chapter 4

Ledger accounting and

double entry

Contents

Introduction
Examination context
Topic List
1 Ledger accounts
2 The nominal ledger
3 Double entry bookkeeping
4 The journal
5 The petty cash imprest system
6 Day book analysis
7 The receivables and payables ledgers
8 Accounting for discounts
9 Accounting for VAT
Summary and Self-test
Answers to Self-test
Answers to Interactive questions

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Introduction

Learning objectives Tick off

 Identify the sources of information for the preparation of accounting records and financial
statements
 Record and account for transactions and events resulting in income, expenses, assets,
liabilities and equity
 Prepare journals for nominal ledger entry

Specific syllabus learning outcomes are: 1b, c; 2d

Practical significance
If you master double entry bookkeeping you will use its principles often in your daily work. Ensuring that
every debit has a credit in the ledger accounts means that the financial statements are balanced.

Stop and think

The accounting equation states that, at any point in time, an entity’s assets must equal capital plus liabilities.
Any transaction that affects a particular asset must also either affect capital or liabilities to the same degree,
or another asset in an equal and opposite manner.

Working context
You may be involved on an assignment where you are checking balance sheet items. You will become aware
that a transaction that increases an asset, such as a credit sale increasing a debtor (trade receivable) also
increases another item, in this case revenue. Double entry allows us to identify where the equal and
opposite side of any transaction should be recorded; this helps you to ensure that the entity you are
involved with is recording transactions accurately and completely.

Syllabus links
The material in this chapter will be developed further in this paper, and then in the Financial Accounting
paper later in the Professional stage and the Financial Reporting paper at Advanced stage.

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Examination context

Exam requirements
In the exam you may be required to:
 State the effect of debit and credit entries in ledger accounts for the elements of financial statements
 Specify the double entry needed to record particular transactions
 Identify how to post transactions to both the nominal and memorandum ledgers
 Prepare ledger accounts for vat, payables and receivables
 Use ledger accounts to identify balancing figures
Very often double entry questions are phrased in terms of preparing a journal.

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1 Ledger accounts

Section overview
 Ledger accounts summarise all the individual transactions listed in the books of original entry.
 Records should be kept in ledger accounts in chronological order, with cumulative totals built up.

1.1 Why do we need ledger accounts?

It is possible to prepare financial statements at any point in time, at any date and relating to any period of
time. A business is continually making transactions, e.g. buying and selling. To prepare an income statement
and a balance sheet on completion of every individual transaction would be a time-consuming and
cumbersome administrative task.
If a business first records and then analyses the transactions that it makes, the assets it acquires and
liabilities it incurs then, when the time comes to prepare an income statement and a balance sheet, the
relevant information can be taken from those records.
The records of transactions, assets and liabilities should be kept in the following ways.
 In chronological order, and dated so that transactions can be related to a particular period of time.
 Built up in cumulative totals.
– Day by day (e.g. total sales on Monday, total sales on Tuesday)
– Week by week
– Month by month
– Year by year
The first step in this process is to list all the transactions in various books of original entry, as we have seen.
Now we will look at the method used to analyse these records: ledger accounting and double entry.

2 The nominal ledger

Section overview
 The nominal ledger is the accounting record which analyses all the entity’s financial records.
 Ledger accounts for each type of transaction can take the form of a T account, the left hand side is
the debit side, and the right hand side is the credit side.

2.1 What is the nominal ledger used for?

Definition
Nominal ledger: An accounting record which analyses the financial records of a business.

The nominal ledger contains details of assets, liabilities, capital, income and expenditure, and so profit and
loss. It consists of a large number of different ledger accounts, each account having its own purpose or
'name' and an identity or code.
There may be various subdivisions, whether for convenience, ease of handling, confidentiality, security, or to
meet the needs of computer software design. For example, the ledger may be split alphabetically, with
different clerks responsible for sections A-F, G-M, N-R and S-Z. This can help to stop fraud, as there would
have to be collusion between the different section clerks.

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Examples of ledger accounts in the nominal ledger include the following.

 Plant and machinery at cost (non-current asset)
 Motor vehicles at cost (non-current asset)
 Plant and machinery, provision for accumulated depreciation (deduction from non-current asset)
 Motor vehicles, provision for accumulated depreciation (deduction from non-current asset)
 Owner's capital (Capital)
 Inventories – raw materials (current asset)
 Inventories – finished goods (current asset)
 Total trade receivables (current asset)
 Total trade payables (current liability)
 Wages and salaries (expense)
 Rent and local taxes (expense)
 Advertising expenses (expense)
 Bank charges (expense)
 Motor expenses (expense)
 Telephone expenses (expense)
 Sales (income)
 Total cash/bank overdraft (current asset/liability)
When it comes to drawing up the financial statements, the income and expense ledger accounts will
together form the income statement, while the asset, capital and liability ledger accounts go into the balance
sheet.

2.2 The format of a ledger account

If a ledger account were to be kept in an actual book, rather than as a computer record, it would look like
this.
ADVERTISING EXPENSES
Date Narrative Ref. CU Date Narrative Ref. CU
20X6 JFK Agency for quarter
to 31 March PL 348 2,500

There are two sides to the account, with an account heading on top. The lines form a 'T', so it is convenient
to think in terms of 'T' accounts.
 On top of the account is its name.
 There is a left hand, or debit side.
 There is a right hand, or credit side.
NAME OF ACCOUNT
CU CU
Debit side Credit side

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3 Double entry bookkeeping

Section overview
 The principle of double entry bookkeeping is that each transaction has two equal but opposite effects
in the ledger accounts of an entity: the dual effect.
 Every debit has a credit.
 Debit entries increase assets and expenses, and decrease liabilities, capital and revenue.
 Credit entries increase liabilities, capital and revenue, and decrease assets and expenses.
 A receipt of cash is a debit in the cash ledger account.
 A payment of cash is a credit in the cash ledger account.
 A credit sale is recorded as debit receivables (increase asset), credit sales (increase revenue).
 A credit purchase is recorded as debit purchases (increase expenses), credit payables (increase
liabilities).
 Discount allowed to customers is credited to receivables along with payments received, and debited
to a discount allowed ledger account.
 Discounts received from suppliers are debited to payables along with payments made, and credited to
a discount received ledger account.

Definition
Double entry bookkeeping: Each transaction has an equal but opposite effect. Every accounting event
must be entered in ledger accounts both as a debit and a credit.

