Introduction to Bookkeeping Accounts and ASA 2 Business

Introduction to Bookkeeping

Accounts and AS/A 2 Business Studies • For AS/A 2 Business Studies you are required to • • • understand, interpret, analyse and manipulate the final accounts of business organisation But in one respects it is the equivalent to entering the cinema part way through the film. As a result, we develop some understanding (at least sufficient for A level purposes) of what is going on but not a complete understanding This is because the basic groundwork of accounting is not part of the specification - that basic ground work is what is called bookkeeping This presentation seeks to outline the basic

Bookkeeping • Bookkeeping is concerned with the • recording • classification • organising • of all financial transactions by a business

Single entry bookkeeping • This is used for small cash based businesses and clubs and societies • A cash based business will not have debtors (because it sells its goods and services for cash not credit) or creditors (because it pays for its inputs in cash). Therefore it will not have the complications associated with a more sophisticated business

Double entry bookkeeping • All transactions have a twofold effect • Double entry records that twofold effect • Double entry bookkeeping requires that there must always be a debit entry and a credit entry when recording financial transactions • The system works on the principle that whenever value is given , value must also be received

Debits and credits • Accountants view the two fold effects of all transactions on a particular account from a receiving and giving perspective • A debit means – to receive value or value received – that a transactions has been received into an account • A credit means – to give value or value given

Debits and credits • A debit entry indicates: – an increase in assets – an increase in expenses – a decrease in liabilities – a decrease in • A credit entry indicates – a decrease in assets – a decrease in expenses – an increase in liabilities – an increase in

Account • An account is – an explanation, a record, a listing of a particular event – a statement of indebtedness from one person to another – a named segment of a ledger recording transactions relevant to the person or matter named • Book of account

Five stages in the process • Stage 1 – Original (prime) documents • Stage 2 - Book of prime entry: day books or journals • Stage 3 - Ledger accounts: all financial transactions are recorded by making double entries in the ledger • Stage 4 - Trial balance: drawn up to check the accuracy of the ledger entries • Stage 5 - Final accounts: profit and loss account, balance sheet

Stage 1 Prime documents

Stage one-prime documents • These business documents are the source of all accounting records - they are the raw materials of the bookkeeping and accounting system • We can track the flow of document in a credit transactions: – Purchase order placed by the customer – Delivery note attached to the goods – Invoice requesting payment – Credit note (where necessary) as a refund for

Documents originating with the buyer • Purchase order - order placed for goods • Remittance advice - advising of payment made • Cheques - means of payment

Document originating with the seller • Delivery note with goods - advising customer • • • of goods delivered Invoice - a document sent to a credit customer demanding payment, usually within a stipulated time Credit note - a document that details the amount of allowance to be made when a purchases returns faulty goods to the supplier Statement of account - summary of the transactions that have taken place between, a supplier and customer. It itemises invoices sent,

Stage 2 Books of prime entry

Books of prime entry • Information from prime documents is initially recorded in the following books of prime entry: • Sales day book - records invoices for sales • Purchases day book - records invoice received from suppliers • Sales returns day book - returned goods

Day books • The day books are the primary accounting • • • record Day books or books of prime entry are books or accounts in which certain types of transaction are recorded before becoming part of the double entry bookkeeping system Purchases and sales on credit are entered in day books using details from invoices and credit notes These books are organised on a day by day basis and summarise the information from the

Entering in books of prime entry Document Credit sales Entered In Sales day book Credit purchases Returns inwards Purchases day book Returns inward day book Returns outward day book Cash receipts and payments Other types of transaction General journal

Sales day book • Also known as a sales journal • It lists all credit sales written up from copy sales invoices sent to customers • Postings are made from this book to ledgers: – As a debit entry to the customers account in the sales ledger – As a credit entry to the sales account in the general or nominal ledger

Purchases day book • Also known as purchases journal • This is a book of prime entry in which invoiced amounts of purchases are recorded • It is written up from purchase invoices received from suppliers of goods • Information from this book is posted – As credits to personal accounts in the purchase ledger

Sales returns day book • Also known as the returns inward book • Returns inwards refers to goods returned by • • • customers usually because the goods are unsatisfactory The book is a record of goods that have been returned by customers It is written up from copy credit notes sent to customers Information from the book is posted as to the credit of personal accounts in the sales ledger

Purchase returns day book • Also known as returns outward book • It records goods returned to suppliers and is written up from credit notes received • From this book entries are posted to – The debit side of individual suppliers accounts in the purchase ledger, and – The credit side of purchase returns account of the general or nominal ledger

