Introduction to BookkeepingIntroduction to Bookkeeping

Accounts and AS/A2 Business Accounts and AS/A2 Business StudiesStudies• For AS/A2 Business Studies you are required to For AS/A2 Business Studies you are required to

understand, interpret, analyse and manipulate the final understand, interpret, analyse and manipulate the final accounts of business organisationaccounts of business organisation

• But in one respects it is the equivalent to entering the But in one respects it is the equivalent to entering the cinema part way through the film. As a result, we cinema part way through the film. As a result, we develop some understanding (at least sufficient for A develop some understanding (at least sufficient for A level purposes) of what is going on but not a complete level purposes) of what is going on but not a complete understandingunderstanding

• This is because the basic groundwork of accounting is This is because the basic groundwork of accounting is not part of the specification - that basic ground work is not part of the specification - that basic ground work is what is called bookkeepingwhat is called bookkeeping

• This presentation seeks to outline the basic processes This presentation seeks to outline the basic processes involved preparatory to drawing up final accountsinvolved preparatory to drawing up final accounts

BookkeepingBookkeeping

• Bookkeeping is concerned with the Bookkeeping is concerned with the

• recordingrecording

• classificationclassification

• organisingorganising

• of all financial transactions by a of all financial transactions by a businessbusiness

Single entry bookkeepingSingle entry bookkeeping

• This is used for small cash based businesses This is used for small cash based businesses and clubs and societiesand clubs and societies

• A cash based business will not have debtors A cash based business will not have debtors (because it sells its goods and services for (because it sells its goods and services for cash not credit) or creditors (because it pays cash not credit) or creditors (because it pays for its inputs in cash). Therefore it will not for its inputs in cash). Therefore it will not have the complications associated with a have the complications associated with a more sophisticated businessmore sophisticated business

• This type of business will rely on the use of its This type of business will rely on the use of its cash book as the main source of informationcash book as the main source of information

Double entry bookkeepingDouble entry bookkeeping

• All transactions have a twofold effectAll transactions have a twofold effect

• Double entry records that twofold effectDouble entry records that twofold effect

• Double entry bookkeeping requires that Double entry bookkeeping requires that there must always be a debit entry and a there must always be a debit entry and a credit entry when recording financial credit entry when recording financial transactionstransactions

• The system works on the principle that The system works on the principle that whenever value is given ,value must also whenever value is given ,value must also be receivedbe received

Debits and creditsDebits and credits

• Accountants view the two fold effects of all Accountants view the two fold effects of all transactions on a particular account from a transactions on a particular account from a receiving and giving perspectivereceiving and giving perspective

• A debit meansA debit means– to receive value or value receivedto receive value or value received– that a transactions has been received into an accountthat a transactions has been received into an account

• A credit meansA credit means– to give value or value givento give value or value given– that a transaction is given by an accountthat a transaction is given by an account

• For every debit there must be a creditFor every debit there must be a credit

Debits and creditsDebits and credits

• A debit entry indicates:A debit entry indicates:

– an increase in assetsan increase in assets– an increase in an increase in

expensesexpenses– a decrease in a decrease in

liabilitiesliabilities– a decrease in revenuea decrease in revenue– a decrease in capitala decrease in capital

• And is shown on the left And is shown on the left hand side of an accounthand side of an account

• A credit entry indicatesA credit entry indicates

– a decrease in assetsa decrease in assets– a decrease in a decrease in

expensesexpenses– an increase in an increase in

liabilitiesliabilities– an increase in revenuean increase in revenue– an increase in capitalan increase in capital

• And is shown on the right And is shown on the right hand side of an accounthand side of an account

AccountAccount

• An account is An account is – an explanation, a record, a listing of a particular an explanation, a record, a listing of a particular

eventevent– a statement of indebtedness from one person to a statement of indebtedness from one person to

anotheranother– a named segment of a ledger recording a named segment of a ledger recording

transactions relevant to the person or matter transactions relevant to the person or matter namednamed

• Book of accountBook of account– these are ledgers and day books in which a these are ledgers and day books in which a

business records its transactionsbusiness records its transactions

Five stages in the processFive stages in the process

• Stage 1 – Stage 1 – Original (prime) documentsOriginal (prime) documents

• Stage 2 - Stage 2 - Book of prime entry:Book of prime entry: day books or day books or journalsjournals

