Summary Business Accounts Reading Notes

BUSINESS ACCOUNTS
Reading Notes: Chapter 2 - 6

Chapter 2 – Double Entry Booking

 THE PURPOSE OF DOUBLE ENTRY BOOKKEEPING
 Bookkeeping - process of recording financial transactions in accounting records of business.
 Double entry bookkeeping system - bookkeeping system to record day-to-day transactions.
 System of recording financial dealings built upon a series of rules.
 PRINCIPLES OF DOUBLE ENTRY
 Every business transaction has two aspects to it, both aspects need to be recorded.
 Examples which illustrate the two aspects of transactions:
 (a) The business pays cash to buy premises:
 Aspect 1 – The business has less cash
 Aspect 2 – The business has acquired premises
 (b) The business sells goods to a customer for cash:
 Aspect 1 – The business has earned income
 Aspect 2 – The business has more cash
 (c) The business provides services to a client on credit:
 Aspect 1 – The business has earned income
 Aspect 2 – The business has a debt owing to it
 (d) The client pays the business the money owed:
 Aspect 1 – The business has lost the debt that was owing to it
 Aspect 2 – The business has more cash
 (e) The business pays wages:
 Aspect 1 – The business has less cash
 Aspect 2 – The business has incurred an expense
 Each aspect must be recorded in a different account e.g. one account for cash, one account
for each type of asset, one for each type of expense, one for each person to whom the
business owes money, one for each debtor that owes money to the business.
 Rules for recording transactions
 For every transaction these two aspects must first be identified and then each of them
recorded in two separate accounts.




 The system is a mechanical method of recording transactions as they happen and
involves no value judgements about the state of the business.
 The business is separate from the proprietor
 Business is regarded as completely separate from its proprietor.
 When proprietor puts in cash, transaction recorded from the point of view of business.

,  Business is gaining cash and is incurring a liability, now owes money to the proprietor.
 This liability to repay its proprietor is normally referred to as the ‘capital’ of the business.
 Debit and credit
 ‘Debit’ (DR) used as label for left-hand side and ‘Credit’ (CR) as label for right-hand side.
 THE FORM OF ACCOUNTS
 Date of the transaction is entered in the ‘Date’ column.
 ‘Details’ column contains cross-reference to name of the account where the other part of
the double entry is made, often with a brief description of the nature of the transaction.
 DR and CR column - amount involved
 ‘Balance’ column shows the running balance on the account.
 MAKING ENTRIES
 EXAMPLE trading business:
 Make profit by buying and selling goods (stock) for cash or on credit.
 Purchase of stock is an expense of the business and recorded in the purchases account.
 The business earns income by selling stock and this is recorded in the sales account.
 EXAMPLE solicitors and other professionals:
 Sale of their services - first aspect, sale of services, second aspect, gain of the debt owed.
 Charges for professional services recorded as CR entry on income account, ‘profit costs’.
 The client’s debt is recorded as a DR entry on an account in the name of the client.
 When client pays, record a receipt of cash and loss of debt owed by client to business.
 No entry is made on the profit costs account when the client pays the cash due.
 Profit costs account records bill issued, not show if clients have paid their bills.
 CASH AND LEDGER ACCOUNTS
 ‘Cash’ account is a record of receipts into and payments out of the bank account.
 ‘Petty cash’ - a small amount of cash in the office to cover small, day-to-day expenses.
 A petty cash account - record periodic receipts of cash from the bank and the various
payments made from petty cash.
 all the accounts are referred to as ‘ledger accounts’ apart from the cash account and, where
there is one, the petty cash account.
 DRAWINGS
 ‘Drawings’ record withdrawals made by the proprietor during the accounting period.
 Temporary account - end of the accounting period, balance on drawings account transferred
to the capital account, capital account up to date, showing total amount owed to proprietor.
 TRIAL BALANCE
 For every DR entry made on an account, CR entry identical amount made on other account.
 Total of DR entries should equal the total of CR entries
 Check the accuracy of bookkeeping by comparing the two totals.
 Preparing a trial balance - adding together all DR and CR balances and comparing the total.
 The Trial Balance is used as a check on the accuracy of the bookkeeping.
 However, the Trial Balance will not reveal all bookkeeping errors – prepared at the end of
the accounting period as a first step in preparing the year-end summary accounts, or ‘Final
Accounts’, of the business.