Double entry bookkeeping

overview of accounting process

1. Transaction occurs

2. Record effects from source documents

3. Balance ledger accounts

4. Produce trial balance

5. Make year end adjustments

6. Prepare financial statements

Source documents

• the documents business transactions are recorded on

• the original evidence of business transactions

• accounting records are created from these documents

Stages of a transaction

• Before sale purchase- quotation, purchase order, sales order

• Goods movement- goods received/dispatched note

• Payment or adjustment- invoice, credit or debit nore

What is a debit

• Increases the value of an asset and decreases the value of a liability

• cash recieved, equipment purchased

what is a credit

• Accounting transaction that increases the value of liabilities

• increasing the income for the business

Uses of source documents

}Quotation: states a fixed price for specified goods or services before an order is accepted

}Purchase order: records goods or services the business wants to buy from a supplier

}Sales order: records an order received from a customer and helps track customer demand

}Goods despatched note (GDN): records goods sent to customers and supports delivery queries

}Goods received note (GRN): confirms goods received from a supplier and supports checking against orders and invoices

}Receipt: confirms that a payment has been received

}Debit note: asks a supplier to issue a credit note for returned goods or an overpayment

}Credit note:  reduces the amount owed where goods are returned or an overpayment has been made

Books of prime entry

Where transactions are first recorded

• sales day book- credit sale

• purchase day book- credit purchases

• sales return book- credit note issues to customers

• Purchase returns day book- Credit notes received from suppliers

• Cash book- Cash and bank reciepts/payments

• Petty cash book- Small cash payment

Duality concept- two effects of a transaction

• Every debit has its corresponding credit entry

• These two effects are equal and opposite such that the accounting equation will always prove correct

how credits and debits are recorded

In T accounts:

• Debits (Dr) are recorded on the left

• Credit (Cr) are recorded on the right

The accounting quandrat

“each transaction must have equal and opposite impacts

Ledger accounts

• Transactions are recorded in the relevant ledger accounts.

• There is a ledger account for each asset, liability, income and expense item.

• Each account has the Debit (Dr) and Credit (Cr) sides.

forms of ledger accounts

• no single form of ledger account rulings

• it can take form of “T” account or “Three column ruiling”

trial balance

the list of balances in the ledger.

Accruals concept

• we should record income and expense in the year in which they are earned or incurred (occurred) irrespective of when the cash will be received or paid

Matching principle

• Requires that the revenues and their related expenses are recorded in the same accounting period in which they occur

cash accounting v accruals accounting

what does it mean to capitalise an asset

recording assets as a non current asset

Bank loan

• important source of long term finance

• terms are agreed with lender

• If repaying gradually may split loan between current (due within 1 year) and non-current liability (after 1 year).

Equity capital

• A limited company issues shares to investors in return for cash.

• Each share has a ‘nominal value’ determined when the company is formed

• Depending on the value of a company, shares may be issued for more than their nominal value.

• The difference between the cash received and the nominal value is share premium