3.1 Dual effect (duality concept)

Double entry bookkeeping is the method used to transfer totals from the books of original entry
into the nominal ledger.
Central to this process is the idea that every transaction has two effects, the dual effect (also known as
the duality concept). This feature is not something peculiar to business. If you were to purchase a car for
CU1,000 cash, for instance, you would be affected in two ways.
 You own a car worth CU1,000.
 You have CU1,000 less cash.
If instead you got a bank loan to make the purchase:
 You own a car worth CU1,000.
 You owe the bank CU1,000.
A month later if you pay a garage CU50 to have the exhaust repaired:
 You have CU50 less cash.
 You have incurred a repairs expense of CU50.
Ledger accounts, with their debit and credit sides, are kept in a way which allows the two-sided nature of
every transaction to be recorded. This is known as double entry bookkeeping, because every
transaction is recorded twice in the ledger accounts.

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3.2 The rules of double entry bookkeeping

A debit entry will:

 Increase an asset  Decrease a liability

 Increase an expense  Decrease capital
 Decrease income

A credit entry will:

 Decrease an asset  Increase a liability

 Decrease expenses  Increase capital
 Increase income

The basic rule, which must always be observed, is that every financial transaction gives rise to two
accounting entries, one a debit and the other a credit. The total value of debit entries in the
nominal ledger is therefore always equal to the total value of credit entries. Which account receives the
credit entry and which receives the debit entry depends on the nature of the transaction.
 An increase in an expense (e.g. a purchase of stationery) or an increase in an asset (e.g. a
purchase of office furniture) is a debit.
 An increase in income (e.g. a sale) or an increase in a liability (e.g. buying goods on credit) or capital
is a credit.
 A decrease in an asset (e.g. making a cash payment) or a decrease in an expense is a credit.
 A decrease in a liability (e.g. paying a creditor) or capital or income is a debit.
In terms of 'T' accounts, for assets, liabilities and capital:
ASSET LIABILITY CAPITAL

CU CU CU CU CU CU
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Increase Decrease Decrease Increase Decrease Increase
For income and expenses, think about profit. Profit retained in the business increases capital. Income
increases profit and expenses decrease profit.
INCOME EXPENSE

CU CU CU CU
DEBIT CREDIT DEBIT CREDIT
Decrease Increase Increase Decrease

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Interactive question 1: Debits and credits [Difficulty level: Intermediate]

Complete the following table relating to the transactions of a bookshop. (The first two are done for you.)

(a) Purchase of books on credit

 Payables increase CREDIT payables (increase in liability)
 Purchases increase DEBIT purchases (increase in expense)
(b) Purchase of cash register by cheque
 Own a cash register DEBIT non-current asset (increase in asset)
 Cash at bank decreases CREDIT cash at bank (decrease in asset)
(c) Payment received from a credit
customer
 Receivables decrease
 Cash at bank increases
(d) Sell books for cash
 Income increases
 Cash at bank increases

See Answer at the end of this chapter.

3.3 Double entry for cash transactions

A good starting point is the cash account, i.e. the nominal ledger account in which receipts and payments of
cash are recorded, or posted, from the book of original entry, the cash book.
 A cash payment is a credit entry in the cash account. Here cash is decreasing. Cash may be paid
out, for example to pay an expense (such as tax) or to purchase an asset (such as a machine). The
matching debit entry is therefore made in the appropriate expense or asset account.
 A cash receipt is a debit entry in the cash account. Here cash is increasing. Cash might be
received, for example, by a retailer who makes a cash sale. The credit entry would then be made in
the revenue account (and the VAT account if relevant).

Worked example: Cash transactions

In the cash book, the following transactions have been recorded (ignore VAT for now).
(a) A cash sale (i.e. a receipt) of CU250
(b) Payment of a rent bill totalling CU150
(c) Buy some goods for cash of CU100
(d) Buy some shelves for cash of CU200
How would these four transactions be entered (or 'posted') to the ledger accounts, and to which ledger
accounts should they be posted? Remember each transaction will be posted twice, in accordance with
double entry rules.

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Solution
(a) The two sides of the transaction are:
 CU250 cash is received (debit cash account).
 Sales increase by CU250 (credit sales account).
CASH ACCOUNT

CU CU
Sales a/c 250
SALES ACCOUNT

CU CU
Cash a/c 250
(The cash account entry is cross-referenced to the sales account and vice-versa. This enables a person
looking at one of the ledger accounts to trace where the other half of the double entry is found.)
(b) The two sides of the transaction are:
 Cash is paid (credit entry in the cash asset account).
 Rent expense increases by CU150 (debit entry in the rent expense account).
CASH ACCOUNT

CU CU
Rent a/c 150
RENT ACCOUNT

CU CU
Cash a/c 150
(c) The two sides of the transaction are:
 Cash is paid (credit entry in the cash asset account).
 Purchases increase by CU100 (debit entry in the purchases expense account).
CASH ACCOUNT

CU CU
Purchases a/c 100
PURCHASES ACCOUNT

CU CU
Cash a/c 100
(d) The two sides of the transaction are:
 Cash is paid (credit cash account).
 Assets – in this case, shelves – increase by CU200 (debit shelves account).
CASH ACCOUNT

CU CU
Shelves a/c 200

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SHELVES ACCOUNT

CU CU
Cash a/c 200
If all four of these transactions related to the same business, the cash account of that business would
end up looking as follows.
CASH ACCOUNT

CU CU
Sales a/c 250 Rent a/c 150
Purchases a/c 100
Shelves a/c 200

3.4 Double entry for credit transactions

Not all transactions are settled immediately. A business can purchase goods or non-current assets on credit
terms, so that suppliers would be trade payables until settlement was made in cash. Equally, the business
might grant customers credit terms, so they would then be trade receivables of the business. No entries
can be made in the cash book when a credit transaction occurs, because no cash has been received or paid.
Instead of the cash account we use receivables and payables accounts. When a business acquires
goods or services on credit, the credit entry is posted from the purchases day book to a 'trade payables'
account instead of the cash account. The debit entry is posted to the expense or asset account, exactly as
in the case of cash transactions. Similarly, when a sale is made to a credit customer, entries posted from the
sales day book are a debit to the trade receivables account (instead of cash account), and a credit to sales
revenue account.

3.4.1 Double entry when credit transactions are entered into

Worked example: Double entry for credit transactions

Recorded in the sales day book and the purchases day book for a business are the following transactions.
(a) The business sells goods on credit to Mr A for CU2,000.
(b) The business buys goods on credit from B Ltd for CU100.
How and where are these transactions posted in the ledger accounts from the books of original entry?