• Stage 3 - Stage 3 - Ledger accounts:Ledger accounts: all financial all financial transactions are recorded by making double transactions are recorded by making double entries in the ledgerentries in the ledger

• Stage 4 - Stage 4 - Trial balance:Trial balance: drawn up to check the drawn up to check the accuracy of the ledger entriesaccuracy of the ledger entries

• Stage 5 - Stage 5 - Final accounts:Final accounts: profit and loss account, profit and loss account, balance sheet balance sheet

Stage 1Stage 1Prime documentsPrime documents

Stage one-prime documents Stage one-prime documents

• These business documents are the source of all accounting These business documents are the source of all accounting records - they are the raw materials of the bookkeeping records - they are the raw materials of the bookkeeping and accounting systemand accounting system

• We can track the flow of document in a credit transactions:We can track the flow of document in a credit transactions:– Purchase order placed by the customerPurchase order placed by the customer– Delivery note attached to the goodsDelivery note attached to the goods– Invoice requesting paymentInvoice requesting payment– Credit note (where necessary) as a refund for unsatisfactory Credit note (where necessary) as a refund for unsatisfactory

goodsgoods– Statement of account - a summary of the accountStatement of account - a summary of the account– Remittance note advising of paymentRemittance note advising of payment– Cheque or other system of paymentCheque or other system of payment– Receipt to acknowledge paymentReceipt to acknowledge payment

Documents originating with Documents originating with the buyerthe buyer

• Purchase order - order placed for Purchase order - order placed for goods goods

• Remittance advice - advising of Remittance advice - advising of payment madepayment made

• Cheques - means of paymentCheques - means of payment

Document originating with Document originating with the sellerthe seller• Delivery note with goodsDelivery note with goods - advising customer of goods - advising customer of goods

delivereddelivered

• InvoiceInvoice - a document sent to a credit customer - a document sent to a credit customer demanding payment, usually within a stipulated timedemanding payment, usually within a stipulated time

• Credit noteCredit note - a document that details the amount of - a document that details the amount of allowance to be made when a purchases returns faulty allowance to be made when a purchases returns faulty goods to the suppliergoods to the supplier

• Statement of accountStatement of account - summary of the transactions - summary of the transactions that have taken place between, a supplier and customer. that have taken place between, a supplier and customer. It itemises invoices sent, monies received, discounts It itemises invoices sent, monies received, discounts allowed and all returnsallowed and all returns

• ReceiptsReceipts - acknowledgement of payment - acknowledgement of payment

Stage 2Stage 2Books of prime entryBooks of prime entry

Books of prime entryBooks of prime entry

• Information from prime documents is initially Information from prime documents is initially recorded in the following books of prime entry: recorded in the following books of prime entry:

• Sales day bookSales day book - records invoices for sales - records invoices for sales

• Purchases day bookPurchases day book - records invoice - records invoice received from suppliersreceived from suppliers

• Sales returns day bookSales returns day book - returned goods - returned goods

• Purchase returns day book -Purchase returns day book - returned goods returned goods

• Cash bookCash book - cash transactions - cash transactions

Day booksDay books

• The day books are the primary accounting recordThe day books are the primary accounting record

• Day books or books of prime entry are books or Day books or books of prime entry are books or accounts in which certain types of transaction are accounts in which certain types of transaction are recorded before becoming part of the double entry recorded before becoming part of the double entry bookkeeping systembookkeeping system

• Purchases and sales on credit are entered in day Purchases and sales on credit are entered in day books using details from invoices and credit notesbooks using details from invoices and credit notes

• These books are organised on a day by day basis and These books are organised on a day by day basis and summarise the information from the prime documentssummarise the information from the prime documents

• Day book entries are transferred to ledgers while Day book entries are transferred to ledgers while totals of entries are transferred to the nominal ledgertotals of entries are transferred to the nominal ledger

Entering in books of prime Entering in books of prime entryentryDocumentDocument Entered InEntered In

Credit salesCredit sales Sales day bookSales day book

Credit purchasesCredit purchases Purchases day bookPurchases day book

Returns inwardsReturns inwards Returns inward day Returns inward day bookbook

Returns outwardReturns outward Returns outward day Returns outward day bookbook

Cash receipts and Cash receipts and paymentspayments

Cash bookCash book

Other types of Other types of transactiontransaction

General journalGeneral journal

Sales day bookSales day book

• Also known as a sales journalAlso known as a sales journal

• It lists all credit sales written up from copy It lists all credit sales written up from copy sales invoices sent to customerssales invoices sent to customers

