2- Double-entry bookkeeping - introduction Flashcards
Sole trader
Organisations that are owned & operated by one person.
Partnership
These are organisations owned by 2 or more persons working in common with a view to making a profit.
Company
These are organisations recognised in law as ‘persons’ in their own right. A company may own assets & incur liabilities in its own name. The accounting of these organisations must meet certain minimum obligations imposed by legislation.
Management accounts
Usually prepared on a monthly basis to present timely financial & statistical info to business managers. This info helps managers to run the business more effectively, making day-to-day & short-term decisions.
Financial accounts
These are prepared annually, mainly for the benefit of people outside the management, such as the owners of the business, HMRC, banks, customers, suppliers & the government.
What are the 2 main financial statements?
- The statement of profit or loss
- The statement of financial position
The statement of profit or loss
This is a summary of the businesses transactions (income & expenses) for a given period.
The statement of financial position
This is a statement of the assets & liabilities of the business at a given date. This date is the end of the period covered by the statement of profit or loss.
Sales revenue
Income generated from the trading activities of the business.
Cost of sales
The cost of buying or producing the goods for resale.
Gross profit
The profit remaining, after the cost of sales have been deducted from sales revenue.
Sundry income
Other types of income that aren’t generated by the primary trading activities of the business.
Expenses
The day-to-day running costs of the business.
Net profit or loss
The profit or loss remaining after expenses have been deducted from gross profit & sundry income.
Asset
Something owned or controlled by a business, available for use in the business.
Non-current asset
An asset acquired for long-term use in the business & not resold as part of the trading activities, e.g. The purchase of a delivery van.
Current asset
A short-term asset of the business which is to be used in the business in the near future i.e. Cash or something that will soon be converted into cash.
Receivable
Is an example of a current asset. A receivable is someone who owes the business money i.e. A credit customer.
Non-current liability
An amount owed by the business & due to be repaid after more than 12 months.
Liability
Is an amount owed by the business, i.e. An obligation to pay money at some future date.
Payable
Is an example of a liability. A payable is someone the business owes money to i.e. A credit supplier.
Capital
The amount which the owner has invested in the business. This is owed back to the owner & could be regarded as a special liability of the business.
Drawings
Amounts withdrawn by the business owner for their own personal use: drawings may be of cash or items of inventory.
Capital expenditure
The purchase of, or improvement of, non-current assets.
Revenue expenditure
The day-to-day running costs of the business.
Capital income
Income from the sale of capital assets of the business.
Revenue income
Income generated from the sales of goods or services.
What are the 3 basic principles based upon double-entry bookkeeping?
• The dual effect principle
• The separate entity principle
• The accounting equation
The dual effect principle
This states that every transaction has 2 financial effects.
E.g. If you spend £2,000 to buy a car & pay for it by bank transfer, you will have £2,000 less money in the bank, but you will have acquired an asset worth £2,000.
The separate entity principle
This states that the owner of the business is a completely separate entity from the business itself. Therefore the money that the owner pays into the business as initial capital has to be accounted for as an amount that the business owes back to the owner. In the same way, any money the owner withdraws from the business, known as ‘drawings’, is treated as a reduction of the initial capital that is owed back to the owner. We always look at this from the POV of the business.
The accounting equation
At its simplest:
Assets = Liabilities
If we treat the owner’s capital as a special liability then it is:
Assets = Liabilities + Capital
Or we could rearrange to:
Assets - Liabilities = Capital
Profit will increase the capital & drawings will reduce it:
Assets - Liabilities = Capital + Profit - Drawings