Solution
(a)
TRADE RECEIVABLES (MR A)

CU CU
Sales a/c 2,000
SALES ACCOUNT

CU CU
Trade receivables a/c (Mr A) 2,000

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(b)
TRADE PAYABLES (B LTD)

CU CU
Purchases a/c 100
PURCHASES ACCOUNT

CU CU
Trade payables a/c (B Ltd) 100

3.4.2 Double entry when cash is paid by customers or to suppliers

What happens when a credit transaction is eventually settled in cash? Suppose that, in the example above,
the business paid CU100 to B Ltd one month after the goods were acquired, recorded in the cash book.
The two sides of this new transaction are:
(a) Cash is paid (credit entry in the cash account).
(b) The amount owing to trade payables is reduced (debit entry in the trade payables account).
CASH ACCOUNT

CU CU
Trade payables a/c (B Ltd) 100
TRADE PAYABLES (B LTD)

CU CU
Cash a/c 100
If we now bring together the two parts of this example, the original purchase of goods on credit and the
eventual settlement in cash, we find that the accounts appear as follows.
CASH ACCOUNT

CU CU
Trade payables a/c (B Ltd) 100
PURCHASES ACCOUNT

CU CU
Trade payables a/c (B Ltd) 100
TRADE PAYABLES (B LTD)

CU CU
Cash a/c 100 Purchases a/c 100
The two entries in trade payables cancel each other out, indicating that no money is owing to B Ltd. A cash
account credit entry of CU100 and a debit purchases account entry of CU100 remain. These are the same
as the entries used to record a cash purchase of CU100. This is what we would expect: after the business
has paid off its trade payables, it is in exactly the same position as if it had made a cash purchase, and the
accounting records reflect this.

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Similar reasoning applies when a customer settles a debt. In the example above, when Mr A pays his debt of
CU2,000 and it is recorded in the cash book, the two sides of the transaction are:
(a) Cash is received (debit entry in the cash account).
(b) The amount owed by trade receivables is reduced (credit entry in the trade receivables account).
CASH ACCOUNT

CU CU
Trade receivables (Mr A) 2,000
TRADE RECEIVABLES (MR A)

CU CU
Cash a/c 2,000
The accounts recording this sale to, and payment by, Mr A now appear as follows.
CASH ACCOUNT

CU CU
Trade receivables (Mr A) 2,000
SALES ACCOUNT

CU CU
Trade receivables a/c (Mr A) 2,000
TRADE RECEIVABLES

CU CU
Sales a/c 2,000 Cash a/c 2,000
The two trade receivables entries cancel each other out, while the entries in the cash at bank account and
sales account reflect the same position as if the sale had been made for cash (see above).

Interactive question 2: Debits and credits [Difficulty level: Intermediate]

Identify the debit and credit entries in the following transactions (ignore VAT).
(a) Bought a machine on credit from A, cost CU8,000.
(b) Bought goods on credit from B, cost CU500.
(c) Sold goods on credit to C, value CU1,200.
(d) Paid D (a credit supplier) CU300.
(e) Collected CU180 from E, a credit customer.
(f) Paid net pay CU4,000.
(g) Received rent bill of CU700 from landlord G.
(h) Paid rent of CU700 to landlord G.
(i) Paid insurance premium CU90.
See Answer at the end of this chapter.

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3.4.3 Double entry for discounts

In Chapter 3 we saw how discounts allowed to customers and received from suppliers are recorded in a
memorandum column of the cash book. This means that neither the debit nor the credit entry is
made in the cash account; instead, the memorandum column is used to post the double entry to two
nominal ledger accounts, as follows.
 Discounts allowed to customers
DEBIT Discounts allowed (administrative expense account)
CREDIT Trade receivables
The discount allowed reduces the balance owed by customers, so it is a credit in the receivables asset
account. The other side of the entry is as a debit to the discount allowed expense account.
 Discounts received from suppliers
DEBIT Trade payables
CREDIT Discount received (other income account)
The discount received reduces the liability to suppliers, so it is a debit in the payables liability account.
The other side of the entry is as a credit in the discount received income account.

Interactive question 3: Ledger entries [Difficulty level: Intermediate]

Ron Knuckle set up a business selling fitness equipment. He put CU7,000 of his own money into a business
bank account (transaction A) and in his first period of trading, the following transactions occurred.
CU
Transaction
B Paid rent of shop for the period 3,500
C Purchased equipment (inventories) on credit 5,000
D Loan from bank 1,000
E Purchase of shop fittings (for cash) 2,000
F Sales of equipment: cash 10,000
G Sales of equipment: on credit 2,500
H Payments for trade payables (discount received CU50) 4,950
I Receipt from trade receivables (discount allowed CU20) 2,480
J Interest on loan (paid) 100
K Other expenses (all paid in cash) 1,900
L Drawings 1,500
Ignore VAT.
Complete the ledger accounts for Ron Knuckle by opening up the following accounts and completing them:
 Cash at bank
 Capital
 Loan
 Purchases
 Trade payables
 Rent
 Shop fittings
 Sales
 Trade receivables
 Discount received
 Discount allowed
 Loan interest
 Other expenses
 Drawings
See Answer at the end of this chapter.

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4 The journal

Section overview
 Journal entries have a particular format that you should use.
 Journals can be used to record any type of financial transaction, in which case the journal acts as the
book of original entry for that transaction.
 Journals are particularly useful for recording internal transfers between ledger accounts.

4.1 What are journal entries used for?

The journal records transactions not recorded in any other book of original entry, such as purchases of
non-current assets. In particular the journal keeps a record of unusual movements between ledger
accounts. It is used to record any double entries made which do not arise from the other books of original
entry, such as when errors are discovered and need to be corrected.
Whatever type of transaction is being recorded, the format of a journal entry is as follows.
Date Debit Credit
CU CU
Account to be debited X
Account to be credited X
Narrative to explain the transaction
In due course, the ledger accounts will be written up to include the transactions listed in the journal.
A narrative explanation should accompany each journal entry. It is required for audit and control, to
indicate the purpose and authority of every transaction which is not first recorded in a book of original
entry.

Worked example: Journal entries to record transactions

The following is a summary of the transactions of Hair by Fiona Middleton hairdressing business, of which
Fiona is the sole owner.

