Book-keeping

What is book-keeping?

 Book-keeping is the process of keeping detailed records of financial

transactions
 Book-keeping is done by book-keepers
 They record the day-to-day transactions of the business
o The information is obtained from business documents
 Such as bank statements, receipts, invoices, cheques, etc
o The book-keeper makes the records using a system called double entry
book-keeping

Every business, no matter how small, must keep a record of every transaction

Accounting
What is accounting?

 Accounting uses the records of the book-keepers to prepare the financial

statements of the business
 Accountants provide information to owners and managers which is used to
o monitor progress of the business
o help with decision making about how to improve profit or reduce loss
 Accounting is the function carried out by accountants
o Accountants are primarily responsible for managing, updating, correcting,
and reporting the business' accounts

What is the difference between accounting and book-keeping?

 Accounting and book-keeping have distinct functions

 They support businesses at different stages of the financial cycle
o Book-keeping involves keeping records of the day-to-day financial data
of the business
o Accounting involves using the information recorded by the book-keeper
to provide information at regular intervals

Profit or Loss
How does a business measure profit or loss?

 An accountant prepares an income statement for a business to show if the

business is making a profit or a loss
  The profit or loss is the difference between the total income and the total
expenses
o A profit is made if the income is higher than the expenses
o A loss is made if the income is lower than the expenses

Why is it important to measure profit or loss?

 The information provided by financial statements shows the owner what has
happened to the business during a certain period of time
o This is usually a year
 It can be used to monitor the progress of the business
o If a profit is made, the owner is making money on their investment
o If a loss is made, the owner might have to make changes to the business

Assets, Liabilities & Capital

How does a business measure its financial position?

 An accountant prepares a statement of financial position to show:

o Assets
o Liabilities
o Capital

What are assets?

 Assets are things owned by the business

o Premises, inventory, motor vehicles, money in the bank, etc
 Assets also include amounts that are owed to the business by other people or
businesses
o Money owed to the business by credit customers
 These are called trade receivables
 Current assets are short-term assets that the business intends
to liquidate within a year
o Trade receivables, inventory, money in the bank, etc
 Non-current assets are long-term assets that the business intends to own for
more than a year and they are not easily liquated
o Premises, motor vehicles, etc

What are liabilities?

 Liabilities are the amounts that the business owes to other people or
businesses
o Bank loans, bank overdraft, etc
o Money owed to credit suppliers by the business
 These are called trade payables
  Current liabilities are short-term liabilities which the business intends to
pay within a year
o Trade payables, bank overdraft, etc
 Non-current liabilities are long-term liabilities which the business intends
to take longer than a year to repay
o Bank loans, etc

What is capital or owner’s equity?

 Capital is any resource provided by the owner to start up the

business or keep it going
o This is sometimes referred to as owner’s equity
 Capital is often in the form of money
o However, it may also consist of other assets
 Such as buildings, furniture, equipment, motor vehicles, goods, etc
 The owner invests capital into their business
o Technically the business owes these assets to the owner
 If a business makes a profit then its capital increases
 If a business makes a loss then its capital decreases

What are drawings?

 Drawings refer to when an owner takes assets from the business for personal
use
o This could be money, goods, motor vehicles, etc
 If the owner takes drawings from the business then the capital decreases

The Accounting Equation

What is the formula for the accounting equation?

 The formula for the accounting equation is: Assets = Liabilities + Capital
 The equation states that the assets of a business are always equal to
the liabilities and capital of the business
 You can rearrange the equation so that you can find one of the three values if
the other two are known
o Liabilities = Assets - Capital
o Capital = Assets - Liabilities

The accounting equation

Why is the accounting equation important?

 The accounting equation may be shown in the form of a statement of financial

position
 The statement of financial position will be affected every time the business
makes changes to the assets, liabilities and capital
 Every single transaction will result in at least two changes which balance out
o Both sides of the equation could increase by the same amount
o Both sides of the equation could decrease by the same amount
o Both sides of the equation could stay the same

CASE STUDY
Hannah is the owner of a business. Some of her transactions are listed below. After
each transaction, the accounting equation still balances.