• Postings are made from this book to Postings are made from this book to ledgers:ledgers:– As a debit entry to the customers account As a debit entry to the customers account

in the sales ledgerin the sales ledger– As a credit entry to the sales account in As a credit entry to the sales account in

the general or nominal ledgerthe general or nominal ledger

Purchases day bookPurchases day book

• Also known as purchases journalAlso known as purchases journal

• This is a book of prime entry in which invoiced This is a book of prime entry in which invoiced amounts of purchases are recordedamounts of purchases are recorded

• It is written up from purchase invoices received It is written up from purchase invoices received from suppliers of goodsfrom suppliers of goods

• Information from this book is postedInformation from this book is posted– As credits to personal accounts in the As credits to personal accounts in the

purchase ledgerpurchase ledger– As debits in the purchase account of the As debits in the purchase account of the

general or nominal ledgergeneral or nominal ledger

Sales returns day bookSales returns day book

• Also known as the returns inward bookAlso known as the returns inward book

• Returns inwards refers to goods returned by Returns inwards refers to goods returned by customers usually because the goods are customers usually because the goods are unsatisfactoryunsatisfactory

• The book is a record of goods that have been returned The book is a record of goods that have been returned by customersby customers

• It is written up from copy credit notes sent to It is written up from copy credit notes sent to customerscustomers

• Information from the book is posted as to the credit of Information from the book is posted as to the credit of personal accounts in the sales ledger and the debit of personal accounts in the sales ledger and the debit of sales return account in the general or nominal ledgersales return account in the general or nominal ledger

Purchase returns day bookPurchase returns day book

• Also known as returns outward bookAlso known as returns outward book

• It records goods returned to suppliers and It records goods returned to suppliers and is written up from credit notes receivedis written up from credit notes received

• From this book entries are posted toFrom this book entries are posted to– The debit side of individual suppliers The debit side of individual suppliers

accounts in the purchase ledger, andaccounts in the purchase ledger, and– The credit side of purchase returns The credit side of purchase returns

account of the general or nominal ledgeraccount of the general or nominal ledger

Cash bookCash book

• The cash book is a book of prime entry which The cash book is a book of prime entry which record which records bank cash transactionsrecord which records bank cash transactions

• This includes receipts from customers and This includes receipts from customers and payments to supplierspayments to suppliers

• The cash book records all transactions for bank The cash book records all transactions for bank account and cash accountaccount and cash account

• It records transactions in date orderIt records transactions in date order

• The petty cash book records low value cash The petty cash book records low value cash payments including transactions not made payments including transactions not made through a bank accountthrough a bank account

Stage 3Stage 3LedgersLedgers

Stage three-ledgersStage three-ledgers

• A ledger is a collection of accounts of A ledger is a collection of accounts of a similar typea similar type

• All transactions are recorded by All transactions are recorded by making double entries in the ledgermaking double entries in the ledger

• This reflects the dual aspect of all This reflects the dual aspect of all financial transactionsfinancial transactions

• Credits are shown on the right and Credits are shown on the right and debits on the leftdebits on the left

Double entry book keeping Double entry book keeping in ledgersin ledgers• Each transaction from the books of original Each transaction from the books of original

entry (day books) is entered into double entry entry (day books) is entered into double entry accounts contained in the ledgersaccounts contained in the ledgers

• Sales ledger - accounts of debtorsSales ledger - accounts of debtors

• Purchase ledger - accounts of creditorsPurchase ledger - accounts of creditors

• General (or nominal )ledger - all other accountsGeneral (or nominal )ledger - all other accounts

• Cash books - for bank and cash transactionsCash books - for bank and cash transactions

• Each transaction is recorded in two different Each transaction is recorded in two different ledgersledgers

Purchases ledgerPurchases ledger

• This contains the accounts of all credit This contains the accounts of all credit suppliers of the business and it recordssuppliers of the business and it records– Purchases made on credit from suppliersPurchases made on credit from suppliers– Purchases returns made by the businessPurchases returns made by the business– Payments made to creditorsPayments made to creditors– Cash discounts received for prompt paymentCash discounts received for prompt payment

• It does not record cash purchasesIt does not record cash purchases

• The ledger contains an account for each The ledger contains an account for each creditor and records the transactions with that creditor and records the transactions with that creditorcreditor

Sales ledgerSales ledger

• This contains the accounts of all the business’s credit This contains the accounts of all the business’s credit customers.customers.– Sales on credit to customersSales on credit to customers– Sales returned by customersSales returned by customers– Payments received from debtors Payments received from debtors – Cash discounts for prompt payment. Cash discounts for prompt payment.