1 January Put in cash of CU2,000 as capital

Purchased brushes and combs for cash CU50
Purchased hair driers from Gilroy Ltd on credit CU150
30 January Paid three months rent to 31 March CU300
Collected and paid in takings CU600
31 January Gave Mrs Sullivan a perm, highlights etc on credit CU80
31 January Took out CU100 for personal expenses

Show the transactions by means of journal entries.

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Solution
JOURNAL
CU CU
1 January DEBIT Cash at bank 2,000
CREDIT Fiona Middleton – capital account 2,000
Initial capital introduced
1 January DEBIT Brushes and combs account (non-current asset) 50
CREDIT Cash at bank 50
The purchase for cash of brushes and combs
1 January DEBIT Hair dryer account (non-current asset) 150
CREDIT Trade payables (Gilroy Ltd) 150
The purchase on credit of hair driers as non-current assets
30 January DEBIT Rent expense account 300
CREDIT Cash at bank 300
The payment of rent to 31 March
30 January DEBIT Cash at bank 600
CREDIT Sales income account 600
Cash takings
31 January DEBIT Trade receivables 80
CREDIT Sales income account 80
The provision of hair treatment on credit
31 January DEBIT Drawings 100
CREDIT Cash at bank 100
Owner's drawings

4.2 Journal entries to correct errors

Errors corrected by the journal must be capable of correction by means of double entry in the
ledger accounts. In other words, the error must not have caused total debits and total credits to be
unequal.
Special rules, covered in Chapter 6, apply to correcting errors which broke the rule of double entry.

5 The petty cash imprest system

Section overview
 The double entry for transactions recorded in the petty cash book works in the same way as the cash
book.

5.1 Double entry for petty cash transactions

In Chapter 3, we saw how the petty cash book was used to operate the imprest system. It is now time to
see how the double entry works.
A business starts with a cash float on 1.3.20X7 of CU250. This will be a payment from cash at bank to petty
cash:
DEBIT Petty cash CU250
CREDIT Cash at bank CU250

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Suppose five payments were made out of petty cash during March 20X7, none of which attracted VAT. The
petty cash book might look as follows.
Total Total
receipts Date Narrative payments Postage Travel
CU CU CU CU
250.00 1.3.X7 Cash
2.3.X7 Stamps 12.00 12.00
8.3.X7 Stamps 10.00 10.00
19.3.X7 Travel 16.00 16.00
23.3.X7 Travel 5.00 5.00
28.3.X7 Stamps 11.50 11.50
250.00 54.50 33.50 21.00
At the end of each month (or at any other suitable interval) the total payments in the petty cash book are
posted to nominal ledger accounts. This just means that the totals of the columns are entered as
appropriate debit and credit entries in the ledger accounts. For March 20X7, CU33.50 would be debited
to the postage account and CU21.00 to the travel account. The total payments of CU54.50 are credited
to the petty cash account. This completes the double entry.
CU CU
DEBIT Postage 33.50
DEBIT Travel 21.00
CREDIT Petty cash 54.50
Next, the cash float needs to be topped up by a payment of CU54.50 from the main bank account:
DEBIT Petty cash CU54.50
CREDIT Cash at bank CU54.50
So double entry rules have been satisfied, and the petty cash book for the month of March 20X7 will look
like this.
Receipts Date Narrative Payments Postage Travel
CU CU CU CU
250.00 1.3.X7 Cash
2.3.X7 Stamps 12.00 12.00
8.3.X7 Stamps 10.00 10.00
19.3.X7 Travel 16.00 16.00
23.3.X7 Travel 5.00 5.00
28.3.X7 Stamps 11.50 11.50
31.3.X7 Balance c/d 195.50
250.00 250.00 33.50 21.00
195.50 1.4.X7 Balance b/d
54.50 1.4.X7 Cash
The cash float is back up to (CU195.50 + CU54.50) = CU250 on 1.4.X7, ready for more payments to be
made.
The petty cash account in the nominal ledger will be as follows.
PETTY CASH
20X7 CU 20X7 CU
1.3 Cash 250.00 31.3 Payments 54.50
1.4 Cash 54.50 1.4 Balance c/d 250.00
304.50 304.50
1.4 Balance b/d 250.00

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Interactive question 4: Petty cash [Difficulty level: Exam standard]

Summit Glazing operates an imprest petty cash system. The imprest amount is CU150.00. At the end of the
period the totals of the four analysis columns in the petty cash book were as follows.
CU
Column 1 23.12
Column 2 6.74
Column 3 12.90
Column 4 28.50
How much cash is required to restore the imprest amount?
See Answer at the end of this chapter.

6 Day book analysis

Section overview
 When day books are analysed, totals are calculated for each column which are then posted to the
ledger accounts that are relevant to that column.

6.1 How are day books posted?

In Chapter 3 we used the following example of four transactions in the sales day book.
SALES DAY BOOK
Invoice/credit
Date note no. Customer Total VAT Boots Shoes
CU CU CU CU
20X0
Jan 10 I 247 Jones & Co 104.81 15.61 50.00 39.20
I 248 Smith Co 86.48 12.88 73.60 –
CN 004 Alex & Co (31.49) (4.69) – (26.80)
I 249 Enor College 1,264.77 188.37 800.30 276.10
1,424.57 212.17 923.90 288.50
The business would open up a 'sale of shoes' account and a 'sale of boots' account as well as a VAT account
and the trade receivables account. Then the sales day book totals would be posted to the nominal ledger
accounts as follows.
CU CU
DEBIT Trade receivables 1,424.57
CREDIT Sale of shoes account 288.50
CREDIT Sale of boots account 923.90
CREDIT VAT account 212.17
That is why the analysis of sales is kept. Exactly the same reasoning lies behind the analyses kept in the
other books of original entry.

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7 The receivables and payables ledgers

Section overview
 Individual ledger accounts for each credit customer are maintained in the receivables ledger.
 These are the personal accounts; a total receivables account is held in the nominal ledger, called the
receivables control account.
 Individual ledger accounts for each credit supplier are maintained in the payables ledger.
 These are the personal accounts; a total payables account is held in the nominal ledger, called the
payables control account.

7.1 Nominal ledger accounts and personal accounts

Nominal ledger accounts relate to types of income, expense, asset, capital and liability – rent, sales, trade
receivables, payables and so on – rather than to the person to whom the money is paid or from whom it is
received. However, there is also a need for personal accounts, most commonly for receivables and
payables, and these are contained in the receivables ledger and the payables ledger. These are
memorandum accounts only; they are not part of the double entry system; instead summary
receivables control and payables control accounts are kept in the nominal ledger.