Effects on liabilities
Transaction Effects on assets
or capital
Assets increase by
$1 120

The money in the bank

increases

A credit customer, Peter, pays the amount Assets decrease by No change in

owed to Hannah by cheque for $1 120 $1 120 liabilities or capital

The amount owed by

Peter decreases

Overall no change to
assets
Assets decrease by Liabilities decrease
$4 200 by $4 200
Hannah pays the amount owed to a credit
supplier, Rizwan, by cheque for $4 200
The money in the bank The amount owed to
decreases Rizwan decreases
Assets increase by Liabilities increase by
$5 500 $5 500
Hannah buys additional fixtures and fittings
for $5 500 on credit from FixFit Ltd
The value of Hannah's The amount owed to
assets increases FixFit Ltd increases

Assets decrease by Capital decreases by

Hannah takes goods worth $500 from the
$500 $500
business for personal use
 The amount of Hannah takes
inventory decreases drawings from the
business

Assets increase by Capital increases by

Hannah transfers $1 000 from her personal $1 000 $1 000
bank account into the business bank
account The money in the bank Hannah invests $1 000
increases into the business
Assets increase by
$50

The amount of cash

increases
Capital increases by
Hannah makes $20 profit by selling goods Assets decrease by $20
which cost $30 for $50 cash $30
A profit has been made
The amount of
inventory decreases

Overall assets
increase by $20

Purpose of Business Documents

What are business documents?

 Business documents are used to keep records of all transactions

 They are used as sources of information
o The amounts are then entered into the books of prime entry
o They can be used to check potential errors

What business documents do I need to know?

 Invoices
 Debit notes
 Credit notes
 Statements of account
 Cheques
 Cheque counterfoils
 Receipts
 Paying-in slips
 Bank statements
  Petty cash vouchers

Trade Discount
What is a trade discount?

 A trade discount is a reduction in the selling price of goods or services

 Trade discount might be offered
o If the customer buys in bulk
o If the customer is a loyal and regular customer
 Trade discount is applied before a transaction takes place
 The discounted amount is the value that is entered into the books of prime
entry
o The value of the trade discount is not entered into the books of prime
entry
o Trade discount is not part of the double entry system

Cash Discount
What is a cash discount?

 A cash discount is offered to credit customers for early repayment of an

invoice
 The supplier will state the deadline for payment in order to claim the cash
discount
 The amount before the cash discount is entered into the books of prime entry
 When the customer pays early and claims the cash discount
o The amount of cash discount is recorded in the books of prime entry

Invoices
What is an invoice?

 An invoice is used as a record of a credit sale or credit purchase

 The supplier issues an invoice to the credit customer
o The customer might refer to this as a purchases invoice
o The supplier will keep a copy
 They might refer to it as a sales invoice
 An entry is made in the books of prime entry when an invoice is issued or
received for goods or services
o The customer enters the value in the purchases journal
o The supplier enters the value in the sales journal
 If the invoice is for a non-current asset then the book of original entry is
the journal
Example of an invoice
Debit Notes & Credit Notes
What is a debit note?

 A credit customer issues a debit note to a supplier to request a reduction in

the balance of an invoice
 The customer could ask for a reduction if
o The goods are damaged or faulty
o They were sent the wrong items
o Goods are missing from their order
 No entries are recorded in the books of prime entry at this stage
o This is because the supplier has not yet authorised the reduction
o This is done when the customer receives a credit note from the supplier

What is a credit note?

 A supplier issues a credit note to a credit customer when the balance on an

invoice is reduced
o The customer uses the credit note received to record the return
 It will be matched and filed with the corresponding invoice and debit
note
o The supplier keeps a copy of the credit note issued to record the return
 It will be matched and filed with the corresponding invoice
 An entry is made in the books of prime entry when a credit note is issued or
received
o The customer enters the value in the purchases returns journal
o The supplier enters the value in the sales returns journal

Statements of Account
What is a statement of account?