• The sales ledger contains an account for each debtor and The sales ledger contains an account for each debtor and records the transaction with that debtorrecords the transaction with that debtor

• Cash sales sales do not appear in this ledgerCash sales sales do not appear in this ledger

• This ledger is also known as the debtors’ ledgerThis ledger is also known as the debtors’ ledger

• Any balance outstanding on any of the accounts is money Any balance outstanding on any of the accounts is money owed by the debtorowed by the debtor

General ledgerGeneral ledger

• This contains all impersonal accounts- this ledger is This contains all impersonal accounts- this ledger is distinguished from personal ledgers which contain accounts distinguished from personal ledgers which contain accounts of customers and suppliersof customers and suppliers

• Nominal accounts - where revenues and expenses are Nominal accounts - where revenues and expenses are recordedrecorded– Sales account - cash and credit sales, sales returnsSales account - cash and credit sales, sales returns– Purchases account - cash and credit purchases, purchases returnsPurchases account - cash and credit purchases, purchases returns– Expenses and income, loans, capital and drawingsExpenses and income, loans, capital and drawings– Value added taxValue added tax– Profit and lossProfit and loss

• Real accounts - transactions dealing with tangible fixed Real accounts - transactions dealing with tangible fixed assets assets – Fixed assetsFixed assets– StockStock

Tracking credit transactionsTracking credit transactions

TransactiTransaction on

Document Document Prime Prime entryentry

Ledger Ledger entryentry

Goods sold Goods sold to to customercustomer

Sales Sales InvoiceInvoice

Sales day Sales day bookbook

GeneralGeneral

Sales Sales

Goods Goods purchasedpurchased

Purchases Purchases invoiceinvoice

Purchase Purchase day book day book

GeneralGeneral

PurchasesPurchases

Returns Returns inward inward

Credit note Credit note sentsent

Sales Sales return day return day bookbook

General General

SalesSales

Returns Returns outwardsoutwards

Credit note Credit note receivedreceived

Purchase Purchase returns day returns day bookbook

General General

Purchases Purchases

Cash transactionsCash transactions

Transaction Transaction Book of Book of original original entryentry

Ledger Ledger

Customer Customer pays with pays with chequecheque

Cash bookCash book Sales ledgerSales ledger

Supplier is Supplier is paid with a paid with a chequecheque

Cash bookCash book Purchasers Purchasers ledgerledger

Stage fourStage fourTrial BalanceTrial Balance

Trial balanceTrial balance

• The trial balance consists of list of all debit The trial balance consists of list of all debit balances and all credit balances from all the balances and all credit balances from all the individual accounts of the businessindividual accounts of the business

• These are taken from the ledgersThese are taken from the ledgers• The debit balances and credit balances are set The debit balances and credit balances are set

out in separate columnsout in separate columns• The debit and credit columns are then totalledThe debit and credit columns are then totalled• The total of all credits should equal the total of The total of all credits should equal the total of

all debitsall debits• If the totals do equate then we can be If the totals do equate then we can be

reasonably confident that bookkeeping reasonably confident that bookkeeping procedures are carried out accuratelyprocedures are carried out accurately

Trial balanceTrial balance

• A trial balance isA trial balance is– A summary of balances of all the accounts at the end of A summary of balances of all the accounts at the end of

the accounting periodthe accounting period– A listing of debit and credit balances to check the A listing of debit and credit balances to check the

correctness of the double entry systemcorrectness of the double entry system– The bringing together of figures from double entry The bringing together of figures from double entry

accounts in the ledgers in the form of a listaccounts in the ledgers in the form of a list

• A trial balance is drawn up periodically to check A trial balance is drawn up periodically to check the accuracy of ledger entries. the accuracy of ledger entries.