7.2 Receivables ledger

The sales day book provides a chronological record of invoices and credit notes sent out by a business to
credit customers, this might involve very large numbers of invoices/credit notes per day or per week. The
same customer might appear in several different places in the sales day book, for sales made on credit at
different times so a customer may owe money on several unpaid invoices. Similarly, the customer may make
payments and take discounts at different times.
In addition to keeping a chronological record of invoices/credit notes and cash received/discount allowed, a
business should also keep a record of how much money each individual credit customer owes, and
what this total debt consists of. The need for a personal account for each customer is a practical one.
 A customer might ask how much they currently owe. Staff must be able to tell them.
 It is a common practice to send out statements to credit customers at the end of each month,
showing how much they owe, and itemising new invoices or credit notes sent out and payments
received during the month.
 The business managers will want to check the credit position of individual customers, and to ensure
that no customer is exceeding their credit limit.
 Most important is the need to match payments received against debts owed. If a customer makes a
payment, the business must be able to set off the payment against the customer's debt and establish
how much he still owes on balance.

Definition
Receivables ledger: The ledger for customers' personal accounts. It is not part of the nominal ledger nor
the double entry system, but double entry rules apply to the receivables ledger account.

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Receivables ledger accounts are written up as follows.

 When invoices or credit notes are sent out, entries are made in the sales day book. Each one is then
subsequently also entered in the relevant customer account in the receivables ledger: invoices on the
debit side, and credit notes on the credit side.
 When receipts are debited in the cash book (cash/cheques etc received), each one is also entered in
the credit side of the relevant customer account.
Each customer account is given a reference or code number, and it is that reference which appears in the
sales day book and cash book.
Here is an example of how a receivables ledger account is laid out. The sales day book reference is SDB 48.
ENOR COLLEGE
A/c no: RL9
CU CU
10.1.X0 Credit note SDB 48 (CN012) 50.00
Balance b/f 250.00 10.1.X0 Cash CB 48 200.00
10.1.X0 Sales SDB 48 (I 249) 1,264.77 Balance c/d 1,264.77
1,514.77 1,514.77
11.1.X0 Balance b/d 1,264.77

7.3 Payables ledger

The payables ledger, like the receivables ledger, consists of a number of personal accounts. These are
separate accounts for each individual supplier, and they enable a business to keep a continuous record
of how much it owes each supplier at any time.

Definition
Payables ledger: The ledger for suppliers' personal accounts. It is not part of the nominal ledger nor part
of the double entry system, but double entry rules apply to the payables ledger account.

After entries are made in the purchases day book and cash book, they are also made in the relevant
supplier account in the payables ledger. Entries are posted to the supplier's personal accounts in the
payables ledger from the books of original entry (the purchases day book and the cash book).
Here is an example of how a payables ledger account is laid out.
COOK
A/c no: PL 31
CU CU
15.3.X8 Cash CB 48 100.00 Balance b/f 200.00
Balance c/d 414.90 15.3.X8 Invoice I 4192 PDB 37 314.90
514.90 514.90
16.3.X8 Balance b/d 414.90

7.4 Control accounts for the receivables and payables ledgers

Having personal accounts for every customer and supplier in the nominal ledger can become very unwieldy,
so:
 Details of transactions are posted from the book of original entry using double entry principles to the
receivables and payables ledgers, and
 Only totals are posted from books of original entry to nominal ledger control accounts as part of
the double entry system
We shall return to control accounts in Chapter 6.

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8 Accounting for discounts

Section overview
 Trade discount reduces the goods total amount on an invoice. It is not recorded separately anywhere
in the accounting system.
 Cash discount is recorded only when it reduces the amount paid by the business (discount received)
or received by it (discount allowed).
 Discount received from suppliers is recorded on the payments side of the cash book. It is debited to
payables control and credited to discounts received (an income account).
 Discount allowed to customers is recorded on the receipts side of the cash book. It is debited to
discounts allowed (an expense account) and credited to receivables control.

Definition
Discount: A reduction in the price of goods below the amount at which those goods would normally be
sold to other customers.

There are two types of discount: trade discount and cash discount.

8.1 Trade discount

Definition
Trade discount: A reduction in the cost of goods, owing to the nature of the trading transaction. It
usually results from buying goods in bulk. It is deducted from the list price of goods sold, to arrive at a final
sales figure. There is no separate ledger account for trade discount.

8.1.1 Examples of trade discount

 A customer is quoted a price of CU1 per unit for a particular item, but a lower price of 95p per unit if
the item is bought in quantities of 100 units or more at a time. This is sometimes called bulk
discount.
 An important customer or a regular customer is offered a discount on all the goods they buy,
regardless of the size of each individual order, because the total volume of their purchases over time is
so large.

8.2 Cash discount

Definition
Cash discount: A reduction in the amount payable in return for immediate payment in cash, or for
payment within an agreed period. There are separate ledger accounts for cash discounts: one for discount
allowed to customers, and one for discount received from suppliers.

For example, a supplier charges CU1,000 for goods, but offers a discount of 5% if the goods are paid for
immediately in cash.

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8.3 Accounting for trade discount

A trade discount is a reduction in the amount of money initially demanded on an invoice.
 If a trade discount is received by a business for goods purchased from a supplier, the amount of money
demanded from the business by the supplier will be net of discount (i.e. it will be the normal sales
value less the discount).
 If a trade discount is given by a business for goods sold to a customer, the amount of money
demanded of the customer by the business will be after deduction of the discount.
Trade discount should therefore be accounted for as follows.
 Trade discounts received should be deducted from the gross cost of purchases by the
supplier. The cost of purchases in the payables ledger will be stated at gross cost minus discount, i.e.
the invoiced amount.
 Trade discounts allowed should be deducted from the gross sales price by the business, so
that revenue will be reported at invoice value net of trade discount, i.e. the invoiced amount.

8.4 Accounting for cash discount received

Whether to take advantage of a cash discount for prompt payment is a matter of financing policy.

Worked example: Taking cash discount

If the business receives, say, CU80 cash discount for paying a debt of CU2,000 early, we account for this as
follows:
 In the purchases account, we debit the invoiced price of CU2,000, and the subsequent financing
decision about accepting the cash discount is ignored. The credit is the trade payable.
 When we pay (CU2,000 – CU80) = CU1,920 and take the discount, we credit cash and debit
payables with CU1,920.
 To account for the discount we debit payables CU80, so eliminating the CU2,000 debt entirely, and
credit an income account CU80, the discount received account.

