Processing Accounting Data

Processing Accounting Data

The Accounting Cycle

The accounting cycle is the process by which financial data is collected and processed. It consists of several steps that ensure accurate financial reporting. The main steps are:

• Transactions taking place
• Completion of source documents
• Recording of transactions in journals
• Posting to ledgers
• Reporting in financial statements
• Analysis and interpretation of financial statements
• Decision making by management

Books of First Entry: Journals

Due to the volume of transactions, it is impractical to record each transaction directly in the general ledger. Instead, transactions are first recorded in journals, also known as books of first entry. Journals group similar transactions together, making it easier to process data before it is posted to the ledger.

A journal serves as a link between source documents and the ledger. No transaction can be recorded in the ledger before it is recorded in a journal.

Types of Journals

Several types of journals are used in accounting:

• Cash Receipts Journal: Records all cash received by the entity.
• Cash Payments Journal: Records all cash payments made by the entity.
• Purchases Journal: Records all credit purchases made by the entity.
• Purchases Returns Journal: Records returns of credit purchases.
• Sales Journal: Records all credit sales made by the entity.
• Sales Returns Journal: Records returns of credit sales.
• General Journal: Records transactions that do not fit into the other journals, such as error corrections.

Cash Receipts Journal

All money received by the entity is recorded in the cash receipts journal. At the end of the month, a single amount representing the total cash receipts is debited to the bank account. Other column totals are credited to the respective accounts. The amounts in the sundry accounts column are credited individually to the relevant accounts.

Example of a Cash Receipts Journal

Let us consider the cash receipts journal for a fictional business, Fix-’n-Mat, for February 20.1:

FIX-’N-MAT
CASH RECEIPTS JOURNAL — FEBRUARY 20.1 CRJ1
Analysis       Sundry accounts
Document Day  Details of Bank Current
number receipts income Amount Fol Details
R      R      R
Rec 1       1   T Tom             130 000           130 000
2           2   ABC Bank          25 000            25 000
3          13   S Silver             1 000             1 000
4          28   C Canon              2 000             2 000
158 000  1 000  157 000

The total cash receipts for the month amount to R158 000, which is debited to the bank account.

Cash Payments Journal

All cash payments made by the entity are recorded in the cash payments journal. At the end of the month, a single amount representing the total cash payments is credited to the bank account. Other column totals are debited to the respective accounts.

Example of a Cash Payments Journal

Now, let us look at the cash payments journal for Fix-’n-Mat for February 20.1:

FIX-’N-MAT
CASH PAYMENTS JOURNAL — FEBRUARY 20.1 CPJ1
Cheque Day  Details                Bank    Wages   Sundry accounts
number Amount Fol Details
R       R      R
1      6 XY Furnishers        100 000           100 000
2     11 Joc Limited            2 000             2 000
3     12 Cash                     1 000             1 000
4     16 Cash                     800               800
103 800  800  103 000

Here, the total cash payments for the month amount to R103 800, which is credited to the bank account.

Posting from Journals to Ledger Accounts

After transactions are recorded in the journals, they must be posted to the general ledger accounts. The ledger accounts reflect the balances for each account. For example, the bank account in the general ledger would reflect the total receipts and payments made during the month.

Example of Posting to Ledger Accounts

The postings from the cash receipts and cash payments journals to the general ledger accounts would look as follows:

Dr Bank  Cr
20.1 R
Feb 28 Receipts CRJ1  158 000
Feb 28 Payments CPJ1  103 800
Balance c/d  54 200
158 000  158 000
20.1
Mar 1 Balance b/d  54 200

In this example, the bank account reflects a balance of R54 200 after accounting for the total receipts and payments.

The Trial Balance

A trial balance is prepared to ensure that the total debits equal the total credits. This helps to identify any errors in the accounting records. The trial balance lists all account balances at a specific point in time.

Example of a Trial Balance

Let us consider a trial balance for a business:

TRIAL BALANCE AS AT 30 JUNE 20.3
Fol        Debit       Credit
R           R
Equipment (at cost)      B1   2 500
Water and electricity deposit B2   500
Bank                      B3   5 113
Capital                   B4   10 000
Drawings                  B5   1 600
Sales                     N1   3 248
Rental expenses           N2   1 000
Stationery                N3   80
Telephone expenses        N4   260
Wages                     N5   800
Total                     13 248   13 248

This trial balance shows that the total debits equal the total credits, indicating that the accounts are balanced.

Self-Assessment Exercise

Consider the following transactions for a fictional business, Beauty’s Hair, for June 20.3:

1. Deposited R10 000 in the business’s bank account.
2. Paid the month’s rental by direct payment to Huurtru, R1 000.
3. Paid the water and electricity deposit, R500.
4. Bought equipment worth R2 500 and consumable inventory worth R845 from Head Suppliers, paid by direct payment, R3 345.
5. Fees received for services rendered, R350.
6. Drew a cheque and paid the assistant’s wages, R200.
7. Cash banked for services rendered, R556.
8. Drew a cheque for R500 to pay the week’s wages, R200, the remainder being for Ms Baloyi’s own use.
9. Cash register roll total for services rendered, R642.
10. Bought stationery from Office Suppliers, R80, and paid by direct payment.
11. Fees received for services rendered, R438.
12. Paid the week’s wages, R200.
13. Bought shampoo and other requirements from Head Suppliers and paid by direct payment, R550.
14. Cash register roll total for services rendered, R387.
15. Drew a direct payment to Telkom to pay the telephone account, R260, which included installation costs of R180.
16. Cashed a cheque for R1 500; R1 300 was for the owner’s own use and R200 was for wages.
17. Cash banked for services rendered, R875.

Required:

1. Prepare the cash receipts journal for Beauty’s Hair for June 20.3.
2. Prepare the cash payments journal for Beauty’s Hair for June 20.3.
3. Show the postings from these journals to the general ledger accounts.
4. Prepare the trial balance as at 30 June 20.3.

Check your understanding

• What are the main steps in the accounting cycle?
• What is the purpose of a cash receipts journal?
• How do you ensure that your trial balance is accurate?
• What is the difference between the cash payments journal and the cash receipts journal?