The Accounting Process and Systems — full notes
Paper No. 1: Financial Accounting · The Accounting Process and Systems
The Accounting Process and Systems
1. The journey of a transaction
Every transaction starts as a source document, gets summarised in a book of prime entry, is posted using double entry to the ledger, and every account's balance is eventually listed on a trial balance. This note follows one real transaction through all four stages.
2. Source documents
| Document | Used for |
|---|---|
| Quotation | A price offered before a sale is agreed |
| Purchase order | A formal request to buy, sent to a supplier |
| Invoice | A request for payment, issued after goods/services are supplied |
| Credit note | Reduces what a customer owes |
| Debit note | Increases what a customer owes |
| Receipt | Confirms payment has been received |
| Remittance advice | Tells a supplier what an invoice payment covers |
| Statement of account | A summary of transactions with a customer over a period |
| Petty cash voucher | Records a small cash payment |
3. Books of prime entry
| Book | Records |
|---|---|
| Sales Journal | All credit sales |
| Purchases Journal | All credit purchases |
| Sales Returns Journal | Goods returned by customers |
| Purchases Returns Journal | Goods returned to suppliers |
| Cash Book | All cash and bank receipts and payments |
| Petty Cash Book | Small cash payments |
| General Journal | Anything that does not fit the other books |
4. Worked example — one transaction, start to finish
Zawadi Stores sells goods on credit to Juma Enterprises for KES 45,000 on 15 March, invoice INV-2201.
Step 1 - Source document: the invoice, recording the customer, date, goods, and amount.
Step 2 - Book of prime entry: the transaction joins the Sales Journal:
| Date | Invoice No. | Customer | Amount (KES) |
|---|---|---|---|
| 2 Mar | INV-2199 | Amani Traders | 32,000 |
| 8 Mar | INV-2200 | Bahati Ltd | 27,500 |
| 15 Mar | INV-2201 | Juma Enterprises | 45,000 |
| 22 Mar | INV-2202 | Amani Traders | 18,750 |
| Total | 123,250 |
Step 3 - Double entry, posted to the ledger:
DEBIT increases: CREDIT increases:
Assets Liabilities
Expenses Capital
Income
For the Juma Enterprises sale: Debit Juma Enterprises' account (Sales Ledger) KES 45,000 - an asset increasing. Credit Sales account (General Ledger) KES 45,000 - income increasing.
Step 4 - Trial balance: every account's closing balance is listed, debit balances in one column, credit balances in the other. The two totals should always match - that is the check a trial balance provides.
5. A second example, to reinforce the rule
Zawadi Stores pays KES 8,000 cash for office rent: Debit Rent Expense KES 8,000 (expense increasing). Credit Cash KES 8,000 (asset decreasing). Same rule, different transaction type.
6. Computerised accounting systems
Software automates posting and totalling, but the underlying logic does not change. Benefits: speed, accuracy, automatic trial balances, easier reporting. Challenges: upfront cost, staff training, system failures or data loss, cybersecurity risk.