Interactive question 5: Discounts 1 [Difficulty level: Easy]

Soft Supplies Co recently purchased from Hard Imports Co 10 printers originally priced at CU200 each. A
10% trade discount was negotiated together with a 5% cash discount if payment was made within 14 days.
Calculate the following.
(a) The total of the trade discount
(b) The total of the cash discount
See Answer at the end of this chapter.

8.5 Accounting for cash discount allowed

The same principle is applied in accounting for cash discounts allowed to customers. Goods are sold at a
trade price, and the offer of a discount on that price is a matter of financing policy for the business.

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Interactive question 6: Discounts II [Difficulty level: Intermediate]

You are required to prepare the income statement of Seesaw Timber Merchants for the year ended 31
March 20X6, given the following information.
CU
Purchases at gross cost 120,000
Trade discounts received 4,000
Cash discounts received 1,500
Cash sales 34,000
Credit sales at invoice price 150,000
Cash discounts allowed 8,000
Distribution costs 32,000
Administrative expenses 40,000
Drawings by proprietor, Tim Burr 22,000
See Answer at the end of this chapter.

9 Accounting for VAT

Section overview
 VAT on sales (output VAT) is debited to receivables as part of the posting from the sales day book and
credited to the VAT current account (it is owed to Govt.); the remaining credit is to the sales
account.
 VAT on purchases (input VAT) is debited to the VAT current account (it is due from Govt.) and
credited to payables as part of the posting from the purchases day book; the remaining debit is to the
purchases or other expense account.
 The net amount of VAT owed to Govt. is paid to Govt. regularly.

9.1 What is VAT?

VAT is an indirect tax on the supply of goods and services. Tax is collected at each transfer
point in the chain from prime producer to final consumer. Eventually, the consumer bears the tax
in full and any tax paid earlier in the chain can be recovered by a registered trader who paid it.

Worked example: VAT

A manufacturing company, A Ltd, purchases raw materials at a cost of CU1,000 plus VAT at the standard
rate of 15%. From the raw materials A Ltd makes finished products which it sells to a retail outlet, B Ltd,
for CU1,600 plus VAT at 15%. B Ltd sells the products to customers at a total price of CU2,000 plus VAT
at 15%. How much VAT is paid at each stage in the chain?

Solution
Value of VAT
goods sold 15%
CU CU
Supply to A Ltd (A Ltd pays CU150 VAT but recovers it) 1,000 150
Value added by A Ltd 600
Sale to B Ltd (B Ltd pays CU240 VAT but recovers it) 1,600 240
Value added by B Ltd 400
Sale to 'consumers' (customers pay CU300 VAT, and cannot recover it) 2,000 300

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9.2 How is VAT collected?

Although it is the final consumer who eventually bears the full VAT of CU300, the sum is collected and
paid by the traders who make up the chain, provided they are registered for VAT. Each trader must
assume that his customer is the final consumer:
 He must collect and pay over VAT at the appropriate rate on the full sales value (known as output
tax) of the goods sold.
 He is normally entitled to reclaim VAT paid on his own purchases of goods, expenses and non-current
assets (known as input tax) and so makes a net payment to the Govt. equal to the tax on value added
by himself.
In the example above, the supplier of raw materials collects from A Ltd output VAT of CU150, all of which
he pays over to Govt. When A Ltd sells goods to B Ltd, output VAT is charged at the rate of 15% on
CU1,600 = CU240. Only CU90, however, is paid by A Ltd to Govt. because the company is entitled to
deduct input tax of CU150 suffered on its own purchases. Similarly, B Ltd must charge its customers
CU300 in output VAT, but need only pay over to Govt. the net amount of CU60 after deducting the
CU240 input VAT suffered on its purchase from A Ltd.

9.3 Registered and non-registered persons

Traders whose sales (outputs) are below a certain level need not register for VAT although they
may do so voluntarily. Unregistered traders neither charge VAT on their outputs nor are entitled to
reclaim VAT on their inputs. They are in the same position as a final consumer.
All outputs of registered traders are either taxable or exempt. Traders carrying on exempt
activities (such as a research institute) cannot charge VAT on their outputs and consequently cannot
reclaim VAT paid on their inputs.
Taxable outputs are chargeable at one of three rates.
 Zero rate (on any goods or services exported or considered to be exported from Bangladesh)
 Reduced rate (4% as Turnover tax)
 Standard rate: 15%
Turnover Tax is a tax, as an alternative to "full" VAT, on the turnover of a manufacturer or producer of
taxable goods or a provider of taxable services, as the case may be, who is not obliged to register for the
purposes of VAT under section 15 of the VAT Act, 1991. The rate of turnover tax has now been fixed at
4%.
Persons carrying on taxable activities are entitled to reclaim VAT paid on their inputs. Some
traders carry on a mixture of taxable and exempt activities. Such traders need to apportion the VAT
suffered on inputs and can usually only reclaim the proportion of input tax that relates to taxable
outputs.
Most traders account monthly to Govt. for VAT.
 The most usual position is to have to pay the net balance to Govt. (when output tax exceeds input
tax) i.e. Govt. is a payable.

9.4 Accounting for VAT

As a general principle the treatment of VAT in the trader's ledger accounts should reflect the trader's role
as tax collector, so VAT should not be included in income or in expenses, whether of a capital or
of a revenue nature.

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9.4.1 Irrecoverable VAT

Where the trader suffers irrecoverable VAT as a cost, as in the following cases, VAT should be
included as an expense. (It cannot be claimed as input tax.)
 Persons not registered for VAT will suffer VAT on inputs as a cost. This will increase their
expenses and the cost of any non-current assets they purchase.
 Registered persons who also carry on exempted activities may have a residue of input VAT
which falls directly on them. In this situation the costs to which this residue applies will be inflated by
the irrecoverable VAT.
 Non-deductible inputs will be borne by all traders.
– VAT on cars purchased and used in the business is not reclaimable (VAT on a car acquired new
for resale, i.e. by a car trader, is reclaimable).
– VAT on business entertaining is not deductible as input tax other than VAT on entertaining
staff.
Where VAT is not recoverable it must be regarded as part of the cost of the items purchased and included
in the income statement or balance sheet as appropriate.

