3. Double-entry Bookkeeping

Question 1

Why do businesses keep accounting records? (5)

Answer 1

• Locate information easily
• Assess what they owe and are owed
• Prepare for annual financial statements
• Prepare for management accounting
• Legal requirements

Question 2

In terms of sales, which forms of documentation are included in the process? (6)

Answer 2

• Quote
• Sales order
• Goods despatched note
• Invoice/statement
• Receipt
• Credit note

Question 3

In terms of purchases, which forms of documentation are included in the process? (5)

Answer 3

• Quote
• Purchase order
• Goods received note
• Debit note
• Remittance advice

Question 4

What are the basic stages in the production of financial statements? (5)

Answer 4

• Books of prime entry/ day books
• General ledger accounts
• Trial balance
• Year end adjustments and closure of ledger accounts
• Financial statements

Question 5

What is the difference between a credit and cash sale?

Answer 5

A cash sale describes the timing of a transaction, not the type. Thus, a cash sale is one where payment is made at point of purchase whereas a credit sale is where payment for a purchase is at a later date, most commonly within 30 days.

Question 6

What are the books of prime entry? Describe what each one includes briefly. (7)

Answer 6

• Sales day book: records credit sales in invoice number order.
• Sales returns day book: records credit notes raised to customers on return of goods sold.
• Purchase day book: records credit purchases in invoice number order.
• Purchase returns day book: records debit notes received from suppliers on return of goods bought.
• Cash book: records all transactions through the bank.
• Petty cash book: records small business transactions
• The journal: records any information that does not nicely fit the above books.

Question 7

A sales return can also be called a ……….. ………….. and a purchase return can also be referred to as a ………. ………..

Answer 7

Sales return: return inwards

Purchase return: return outwards

Question 8

What are the main cash receipt sources? (4)

Answer 8

• Cash from cash sales
• Cash from credit sales
• Cash from the sale of assets
• Cash from purchase returns

Question 9

What are the main cash payment sources? (4)

Answer 9

• Cash from cash purchases
• Cash from credit purchases
• Cash expenses
• Cash from sales returns

Question 10

What are the most common journal entries? (4)

Answer 10

• Writing off irrecoverable debts
• Accruals and prepayments
• Credit sale/purchase of non-current assets
• Depreciation
• Error corrections

Question 11

1. Define capital.
2. What is the formula for capital?
3. What is capital the same as?

Answer 11

1. Residual interest in the business after all assets are sold and liabilities paid. What the business owes the owner.
2. Capital = initial investment + profit - drawings
3. Capital and equity are the same

Question 12

What are the three main accounting principles?

Answer 12

• Dual effect principle
• Separate entity concept
• Accounting equation: assets = capital + liabilities

Question 13

Most commonly, a debit is an increase in ………., ………… or ……….. and a credit is an increase in ……….., …………. or ………..

Answer 13

Debits are usually increases in

• purchases
• expenses
• assets

Credits are usually increases in

• revenue
• liabilities
• shareholder’s equity