount

1/12 Purchases 4200

4/12 Purchases 8500
9/12 Purchases 9200

Dr B. Gumo Cr
Date Details Amount Date Details Amount

5/12 Purchases 2100

Dr A. Mole Cr

Date Details Amount Date Details Amount

1/12 Purchases 6700

8/12 Purchases 6100
10/12 Purchases 10400

Dr H. Njeri Cr

Date Details Amount Date Details Amount

8/12 Purchases 4100

iii. General Ledger

All other accounts that do not fall under either the sales or purchases ledger are held under the
general ledger. Such accounts would include:
a) Noncurrent assets accounts e.g. furniture and fittings account, plant and equipment
account
b) Expenses accounts e.g. electricity account insurance, expense account e.t.c
c) Return inwards account
d) Return outwards account
Exercise

Given the following details; enter them in the sales journal, purchases journal, general journal,
and then post them to the relevant ledger accounts.
Year 2022
May 2 Credit sales to E. Kamau Sh 12,800
“2 Credit purchases to H Opati Sh 9,600
“4 Credit sales to J Omondi Sh 11,700
“7 Credit sales to N.Kimanzi Sh 20,700
“8 Credit sales to P.Amino Sh. 4,900
“12 credit purchases from M. Kibaki Sh 7,200
“13 Credit sales to E. Kamau Sh 42,000
“13 Credit purchases from G.Njenga Sh. 9,700
“15 return inwards from J Hadija Sh. 200
“16 return outwards to K Nyongesa Sh.1, 200
“20 credit purchases from H. Opati Sh. 11,200
“21 credit purchases from E. Joe Sh 4,900
“23 credit purchases from O. Mbiyu Sh. 4,500
“27 bought motor vehicle cash Sh 20,000
“30 Sales to E Williams Sh. 10,600