9.5 VAT and discounts

VAT is charged on the goods or services total on an invoice (or credit note) net of:
 Trade discount

This general principle is carried to the extent that where a discount is offered at the point of sale, VAT is
charged on the amount net of the offered discount.

Worked example: VAT and discounts

Matt sells usually sells goods at CU130 each, he gives Anil a trade discount of CU10 so he sells goods to
Anil for CU120. Matt is registered for VAT.

How much output VAT should Matt include on Anil's invoice?

Solution
If the discount had not been offered output VAT of CU120 x 15% = CU18.00 would be due. But because of
the discount, Matt's sales invoice will show
INVOICE
CU
List price 130.00
Trade discount (10.00)
Goods value 120.00
VAT (120  95%  15%) 17.50
Invoice total 137.10

If Anil takes up the discount, he need only pay CU137.10 in full settlement, but even if he does not take the
discount, the amount of VAT is not adjusted.

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9.6 VAT and irrecoverable debts

Most registered persons are obliged to record VAT when a supply is made or received (effectively when a
sales invoice is raised or a purchase invoice recorded). This has the effect that output tax has to be paid
to Govt. before it has all been received from customers. If an amount due from a customer is
subsequently written off as irrecoverable, the VAT element may not be recoverable from Govt. for some
time after the sale.

9.7 Summary of accounting entries for VAT

In Chapter 3 we saw how VAT is initially recorded in the books of original entry. Let's summarise it now.
(a) Sales income shown in the income statement must exclude output VAT. However trade
receivables will include VAT, as they reflect the total amount due from customers. The sales day
book is the book of original entry for VAT on credit sales.
The double entry posted from the sales day book for sales of CU500,000 on credit is:
CU CU
DEBIT Trade receivables a/c (including VAT, called gross) 575,000
CREDIT Sales a/c (excluding VAT, called net) 500,000
VAT a/c (15%  CU500,000) – output tax 75,000
(b) Expenses shown in the income statement must exclude input VAT. However, trade payables will
include input VAT, as they reflect the total amount payable to suppliers. The purchases day book is
the book of original entry for VAT on credit purchases. The double entry posted from the purchases
day book for purchases of CU400 is:
CU CU
DEBIT Purchases expense (net) 400
VAT a/c (15%  CU400) – input tax 60
CREDIT Trade payables (gross) 460
(c) Sales income received and expenses paid as cash transactions in the cash book or petty cash book
must have the VAT recorded in these books of original entry, and then posted as above in (a) and (b).
(d) Irrecoverable VAT on expenses or non-current assets must be included in their cost in the
income statement or balance sheet.
(e) The net amount due to Govt. should be included in other payables (or other receivables) in the
balance sheet.

9.8 Calculating VAT from a gross amount

If you are told that an amount includes VAT at 15% (a gross amount), you can calculate the VAT element by
multiplying the gross amount by 15/115, or 3/23.

Worked example: VAT calculation

A sale of CU200 attracts VAT at 15%, i.e. CU30. The gross amount is CU230. To get back to the VAT
element:
CU230 x 3/23 = CU30

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Interactive question 7: VAT [Difficulty level: Exam standard]

Mussel is preparing financial statements for the year ended 31 May 20X9. Included in its balance sheet as at
31 May 20X8 was a balance for VAT due from Govt. of CU15,000.

Mussel's summary income statement for the year to 31 May 20X9 is as follows.
CU'000
Revenue (net) (all standard rated) 500
Purchases (net) (all standard rated) (120)
Gross profit 380
Expenses (see note) (280)
Net profit 100
CU'000
Note: expenses
Wages and salaries (exempt of VAT) 163
Entertainment expenditure (CU40 + irrecoverable VAT CU6) 46
Other (net) (all standard rated at 15%) 70
279

Payments of CU5,000, CU15,000 and CU20,000 have been made in the year to Govt. and a repayment of
CU12,000 was received.

Requirement
What is the balance for VAT in the balance sheet as at 31 May 20X9? Assume a 15% standard rate of VAT.
(Hint: Use a T account for VAT.)
See Answer at the end of this chapter.

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Summary and Self-test

Summary
Journal Books of original entry

Sales day Petty cash Purchases

Cash book Payroll
book book day book

Receipts/Payments

Nominal ledger accounts

Receivables ledger Payables ledger

RECEIVABLES Duality concept PAYABLES

Sales/VATX Cash rec’d X Cash paid X Purch/VAT X
Disc all’d X Disc rec’d X

Double entry bookkeeping

Every transaction gives rise to two
equal entries: Debit = Credit
ASSET EXPENSE
Debit Credit Debit Credit
Increase Decrease Increase Decrease
CAPITAL
Debit Credit
Decrease Increase
LIABILITY REVENUE
Debit Credit Debit Credit
Decrease Increase Decrease Increase

Debits (DR) Credits (CR)

Increase Assets/Expenses Liabilities/Capital/Income
Decrease Liabilities/Capital/Income Assets/Expenses

Journal entry
CU CU
DR Name of account to be debited X
CR Name of account to be credited X
Narrative

To record items not recorded elsewhere

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Self-test
Answer the following questions.
1 Together ledger accounting and double entry
A Record directly all the source documents
B Summarise the transactions listed in the books of original entry
C Record all the entity’s credit transactions
D Record all the entity’s cash transactions
2 The nominal ledger
A Is the book of original entry for all transactions not recorded in other books of original entry
B Summarises all transactions relating to receivables
C Summarises all transactions relating to payables
D Summarises all the entity’s financial transactions
3 In a T account a debit entry would be made in the
A Left hand side
B Right hand side
4 A debit entry in a T account will
A Decrease an asset
B Decrease an expense
C Increase a liability
D Decrease capital
5 A credit entry in a T account will
A Decrease an asset
B Increase an expense
C Decrease a liability
D Decrease capital
6 When a credit customer pays an invoice for CU115.00 including VAT at 15%, the credit entry in the
VAT ledger account will be
A CU 115.00
B CU100
C CU15.00
D Nil

7 Discount received from suppliers that is recorded initially in the cash book is debited to
A Trade payables
B Trade receivables
C Discount received
D Purchases
8 A journal does not need to contain
A The name of the ledger account to be debited
B The name of the ledger account to be credited
C Narrative
D The name of the book of original entry where the relevant source document is recorded
9 When petty cash is topped up the credit entry is made to
A The petty cash book
B Trade receivables
C The cash book
D Trade payables

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10 Individual customer accounts are kept in which ledger?

