1. Introduction to Bookkeeping

2. Accounts and AS/A2 Business Studies For AS/A2 Business Studies you are required to understand, interpret, analyse and manipulate the final accounts of business organisation For AS/A2 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 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 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 processes involved preparatory to drawing up final accounts This presentation seeks to outline the basic processes involved preparatory to drawing up final accounts

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

4. Single entry bookkeeping This is used for small cash based businesses and clubs and societies 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 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 This type of business will rely on the use of its cash book as the main source of information This type of business will rely on the use of its cash book as the main source of information

5. Double entry bookkeeping All transactions have a twofold effect All transactions have a twofold effect Double entry records that 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 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 The system works on the principle that whenever value is given,value must also be received

6. Debits and credits Accountants view the two fold effects of all transactions on a particular account from a receiving and giving perspective Accountants view the two fold effects of all transactions on a particular account from a receiving and giving perspective A debit means A debit means –to receive value or value received –that a transactions has been received into an account A credit means A credit means –to give value or value given –that a transaction is given by an account For every debit there must be a credit For every debit there must be a credit

7. Debits and credits A debit entry indicates: A debit entry indicates: –an increase in assets –an increase in expenses –a decrease in liabilities –a decrease in revenue –a decrease in capital And is shown on the left hand side of an account And is shown on the left hand side of an account A credit entry indicates A credit entry indicates –a decrease in assets –a decrease in expenses –an increase in liabilities –an increase in revenue –an increase in capital And is shown on the right hand side of an account And is shown on the right hand side of an account

8. Account An account is 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 Book of account –these are ledgers and day books in which a business records its transactions

9. Five stages in the process Stage 1 – Original (prime) documents Stage 1 – Original (prime) documents Stage 2 - Book of prime entry: day books or journals 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 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 4 - Trial balance: drawn up to check the accuracy of the ledger entries Stage 5 - Final accounts: profit and loss account, balance sheet Stage 5 - Final accounts: profit and loss account, balance sheet

10. Stage 1 Prime documents

11. 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 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: 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 unsatisfactory goods –Statement of account - a summary of the account –Remittance note advising of payment –Cheque or other system of payment –Receipt to acknowledge payment

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

13. Document originating with the seller Delivery note with goods - advising customer of goods delivered Delivery note with goods - advising customer of goods delivered Invoice - a document sent to a credit customer demanding payment, usually within a stipulated time 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 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, monies received, discounts allowed and all returns Statement of account - summary of the transactions that have taken place between, a supplier and customer. It itemises invoices sent, monies received, discounts allowed and all returns Receipts - acknowledgement of payment Receipts - acknowledgement of payment

14. Stage 2 Books of prime entry

15. Books of prime entry Information from prime documents is initially recorded in the following 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 Sales day book - records invoices for sales Purchases day book - records invoice received from suppliers Purchases day book - records invoice received from suppliers Sales returns day book - returned goods Sales returns day book - returned goods Purchase returns day book - returned goods Purchase returns day book - returned goods Cash book - cash transactions Cash book - cash transactions

16. Day books The day books are the primary accounting record 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 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 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 prime documents These books are organised on a day by day basis and summarise the information from the prime documents Day book entries are transferred to ledgers while totals of entries are transferred to the nominal ledger Day book entries are transferred to ledgers while totals of entries are transferred to the nominal ledger

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

18. Sales day book Also known as a sales journal Also known as a sales journal It lists all credit sales written up from copy sales invoices sent to customers It lists all credit sales written up from copy sales invoices sent to customers Postings are made from this book to ledgers: 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

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

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

21. Purchase returns day book Also known as returns outward book Also known as returns outward book It records goods returned to suppliers and is written up from credit notes received It records goods returned to suppliers and is written up from credit notes received From this book entries are posted to 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

22. Cash book The cash book is a book of prime entry which record which records bank cash transactions The cash book is a book of prime entry which record which records bank cash transactions This includes receipts from customers and payments to suppliers This includes receipts from customers and payments to suppliers The cash book records all transactions for bank account and cash account The cash book records all transactions for bank account and cash account It records transactions in date order It records transactions in date order The petty cash book records low value cash payments including transactions not made through a bank account The petty cash book records low value cash payments including transactions not made through a bank account

23. Stage 3 Ledgers

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

25. 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 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 Sales ledger - accounts of debtors Purchase ledger - accounts of creditors Purchase ledger - accounts of creditors General (or nominal )ledger - all other accounts General (or nominal )ledger - all other accounts Cash books - for bank and cash transactions Cash books - for bank and cash transactions Each transaction is recorded in two different ledgers Each transaction is recorded in two different ledgers

26. Purchases ledger This contains the accounts of all credit suppliers of the business and it records 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 It does not record cash purchases The ledger contains an account for each creditor and records the transactions with that creditor The ledger contains an account for each creditor and records the transactions with that creditor

27. Sales ledger This contains the accounts of all the business’s credit customers. 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 The sales ledger contains an account for each debtor and records the transaction with that debtor Cash sales sales do not appear in this ledger Cash sales sales do not appear in this ledger This ledger is also known as the debtors’ ledger This ledger is also known as the debtors’ ledger Any balance outstanding on any of the accounts is money owed by the debtor Any balance outstanding on any of the accounts is money owed by the debtor

28. General ledger This contains all impersonal accounts- this ledger is distinguished from personal ledgers which contain accounts of customers and suppliers 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 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 tangible fixed assets Real accounts - transactions dealing with tangible fixed assets –Fixed assets –Stock

29. Tracking credit transactions Transactio n Document Prime entry Ledger entry Goods sold to customer Sales Invoice Sales day book GeneralSales Goods purchased Purchases invoice Purchase day book GeneralPurchases Returns inward Credit note sent Sales return day book GeneralSales Returns outwards Credit note received Purchase returns day book GeneralPurchases

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

31. Stage four Trial Balance

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

33. Trial balance A trial balance is 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. A trial balance is drawn up periodically to check the accuracy of ledger entries. It is an arithmetic checking of double entry book-keeping It is an arithmetic checking of double entry book-keeping

34. Functions of the trial balance The trial balance summarises information from the ledgers The trial balance summarises information from the ledgers Final accounts are prepared using information from the trial balance 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 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 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 the book-keeper posted entries into the accounting system If the credit and debit columns of the trial balance are the same, it proves that debit entries and credit entries were matched when the book-keeper posted entries into the accounting system But certain errors such as the omission of a transactions or erroneous entries will not be disclosed by a trial balance But certain errors such as the omission of a transactions or erroneous entries will not be disclosed by a trial balance

35. A trial balance for company X at 31/3/06 Item Debit(£k ) Credit (£k) Transferred to… Capital20 Balance sheet Bank4 Cash1 Purchases20 P+L account Wages30 Sales45 Debtors5 Balance sheet Creditors5 Total6565

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

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

38. Bookkeeping errors

39. Types of book-keeping error Of omission - transaction not recorded Of omission - transaction not recorded Of commission - transaction recorded in the wrong account 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 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 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 account- entered a credit as debit and vice versa Of reverse entries - recorded in the correct amounts but the wrong side of the account- entered a credit as debit and vice versa Compensating error - errors which cancel each other out – the trial balance will wrongly balance Compensating error - errors which cancel each other out – the trial balance will wrongly balance

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

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