Cash book • The cash book is a book of prime entry which records bank cash transactions • This includes receipts from customers and payments to suppliers • The cash book records all transactions for bank account and cash account • It records transactions in date order • The petty cash book records low value

Stage 3 Ledgers

Stage three-ledgers • A ledger is a collection of accounts of a similar type • All transactions are recorded by making double entries in the ledger • This reflects the dual aspect of all financial transactions • Credits are shown on the right and debits on the left

Double entry book keeping in ledgers • Each transaction from the books of original entry (day books) is entered into double entry accounts contained in the ledgers • Sales ledger - accounts of debtors • Purchase ledger - accounts of creditors • General (or nominal )ledger - all other accounts • Cash books - for bank and cash transactions

Purchases ledger • This contains the accounts of all credit suppliers of the business and it records – Purchases made on credit from suppliers – Purchases returns made by the business – Payments made to creditors – Cash discounts received for prompt payment • It does not record cash purchases • The ledger contains an account for each creditor and records the transactions with

Sales ledger • This contains the accounts of all the business’s credit customers. – – Sales on credit to customers Sales returned by customers Payments received from debtors Cash discounts for prompt payment. • The sales ledger contains an account for each • debtor and records the transaction with that debtor Cash sales do not appear in this ledger

General ledger • This contains all impersonal accounts- this ledger • is distinguished from personal ledgers which contain accounts of customers and suppliers Nominal accounts - where revenues and expenses are recorded – Sales account - cash and credit sales, sales returns – Purchases account - cash and credit purchases, purchases returns – Expenses and income, loans, capital and drawings – Value added tax – Profit and loss • Real accounts - transactions dealing with

Tracking credit transactions Transaction Document Goods sold to customer Goods purchased Returns inward Returns outwards Prime entry Ledger entry Sales Invoice Sales day General book Sales Purchase day General invoice book Purchases Credit note Sales return General sent day book Sales Credit note Purchase General received returns day Purchases book

Cash transactions Transaction Book of Ledger original entry Cash book Sales ledger Customer pays with cheque Supplier is paid Cash book with a cheque Purchasers ledger

Stage four Trial Balance

Trial balance • The trial balance consists of list of all debit balances and all credit balances from all the individual accounts of the business • These are taken from the ledgers • The debit balances and credit balances are set out in separate columns • The debit and credit columns are then totalled • The total of all credits should equal the total of all debits • If the totals do equate then we can be

Trial balance • A trial balance is – A summary of balances of all the accounts at the end of the accounting period – A listing of debit and credit balances to check the correctness of the double entry system – The bringing together of figures from double entry accounts in the ledgers in the form of a list • A trial balance is drawn up periodically to check the accuracy of ledger entries.

Functions of the trial balance • The trial balance summarises information from • • the ledgers Final accounts are prepared using information from the trial balance The trial balance provides information for internal control purposes e. g. the amount owed and amount owing The arithmetic accuracy of entries made in books of account can be confirmed If the credit and debit columns of the trial balance are the same, it proves that debit entries and credit entries were matched when

A trial balance for company X at 31/3/06 Item Capital Bank Cash Purchases Wages Sales Debtors Creditors Total Debit(£k ) 4 1 20 30 5 5 65 Credit Transferred to… (£k) 20 Balance sheet P+L account 45 P+L account Balance sheet 65

Trial balance Normally debit • Cash account • Purchases account • Fixed assets account • Expense accounts • Drawings account • Debtors account • Stock Normally credit • Sales account • Capital account • Loans to the business creditors accounts

Stage five - final accounts • Manufacturing account • Trading and profit and loss account – These two are statements measuring profit (or loss) for an accounting period • Balance sheet – A statement of assets, liabilities and capital at the end of an accounting period • Cash flow statement – A statement of cash inflow and cash outflow

Bookkeeping errors

Types of book-keeping error • Of omission - transaction not recorded • Of commission - transaction recorded in the • • • wrong account Of principle - transaction recorded in the wrong class of accounts e. g. as an asset rather than a liability Of original entry - transaction recorded but the wrong amount –a transaction entered incorrectly in both accounts Of reverse entries - recorded in the correct amounts but the wrong side of the accountentered a credit as debit and vice versa

Inaccurate record keeping • Inaccurate record keeping leads to • Incorrect information being used as the basis forecasts and decisions • Late or non-payment or incorrect payment of creditors • Late or non-payment or incorrect payment by debtors • Inaccurate profit calculations and incorrect tax assessment

Inaccurate record keeping • Inaccurate record keeping leads to: • Poor cost control • Poor working capital control • Cash flow problems • Loss of confidence on the part of management, future investors, financiers, customers, suppliers and employees