The Organisation of Accounts Chapter 5

Accounting system overview Books of original entry Double entry transactions Profit & Loss Statement Trial Balance Balance Sheet Source documents

Documentation A sales invoice gives rise to the recording of a sale. A purchase invoice gives rise to the recording of a purchase. A credit note which is issued to a customer gives evidence of a sales returns. A debit note which is issued to suppliers gives evidence of purchase returns. Copy receipts issued to customers, cheques received and till rolls give evidence of monies and cheques received. Copies of cheques written, receipts, bank statements and supplier statements give evidence of monies paid out. Purchase and sales invoices give evidence for the purchase and sale of fixed assets

Books of prime entry Sales Journal Sales Returns Journal Purchases Journal Purchases Returns Journal Cash Book General Journal Recording all credit sales Recording sales returns Recording all credit purchases of stock for resale Recording purchases returns Recording all payments and receipts Recording all other transactions

Accounting ledgers Sales LedgerPurchases LedgerGeneral Ledger Contains all the individual debtor/customer accounts Contains all the individual creditor/suppliers accounts Contains all other accounts

Ledger accounts Personal accounts are the individual debtor and creditor accounts in the sales and purchases ledgers Impersonal accounts can be classified into two categories Real accounts, which focus on tangible assets such property machinery, fixtures, motor vehicles, equipment and stock. Nominal accounts, which focus on the expense and revenue accounts including the capital and drawings accounts.

Example 5.1 Jack O’Donoghue manages and owns a souvenir shop in a popular tourist location in county Kerry. His accounting transactions are generally made up of buying and selling souvenirs, paying wages and general expense items for running the business including rent, light and heating, insurance etc. He needs to record all of these transactions in his accounting records system.

The details are transferred from the book of original entry into the ledger accounts. The ledger accounts for Jack are broken into the following Purchases ledger General ledger For this business as there are no credit sales there will be no debtors and hence no sales ledger accounts. The ledger accounts are totaled at the end of the accounts period and balances are transferred to a trial balance. From the trial balance the final accounts are prepared. Depending on the nature of the transactions that occur, the details will be entered in the following books of original entry for Jack O’Donoghue. Cash book Purchases journal Purchases returns journal General journal Note: there is no mention of the sales journal or sales returns journal as a souvenir shop would be categorised as a cash type business that has zero credit sales and returns. Stage 2 Stage 3 Stage 4 Stage 1 Solution

Accounting system overview

Computerised accounts Computerised software organises the accounts of a business in a similar format to the manual system

Advantages of computerised accounts Greater accuracy of calculation. Speed in the preparation of financial reports to provide more timely information for managers. A greater variety of financial reports for management. Ultimately they reduce the cost of providing financial information. Greater information at the fingertips of management. Comprehensive credit history of customers Purchases and stock requirements Access to statistics on order and stock levels etc. Saves time and the owners/managers can devote themselves to the proper running of their businesses.