The accounting system (chapter 1)

What is the primary role of an accounting system in a business?

To record financial transactions and prepare financial statements (final accounts).

What type of business is run by a single individual, such as a local shop or garage?

A sole trader.

A business structure with between two and 20 partners is known as a _.

partnership

What are large professional firms, such as solicitors and accountants, often set up as?

Limited liability partnerships (LLPs).

What are the three main activities involved in accounting?

Recording business transactions, reporting financial information, and advising the owner on performance and decisions.

Why is 'internal control' an important reason for keeping accounts?

To ensure financial transactions are correctly recorded to show the true financial position and to help prevent fraud.

How do financial reports and year-end statements help a business?

They are used for measuring business performance.

Why might a business need to provide its financial information to lenders?

For the purpose of obtaining credit or financing.

What is the 'statutory requirement' for keeping accounts in the UK?

To provide information for VAT Returns and income tax returns to HM Revenue & Customs.

What is the primary function of a financial accountant?

To deal with financial transactions, control accounts, and prepare year-end financial statements.

What is the main record in a handwritten accounting system?

The ledger, which was traditionally a large bound volume.

What is the major advantage of a digital accounting system over a manual one?

It is a very accurate method of recording business transactions.

What does the word 'ledger' describe in a digital accounting system?

It is used to describe data files held electronically.

The principle of maintaining accounts in a straightforward and honest way is known as keeping them with _.

integrity

Why is physical security, such as using computer passwords, important for financial accounts?

To prevent unauthorised persons accessing the accounts to enter false or fraudulent transactions.

What is the first stage in the accounting system, from which all other records are generated?

Financial documents.

What is the purpose of an invoice in a credit transaction?

It states the amount owing, when it should be paid, and details of the goods or service provided.

What is the key difference between a cash sale and a credit sale?

In a cash sale payment is immediate, whereas in a credit sale payment is made at a later date.

Term: Trade Receivable

Definition: A person or business who owes you money when you sell goods or services on credit.

Term: Trade Payable

Definition: A person or business to whom you owe money when you buy goods or services on credit.

What is the term for the total of sales, both cash and credit, for a specific time period?

Revenue or sales revenue.

What document is prepared by a seller when a buyer returns goods bought on credit?

A credit note.

What is the purpose of a credit note?

It reduces the amount of money owed by the buyer for returned or faulty goods.

Summaries of financial documents like invoices and credit notes are listed in books known as _.

books of prime entry or day books

The Sales Day Book is a list of credit sales compiled from which documents?

Invoices issued.

The Purchases Day Book is a list of credit purchases compiled from which documents?

Invoices received.

What is recorded in the Sales Returns Day Book?

A list of goods returned by credit customers (returns in).

What is recorded in the Purchases Returns Day Book?

A list of goods returned by the business to credit suppliers (returns out).

What type of transactions are recorded in the journal?

Non-regular transactions which are not recorded in any other book of prime entry.

Which book of prime entry is also part of the double-entry system?

The cash book.

The basis of most accounting systems, involving two entries for each transaction, is the _ system.

double-entry bookkeeping

In a digital accounting system, how is the second part of a double-entry transaction typically recorded?

The user makes one entry but indicates where the other entry is to be made using a numerical code.

What is the name for the set of all accounts in a business?

The ledger.

Which ledger contains the personal accounts of customers to whom the business has sold on credit?

The receivables ledger (or sales ledger).

Which ledger contains the personal accounts of suppliers to whom the business owes money?

The payables ledger (or purchases ledger).

Which ledger contains accounts for income, expenses, assets, liabilities, and capital?

The general ledger.

When control accounts are in use, the receivables and payables ledgers are known as _ ledgers.

memorandum or subsidiary

What is the purpose of a trial balance?

To check the arithmetical accuracy of the double-entry bookkeeping entries.

What are the two primary financial statements that make up the 'final accounts' of a business?

The statement of profit or loss and the statement of financial position.

What is the fundamental calculation performed by the statement of profit or loss?

Income minus expenses equals profit or loss.

What does the statement of financial position show?

The assets, liabilities, and capital of a business at a specific point in time.

Term: Assets

Definition: Items that a business owns.

What is the difference between non-current assets and current assets?

Non-current assets have a life span of more than one year (e.g., premises), while current assets are for everyday use (e.g., inventory).

An asset that has material substance, meaning you can see and touch it, is known as a _ asset.

tangible

What is an example of an intangible non-current asset?

Goodwill.

Term: Liabilities

Definition: Items that a business owes.

How are current liabilities different from non-current liabilities?

Current liabilities are repayable within twelve months (e.g., trade payables), while non-current liabilities are repayable in more than twelve months (e.g., a bank loan).

Term: Capital/Equity

Definition: The owner's or shareholders' stake in the business, comprising investment and retained profits.

What is the fundamental accounting equation as illustrated by the statement of financial position?

Assets minus Liabilities equals Capital.

How does the accounting equation change when a business pays a supplier from its bank account?

An asset (bank) decreases and a liability (trade payables) decreases by the same amount.

What is the effect on the accounting equation when a business buys a computer using money from its bank account?

One asset (computer) increases while another asset (bank) decreases, leaving total assets unchanged.

How does the accounting equation change when the owner introduces new capital into the business bank account?

An asset (bank) increases and capital increases by the same amount.

What alternative form of the accounting equation is used in the extended trial balance?

Assets equals Capital plus Liabilities.

Term: Purchases

Definition: Goods bought, either on credit or for cash, which are intended to be resold or used in production.

Term: Credit Purchases

Definition: Goods bought, with payment to be made at a later date.

Term: Cash Purchases

Definition: Goods bought and paid for immediately.

Term: Sales

Definition: The sale of goods, whether on credit or for cash, in which the business trades.

Term: Credit Sales

Definition: Goods sold, with payment to be received at an agreed date in the future.

Term: Cash Sales

Definition: Goods sold, with immediate payment received.

Term: Expenses

Definition: The costs of running the business, such as wages, rent, and rates.

The Discounts Allowed Day Book is a list of discounts given to _ for prompt payment.

customers

The Discounts Received Day Book is a list of discounts received from _ for prompt payment.

suppliers

What is the dual function of the Cash Book in an accounting system?

It is both a book of prime entry and part of the double-entry ledger system (cash and bank accounts).

At the financial year-end, the value of inventory held is recorded in the inventory account within which ledger?

The general ledger.

How does an extended trial balance assist in preparing financial statements?

It helps produce the data required for the statement of profit or loss and the statement of financial position.

What is goodwill?

An intangible non-current asset, often paid for by the purchaser when buying an existing business.

Which type of businesses are the primary focus of the source text?

Sole trader and partnership businesses.

What is the main principle underpinning double-entry bookkeeping?

Every business transaction has a dual aspect, as two entries are involved.

What is the purpose of maintaining inventory records?

To keep a separate record for each type of inventory, showing items received and items sold or issued.

What is meant by the 'confidentiality' of financial accounts?

They should not be revealed to people outside the business without authorisation and only to those inside who are entitled to see them.

The statement of financial position shows how a business has been _.

financed

An accountant's role includes checking, summarising, presenting, analysing and _ the accounts.

interpreting

What documents are used for bank account transactions besides cheques?

Paying-in slips, BACS, direct credits, direct debits, and Faster Payment transfers.

The accounting system stage where information is gathered and summarised occurs in the _.

books of prime entry

The accounting system stage for recording the dual aspect of transactions is called _.

double-entry bookkeeping