A Payables ledger
B Trade receivables
C Receivables ledger
D Nominal ledger
Now, go back to the Learning Objectives in the Introduction. If you are satisfied that you have achieved
these objectives, please tick them off.

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Answers to Self-test

1 B The nominal ledger contains summaries of both cash and credit transactions (C and D). Source
documents are recorded directly in books of original entry, not the nominal ledger (A)
2 D The nominal ledger contains summaries of transactions relating to both receivables and payables
(B and C) as well as other transactions. Answer (A) describes the journal
3 A A credit entry is made in the right hand side
4 D Answers A, B and C all describe credit entries
5 A Answers B, C and D all describe debit entries
6 D The VAT is recorded in the VAT account when the invoice is first entered in the sales day book,
not when the customer pays
7 A The double entry is debit trade payables, credit discount received (C). It has no effect on
purchases (D) nor on trade receivables (B)
8 D The journal is the book of original entry. Items A, B and C are all required in a journal entry,
though narrative is often omitted when the journal is routine
9 C The double entry is debit petty cash (A), credit cash at bank. Trade receivables and payables (B
and D) are unaffected
10 C The receivables ledger contains the individual customer accounts. The nominal ledger (D)
contains the trade receivables account (B) which is the total of all the individual customer
accounts. The payables ledger contains individual suppliers accounts

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Answers to Interactive questions

Answer to Interactive question 1

(c) Payment received from a credit customer
 Receivables decrease CREDIT Receivables (decrease in asset)
 Cash at bank increases DEBIT Cash at bank (increase in asset)
(d) Sell books for cash
 Income increases CREDIT Sales (increase in income)
 Cash at bank increases DEBIT Cash at bank (increase in asset)

Answer to Interactive question 2

CU CU
(a) DEBIT Machine account (non-current asset) 8,000
CREDIT Trade payables 8,000
(b) DEBIT Purchases account 500
CREDIT Trade payables 500
(c) DEBIT Trade receivables 1,200
CREDIT Sales 1,200
(d) DEBIT Trade payables 300
CREDIT Cash at bank 300
(e) DEBIT Cash at bank 180
CREDIT Trade receivables 180
(f) DEBIT Wages account 4,000
CREDIT Cash at bank 4,000
(g) DEBIT Rent account 700
CREDIT Trade payables 700
(h) DEBIT Trade payables 700
CREDIT Cash at bank 700
(i) DEBIT Insurance expense 90
CREDIT Cash at bank 90

Answer to Interactive question 3

In this answer we have calculated the balancing figure on the cash at bank account. We shall come back to
this in Chapter 5. For now, just make sure that you completed all the necessary steps correctly.
CASH AT BANK

CU CU
Capital (A) 7,000 Rent (B) 3,500
Bank loan (D) 1,000 Shop fittings (E) 2,000
Sales (F) 10,000 Trade payables (H) 4,950
Trade receivables (I) 2,480 Bank loan interest (J) 100
Other expenses (K) 1,900
Drawings (L) 1,500
13,950
Balancing figure (the amount of cash
left over after payments have been
made) – carried down 6,530
20,480 20,480
Debit balance brought down 6,530

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CAPITAL (RON KNUCKLE)

CU CU
Cash at bank (A) 7,000
BANK LOAN

CU CU
Cash at bank (D) 1,000
PURCHASES

CU CU
Trade payables (C) 5,000
TRADE PAYABLES

CU CU
Cash at bank (H) 4,950 Purchases (C) 5,000
Discount received (H) 50
5,000 5,000
RENT

CU CU
Cash at bank (B) 3,500
SHOP FITTINGS

CU CU
Cash at bank (E) 2,000
SALES

CU CU
Cash at bank (F) 10,000
Trade receivables (G) 2,500
TRADE RECEIVABLES

CU CU
Sales (G) 2,500 Cash at bank (I) 2,480
Discount allowed (I) 20
2,500 2,500
DISCOUNT RECEIVED

CU CU
Trade payables (H) 50
DISCOUNT ALLOWED

CU CU
Trade receivables (I) 20

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BANK LOAN INTEREST

CU CU
Cash at bank (J) 100
OTHER EXPENSES

CU CU
Cash at bank (K) 1,900
DRAWINGS ACCOUNT

CU CU
Cash at bank (L) 1,500
(a) If you want to make sure that this solution is complete, you should go through the transactions A to L
and tick off each of them twice in the ledger accounts, once as a debit and once as a credit. When you
have finished, all transactions in the 'T' account should be ticked, with only totals and the balancing
figure in the cash at bank account left over.
(b) In fact, there is an easier way to check that the solution to this sort of problem does 'balance'
properly, which we will see in Chapter 5.
(c) On asset, capital and liability accounts, the debit or credit balance represents the amount of the asset,
capital or liability outstanding at the period end. For example, on the cash at bank account, debits
exceed credits by CU6,530 and so there is a balance on the credit side carried down to be a debit
balance of cash in hand of CU6,530. On the capital account, there is a credit balance of CU7,000 and
so the business owes Ron CU7,000.
(d) The balances on the revenue and expense accounts represent the total of each revenue or expense
for the period. For example, sales revenue for the period totals CU12,500.

Answer to Interactive question 4

CU71.26. This is the total amount of cash that has been used.

Answer to Interactive question 5

(a) CU200 (CU200  10  10%)
(b) CU90 (CU200  10  90%  5%)

Answer to Interactive question 6

SEESAW TIMBER MERCHANTS
INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH 20X6
CU CU
Sales (150,000 + 34,000) 184,000
Purchases (120,000 – 4,000) (116,000)
Gross profit 68,000
Discounts received 1,500
Expenses
Distribution costs 32,000
Administrative expenses including discount allowed (40,000 + 8,000) 48,000
(80,000)
Net loss transferred to balance sheet (10,500)

© The Institute of Chartered Accountants in England and Wales, March 2009 105
 Accounting

Answer to Interactive question 7

VAT

CU CU
Balance b/d 15,000 Output tax – (CU500,000  15%) 75,000
Input tax – Purchases (CU120,000  18,000 Cash received from Govt 12,000
15%)
Input tax – Other expenses 10,500
(CU70,000  15%)
Cash paid to HMRC (5,000 + 15,000 40,000
+ 20,000)
Balance c/d 3,500
87,000 87,000
Balance b/d 3,500
Therefore there is a balance owing to Govt. of CU3,500, which is shown on the balance sheet as an
other payable.

106 © The Institute of Chartered Accountants in England and Wales, March 2009