• It is an arithmetic checking of double entry book-It is an arithmetic checking of double entry book-keepingkeeping

Functions of the trial Functions of the trial balancebalance• The trial balance summarises information from the ledgersThe trial balance summarises information from the ledgers• Final accounts are prepared using information from the Final accounts are prepared using information from the

trial balancetrial balance• The trial balance provides information for internal control The trial balance provides information for internal control

purposes e.g. the amount owed and amount owingpurposes e.g. the amount owed and amount owing• The arithmetic accuracy of entries made in books of The arithmetic accuracy of entries made in books of

account can be confirmedaccount can be confirmed• If the credit and debit columns of the trial balance are the If the credit and debit columns of the trial balance are the

same, it proves that debit entries and credit entries were same, it proves that debit entries and credit entries were matched when the book-keeper posted entries into the matched when the book-keeper posted entries into the accounting systemaccounting system

• But certain errors such as the omission of a transactions or But certain errors such as the omission of a transactions or erroneous entries will not be disclosed by a trial balanceerroneous entries will not be disclosed by a trial balance

A trial balance for company X A trial balance for company X at 31/3/06 at 31/3/06

ItemItem Debit(£Debit(£k)k)

Credit Credit (£k) (£k)

Transferred to…Transferred to…

CapitalCapital 2020 Balance sheetBalance sheet

BankBank 44 Balance sheetBalance sheet

Cash Cash 11 Balance sheetBalance sheet

PurchasesPurchases 2020 P+L account P+L account

Wages Wages 3030 P+L accountP+L account

Sales Sales 4545 P+L accountP+L account

Debtors Debtors 55 Balance sheetBalance sheet

CreditorsCreditors 55 Balance sheetBalance sheet

Total Total 6565 6565

Trial balanceTrial balance

Normally debitNormally debit

• Cash accountCash account

• Purchases accountPurchases account

• Fixed assets accountFixed assets account

• Expense accountsExpense accounts

• Drawings accountDrawings account

• Debtors accountDebtors account

• Stock Stock

Normally creditNormally credit

• Sales accountSales account

• Capital accountCapital account

• Loans to the Loans to the business creditors business creditors accountsaccounts

Stage five - final accountsStage five - final accounts

• Manufacturing accountManufacturing account

• Trading and profit and loss accountTrading and profit and loss account– These two are statements measuring profit (or These two are statements measuring profit (or

loss) for an accounting periodloss) for an accounting period

• Balance sheetBalance sheet– A statement of assets, liabilities and capital at the A statement of assets, liabilities and capital at the

end of an accounting periodend of an accounting period

• Cash flow statementCash flow statement– A statement of cash inflow and cash outflow over A statement of cash inflow and cash outflow over

the past accounting periodthe past accounting period

Bookkeeping errorsBookkeeping errors

Types of book-keeping errorTypes of book-keeping error

• Of Of omission omission - transaction not recorded- transaction not recorded• Of Of commissioncommission - transaction recorded in the wrong - transaction recorded in the wrong

accountaccount• Of Of principleprinciple - transaction recorded in the wrong class of - transaction recorded in the wrong class of

accounts e.g. as an asset rather than a liabilityaccounts e.g. as an asset rather than a liability• Of Of original entryoriginal entry - transaction recorded but the wrong - transaction recorded but the wrong

amount –a transaction entered incorrectly in both amount –a transaction entered incorrectly in both accountsaccounts

• Of Of reverse entriesreverse entries - recorded in the correct amounts - recorded in the correct amounts but the wrong side of the account- entered a credit as but the wrong side of the account- entered a credit as debit and vice versadebit and vice versa

• Compensating errorCompensating error - errors which cancel each other - errors which cancel each other out – the trial balance will wrongly balanceout – the trial balance will wrongly balance

Inaccurate record keeping Inaccurate record keeping

• Inaccurate record keeping leads to Inaccurate record keeping leads to

• Incorrect information being used as the Incorrect information being used as the basis for forecasts and decisionsbasis for forecasts and decisions

• Late or non-payment or incorrect payment Late or non-payment or incorrect payment of creditorsof creditors

• Late or non-payment or incorrect payment Late or non-payment or incorrect payment by debtorsby debtors

• Inaccurate profit calculations and incorrect Inaccurate profit calculations and incorrect tax assessmenttax assessment

Inaccurate record keepingInaccurate record keeping

• Inaccurate record keeping leads to: Inaccurate record keeping leads to:

• Poor cost control Poor cost control

• Poor working capital controlPoor working capital control

• Cash flow problemsCash flow problems

• Loss of confidence on the part of Loss of confidence on the part of management,future investors, management,future investors, financiers, customers,suppliers and financiers, customers,suppliers and employeesemployees