Study Notes on Bookkeeping

STUDENTS PACK - AN INTRODUCTION TO BOOKKEEPING

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• © Kaplan Financial Limited, September 2020

• No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without prior written permission of Kaplan Publishing.

CONTENTS

• Session 1: Introduction to Accounting
  Page 1

• Session 2: Basic Principles
  Page 10

• Session 3: Ledger Accounts
  Page 20

• Session 4: Introduction to Value Added Tax (VAT)
  Page 49

• Session 5: Accounting for Credit Sales
  Page 53

• Session 6: Accounting for Credit Purchases
  Page 68

• Session 7: Bookkeeping in Action
  Page 80

• Session 8: Additional Practice Questions
  Page 92

• Session 9: Suggested Answers to Key Tasks
  Page 106

SESSION 1: INTRODUCTION TO ACCOUNTING

• Elements of Accounting

  • Recording Transactions: Transactions must be recorded as they occur to provide up-to-date information for management.

  • Summarising Transactions: Periodic summarisation provides information about the company to interested parties.

• Financial Statements:

  • Statement of Profit or Loss: Reflects the performance of a business over a period of time.

  • Statement of Financial Position: Reflects the position of a business at a specific point in time.

• Types of Business Entity:

  • Sole Trader

  • Partnership

  • Company

  • Capital: Money invested by the owners of the business (sole trader, partners, shareholders).

• Types of Accounting:

  • Management Accounting: Produces reports primarily for management use.

  • Financial Accounting: Prepared annually, mainly for external stakeholders like investors and lenders.

• Key Financial Statements of a Sole Trader:

  • Statement of Financial Position

  • Statement of Profit or Loss

• Example of a Statement of Profit or Loss:

  • Sales Revenue: £50,000

  • Cost of Sales:

  • Opening Inventory: £2,080

  • Purchases: £26,130

  • Closing Inventory: (£2,210)

  • Gross Profit: £16,100

  • Expenses: (Total: £7,900)

  • Net Profit: £8,200

• Example of a Statement of Financial Position:

  • Non-current Assets Total: £80,000

  • Current Assets Total: £7,000

  • Current Liabilities: (£1,800)

  • Net Assets: £35,200

• Definitions:

  • Assets: Resources controlled by a business that will provide future economic benefits.

  • Non-current Asset: Long-term assets not expected to be converted into cash within a year.

  • Current Asset: Assets expected to be converted into cash or used within one year, e.g. inventory and receivables.

  • Liabilities: Present obligations of the business, what is owed.

  • Capital: Funds invested in the business.

  • Drawings: Withdrawals by owners from the business.

  • Non-current Liabilities: Long-term debts.

  • Current Liabilities: Obligations due within one year, e.g. payables.

SESSION 2: BASIC PRINCIPLES

• Basic Concepts and Rules of Bookkeeping:

  • Dual Effect Principle: Every transaction has two financial effects.

  • Separate Entity Principle: The business and its owners are treated as separate entities.

Account Examples:

• Transaction:

  1. Business purchases a van for £1,000 cash.

  2. Purchases a computer for £500 on credit.

• Accounting Equation:
  $Assets = Capital + Liabilities$

Worked Examples:

1. Introduced Capital:

   • Example: Winning £10,000 to start a business.

   • Impact on Accounts:

   • Assets: Cash increases by £10,000.

   • Capital Account: Increases by £10,000.

2. Purchase of Inventory:

   • Purchased 500 chocolate hearts at £5 each.

   • Impact on Accounts:

   • Increase in Assets (Inventory) and decrease in Cash.

3. Selling Inventory for Profit:

   • Selling 200 red roses for £15 each.

   • Impact on Accounts:

   • Increase in Assets and increase in Capital.

SESSION 3: LEDGER ACCOUNTS

• Purpose of Ledger Accounts:

  • To efficiently record and summarise financial transactions.

• Structure of Ledger Accounts:

  • T-Accounts: Left side = Debit, Right side = Credit.

Golden Rules for Ledger Accounts:

• Every debit has an equal and opposite credit.

• Increases and decreases are represented by debits and credits.

Worked Examples in Ledger Accounts:

1. Cash paid into the bank (£2,000):

   • Debit Cash, Credit Bank.

2. Purchasing Inventory:

   • Debit Purchases, Credit Cash/Payables.

SESSION 4: INTRODUCTION TO VAT

• Definition of VAT:

  • VAT is charged on the taxable supply of goods and services in the UK by taxable persons.

  • Indirect tax borne by consumers, administered by HMRC.

Rates of VAT:

1. Standard Rate: 20%

2. Zero Rate: 0% (e.g. books)

3. Exempt: (no rate) (e.g. insurance)

4. Reduced Rate: 5% (e.g. domestic fuel)

Calculation of VAT:

• Cost Structure:

  • Net: 100%

  • VAT: 20%

  • Gross: 120%

SESSION 5: ACCOUNTING FOR CREDIT SALES

• Importance of Recording Sales Transactions:

  • Essential for understanding how much is owed to the business.

Structure for Recording Sales:

1. Sales Day Book:

   • Record credit sales transactions.

   • Total the sales for posting to the general ledger.

2. Subsidiary Ledger:

   • Records individual customer accounts.

Worked Example of Credit Sales:

• Sale to customers with a credit term.

• Recording cash receipts against receivables.

SESSION 6: ACCOUNTING FOR CREDIT PURCHASES

• Recording Purchases Transactions:

  • Similar to sales but focuses on the purchase daybook and payables.

Structure for Recording Purchases:

1. Purchase Day Book:

   • Record all purchases on credit.

2. Subsidiary Purchase Ledger:

   • Details individual supplier accounts.

SESSION 7: BOOKKEEPING IN ACTION

• Practical Application of Bookkeeping Principles:

  • Record and reconcile transactions in a realistic context.

SESSION 8: ADDITIONAL PRACTICE QUESTIONS

• Exercises to Reinforce Learning:

  • Real-world scenarios for practice.

SESSION 9: SUGGESTED ANSWERS TO KEY TASKS

• Evaluation and Review of Exercises:

  • Provide correct answers and explanations to practice tasks.