Bookkeeping Transactions Lesson 1

Aims of the Session Financial transactions The accounting system Different types of accounts The accounting equation Terminology Fundamental principles of double entry bookkeeping

Financial Transactions Goods and services can be sold or purchased for immediate payment or payment at a later date. Immediate payment = cash sales Later date = credit sales Generally these are made through the bank.

Businesses need to keep track of: Income Expenditure Money owed by individual customers Total money owed by all customers Money owing to individual suppliers Money owing Why?

The Accounting System Has 5 stages Financial transaction takes place Financial document is generated Entry into books of prime entry Transferred to the ledger accounts Trial balance is produced

Financial Transactions A sale A purchase A payment

Financial Documentation is Generated Invoice Credit note Receipt Petty cash voucher

Books of Prime Entry Day books: Sales day book Purchases day book Sales return day book Purchases return day book Discounts allowed day book Discounts received day book Petty cash book Cash book Not necessarily part of the double entry system

Ledger Accounts Part of the double entry system. Involves two entries for each transaction A debit A credit

Trial Balance Checks accuracy of double entry. Useful source of information. Calculate profit. Monitor expenses and income.

Ledger Accounts in the General Ledger Different types of account: Asset – what is owned Liability – what is owed Expense Income Drawings – what the owner takes out the business Capital – what the business owes back to the owner Where the double entry takes place

Exercises on Types of Accounts

Terminology

Fundamental Principle of Double Entry For every transaction there is a debit and a credit entry.

DEAD CLIC Debit Credit Expenses Liabilities Assets Income Drawings Capital A debit entry on these accounts increases their worth. A credit entry on these accounts increases their worth. To reduce the value of the account you carry out the reverse entry.

In Practise A new business owner pays £5,000 into the business bank account to start the business. Bank money the business owns an asset Capital Account money the business owes back to the owner Dr Cr Dr Cr Capital £5,000 Bank £5,000

money the business owns an asset In Practise A business buys £30 of stationery using the business bank account. Bank money the business owns an asset Stationery Account an expense account Dr Cr Dr Cr Stationery £30 Bank £30

T Accounts Basic and simple way of drawing up double entry. Unlimited amount of accounts – if in doubt draw one up. Most complicated transactions can be reduced to T account format.

A debit entry on these accounts increases their worth. Credit Expenses Assets Drawings Liabilities Income Capital A debit entry on these accounts increases their worth. A credit entry on these accounts increases their worth.

Balancing T Accounts Cr Dr Bank Cash sales £150 Cash sales £ 75 Purchases £67 Stationery £10 Balance carried down £148 £225 £225 Balance brought down £148

T Account Exercises

The Accounting Equation Assets – Liabilities = Capital

Exercises on the accounting equation

Questions