Chapter 1

Introduction to the accounting system.

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Financial Transactions

Selling goods and services

  • Goods and services can either be sold for immediate payment, or for credit.

Making purchases and paying expenses

  • Such as; Settling purchase invoices, buying assests, pretty cash

Payments in and out of the bank account

  • All money in and out of the business bank account. Such as cash and cheques from sales, paying wages or drawings.
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The Five Stage Account System

1 - Financial Transaction; The original transaction.

2 - Financial Document; Documents generated by the transaction.

3 - Books of Prime Entry; The place where the document is first recorded.

4 - Ledger Accounts; The main accounting records of the business, these normally involve Double-Entry Accounts

5 - Trial Balance; A listing of the ledger accounts, used as a checking device and a source of accounting information for the owners and managers.

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From Document To Book Of Prime Entry

The Sales Day Book generally consists of 6 columns;

Date, Details(Customer name), Invoice No, Total, VAT, Net.

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From Books Of Prime Entry To ledger Accounts

Next the entries in the Books Of Prime Entry need to be transferred to the Ledger Accounts.

Examples of Books Of Prime Entry are; Day Book and Cash Book

The Ledger Accounts are the formal bookkeeping records kept by a business.

There are three types of Ledger Accounts;

General Ledger - This is a collection of all the transactions within a business.

Sales Ledger - Every customer is given a personal account which contains records of every sale made to them, any returned goods and all payments received.

Purchases Ledger - Every supplier is given a personal account which contains records of every purchase made, any returned goods and all payments made to the supplier.

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Control Accounts

Many businesses use Control Accounts to provide them with information about the financial state of the organisation.

Control Accounts are "total" accounts which summarise a number of other account.

Examples include:

Sales Ledger Control Account - Contains the totals of all the receivable accounts in the Sales Ledgers

Purchases Ledger Control Account - Contains the totals of all the payable accounts in the Purchases Ledger

These Control Accounts are always contained in the general ledger.

The Ledger = General Ledger + Sales Ledger + Purchases Ledger

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Trial Balance

The Trial Balance brings together the balances of all the ledger accounts in the general ledger, splitting them into two columns; debit and credit. These two columns should give equal totals.

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Key Terms

Cash Sale - A sale where payment is made straight away.

Credit Sale - A sale where payment is made at a later date.

Day Book - A Book of Prime Entry which lists the details of various financial transactions.

Cash Book - The Book of Prime Entry which lists all payments in and out of the bank account.

Receivable - A customer who owes a business money.

Payable - A supplier who is owed money by a business.

Assets - Items owned by a business.

Liabilities - Items owed by a business.

Capital - The investment made in a business by the owner(s)

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