(13)-DOUBLE ENTRY BOOKKEEPING

Double Entry Bookkeeping

Double entry bookkeeping is the method by which a business records financial transactions. An account is maintained for every supplier, customer, asset, liability, income and expenses.

Every transaction is recorded twice so that for every debit there is an equal, corresponding credit.

Double entry bookkeeping is the method used to transfer totals from our books of prime entry into the normal ledger. In ledger accounts we saw debt and credit side, are kept in a way which allows the two sided nature of business transactions to be recorded.

The Rules of Double Entry Bookkeeping

The basic rule which must always be always be observed is that every financial transaction gives rise to two accounting entries, one a debt and the other a credit.
Which accounting receives the credit entry and which receives the debit depends on the nature of the transaction.

• An increase in an expense or an increase in an asset is a debit.
• An increase in income or an increase in a liability is a Credit.
• A decrease in an asset is a credit.
• A decrease in a liability is a debit.

(12)-LEDGER ACCOUNTS

Ledger Accounts

It is common sense that a business should keep a record of the transactions that is makes, the assets it acquires and liabilities are incurs. When the time comes to prepare a profit and loss account and a balance sheet, the relevant information can be taken from those records.
The records of transactions, assets and liabilities should be,

• Dated and in chronological order,
• Built up in cumulative totals, day by day, week by week, month by month, year by year,

In our previous posts we discussed the first step in this process, which is to list all the transactions in various books of prime entry. Now we must turn our attention to the method used to summarize these records, ledger accounting and double entry.

The general ledger (The normal ledger)

The normal ledger (general ledger) is an accounting record which summarizes the financial affairs of a business. It contains details of assets, liabilities and capital, income and expenses, and so profit and loss. It consists of a large number of different accounts, each account having its own purpose or name and identity or code.

Format of a Ledger Account

There are two sides to the account and an account heading on top and so it is convenient to think in terms of “T” accounts.

• On top of the account is its name.
• There is a left side, called debt side.
• There is right side, called credit side.

(11)-SOURCE DOCUMENTS AND THE BOOKS OF PRIME ENTRY

Source Documents and the Books of Prime Entry

Source Documents
Whenever a business transaction take place, involving sales or purchases, receiving or paying money, or owing or being owed money, it is usual for the transaction to be recorded on a document. These documents are the source of all information recorded by a business.
Examples –

• Sales order – A customer writes out an order or signs an order for goods or services he wishes to buy.
• Purchase order – A business makes an order from another business for the purchase of goods or services.
• Invoice – An invoice relates to a sales order or a purchase order. When a business buys goods or services on a credit customer it sends out an invoice. The details on the invoice should match up with the details on the sales order. When a business sells buys goods or services on credit it receives an invoice from the suppliers. The details on the invoice should match up with the details on the purchase order.
• Credit note – A credit note is a document relating to returned goods or refunds when a customer has been overcharged. It can be regarded as a “negative invoice”.
• Remittance advices – A customer sends this with a payment.
• Cheque stubs – A business record of payments it has made.
• Petty cash vouchers – A claim for reimbursement out of petty cash.

Books of Prime Entry
The details on these source documents need to be summarized, as otherwise the business might forget to ask for some money, or forget to pay, or even accidentally pay some twice.
Books of prime entry are books in which we first record transactions. They are sometimes called books of prime entry.
The main books of prime entry which we need to use are as follows

1. Sales day book – The sales day book is the book of prime entry for credit sales.
2. Purchase day book – The purchase day book is the book of prime entry for credit purchase.
3. Sales returns day book – The sales returns day book is the book of prime entry for goods returned by the customers.
4. Purchases returns day book – The purchases return day book is the book of prime entry for goods returned to suppliers.
5. Cash book – The cash book is the book of prime entry for cash and bank receipts and payments.
6. Petty cash book – The petty cash book is a cash book for small payments.
7. The journal – The journal keeps a record of unusual movement between accounts. It is used to record any double entries made which do not arise from the other books of prime entry. For example, journal entries are made when errors are discovered and need to be corrected.

(10)-THE ACCOUNTING PROCESS

The Accounting Process

Most organizations exist to provide products and services in the ultimate hope of making a surplus or profit for their owners, which they do by receiving payment in money for goods and services provided. The role of accounting system is to record these monetary effects and create information about them.