 A statement of account is used to show all transactions between a credit

customer and a supplier within a given time frame
 A statement of account is issued on a regular basis by the supplier
 No entries are recorded in the books of prime entry when a statement of
account is issued or received
o This is because no new transactions have taken place
o The customer can check the balance on the statement with the balance
in their purchases ledger account
 There is usually a balance column which shows the balance after each
transaction
 The statement of account is written from the point of view of the supplier
o Transactions which increase the customer’s balance will be labelled as
a debit
 o Transactions which decrease the customer’s balance will be labelled as
a credit

Receipts
What is a receipt?

 A receipt is used as a record of a cash payment

 A supplier issues a receipt to a customer when they pay for goods
using physical cash
o Sometimes a receipt is issued when the customer pays using money in
their bank account
 Other business documents may also be used to record these
transactions

Example of a cash receipt

Cheques & Cheque Counterfoils

What is a cheque?

 A cheque is a form of payment

 It is written by the customer and given to the supplier
  The supplier takes the cheques they receive to the bank and deposits
them into the business bank account
 A cheque will contain:
o The details of the customer’s bank account
o The name of the supplier
o The amount to be paid
o The date on which the cheque is written
o The customer’s signature
 The supplier will use the cheque as the business document for payments
o When the customer pays by cheque

What is a cheque counterfoil?

 Cheques are attached to counterfoils in a chequebook

 When a customer writes a cheque they also fill in some basic details on the
counterfoil
o The name of the person who is being paid
o The amount to be paid
o The date that the cheque is written
 The customer tears off the cheque and hands it to a supplier as payment
 The customer keeps the cheque counterfoil
o This is used as a record of the payment

Example of a cheque with a counterfoil

Petty Cash Vouchers
What is a petty cash voucher?

 A petty cash voucher is a document used when paying for small valued
purchases using petty cash
o This is usually done when a cheque would not be appropriate due to the
low value
 The customer pays the supplier using money from the petty cash till and
records the details on a voucher
 The information from the vouchers is then transferred to the petty cash book

Paying-In Slips
What is a paying-in slip?

 A paying-in slip is a document used when depositing cash and/or cheques into
a bank account
 The paying-in slip is kept by the business as a record of the deposit
 It contains:
o The total amount from cash
o The total amount from cheques
o The total amount being deposited
o The date
 Example of a paying-in slip

Bank statements
What is a bank statement?

 A bank statement is issued regularly by a bank

 It details all the bank transactions within a given period
o It shows money that goes in and out of the business' bank account
 It shows the opening and closing balances for that period
 A bank statement is used as a business document to identify and reconcile:
o Payments by credit transfer
o Payments by telephone transfer
o Payments by direct debit
o Payments by standing order
 o Bank charges and interest

What is a direct debit?

 A direct debit is used by a business to make recurring bank transfer

payments to a person or another business
 The direct debit is set up by the person or business receiving the payments
o The business that makes the payment needs to agree to the terms
 The payments can change
o The dates of the payments
o The amounts of the payments

What is a standing order?

 A standing order is used by a business to make recurring bank transfer

payments to a person or another business
 The standing order is set up by the business making the payments
 The payments are fixed
o The dates are determined in advance
 It could be the same day each month
o The amounts are the same for each payment
 Example of bank statement

A Summary of Business Documents for Transactions

Business document for Business document
Transaction
the customer for the supplier
The customer buys goods on credit from the supplier Purchases invoice Sales invoice
The customer returns goods to the supplier Credit note received Credit note issued
The customer pays a supplier using cash Receipt Receipt
The customer pays a supplier using petty cash Petty cash voucher Receipt
The customer pays a supplier using a cheque Cheque counterfoil Cheque
The customer pays the supplier by credit transfer,
Bank statement Bank statement
telephone transfer, direct debit or standing order
The supplier deposits the cash and cheques into their
None Paying-in slip
bank