In our previous two posts you understand the basic principles underlying the balance sheet and profit and loss account and have an idea of what they look like. Before preparing these financial statements business need to know about events and transactions in business and summarized them that process called accounting process.

The accounting process using steps given below,

1. Identify events and transactions using source documents.
2. Enter them into prime entry books (day books).
3. Analysis day books and copy them into ledger accounts using double entry system.
4. Summarized all ledger accounts balances using trial balance.
5. Identifying errors in accounting and correct them.
6. Preparing corrected trial balance.
7. Doing adjustments for financial statements needed.
8. Preparing adjusted trial balance.
9. Preparing the financial statements.
10. Analyzing financial statements using other techniques.

In our next posts you can read all these steps with description please are kind enough let we know about your questions through comments.

(9)-FINANCIAL STATEMENTS - THE TRADING PROFIT AND LOSS ACCOUNT

The Trading Profit and Loss Account

The trading profit and loss account is a statement showing in detail how the profit or loss of a period has been made.
The two parts of the statement may be examined in more detail

1. The trading account – This shows the gross profit for the period. Gross profit is the difference between the value of sales and the purchase or production cost of the goods sold.


2. The profit and loss account – This shows the net profit of the business. Net profit is the gross profit plus any other income from sources other than the sale of goods minus other expenses of the business which are not included in the cost of goods sold.

Relationship between the profit and loss account and the balance sheet

• The net profit is the profit for the period, and it is transferred to the balance sheet of the business as part of the proprietor’s capital.
• Drawings are appropriations of profit are not expenses.

(8)-FINANCIAL STATEMENTS - THE BALANCE SHEET

Financial Statements – The Balance Sheet

Balance sheet is a statement of the liabilities, capital and assets of a business at a given moment in time. A balance sheet is prepared to show the liabilities, capital and assets as at the end of the accounting period to which the financial accounts relate.


Liabilities

We define liabilities in our previous post,
The various liabilities should be itemized separately; in addition a distinction is made between current liabilities and long term liabilities.

Current Liabilities

Current liabilities are debts of the business that must be paid within a fairly short period of time.
Example-

• Loans repayable within one year
• A bank overdraft
• Trade creditors
• Accrued charges
• Taxation payable

Long Term Liabilities

A long term liabilities is a debt which is not payable within the short term and so liability which is not current must be long term.
Example-

• Loans which are not payable for more than one year, such as a bank loan or a loan from an individual to a business.
• Debentures or debenture loans.
• A mortgage loans.

Assets
We define assets in our previous posts.

Asset in the balance sheet are divided into two groups, as fixed assets and current assets.

Fixed Assets

A fixed asset is an asset acquired for continuing use within the business. A fixed asset is not acquired for sale to a customer. To be classed as a fixed asset in a balance sheet, it must be used by the business and the asset must have a life in use of more than one year.

Assets classified as

• Tangible fixed assets
• Intangible fixed assets
• Long term investments
  A tangible fixed asset is a physical asset and an Intangible fixed asset is an asset which does not have a physical existence.

Current assets

Current assets are either items owned by the business with the intention of turning them into cash within one year or cash including money in bank, owned by the business and they are continually following through business.
Examples-

• Stocks
• Debtors
• Cash

(7)-THE ACCOUNTING EQUATION

The Accounting Equation

The rule that the assets of a business will at all times Equal its liabilities. This is also known as the balance sheet equation.
Assets = Capital + Liabilities

Capital
In accounting capital is an investment of money with the intention of earning a return. A business proprietor invests capital with the intention of earning profit. As long as that money is invested, accountants will treat the capital as money owed to the proprietor by the business.

Assets and liabilities we define in our previous post.

Drawings
Drawings are amounts of money taken out of a business by its owner.

The business equation
The business equation gives a definition of profits earned.
P = I + D – Ci
P = Represents profit
I = Represents the increase in net assets, after drawings have been taken out by the proprietor
D = Drawings
Ci = the amount of extra capital introduced into the business during the period

Creditors
A creditor is a person to whom a business owes money. A trade creditor is a person to whom a business owes money for debt incurred in the course of trading operation. A creditor is a liability of a business.

Debtors
A customer who buys goods without paying cash for them straight away is a debtor. A debtor is a asset of a business.