Basic bookkeeping - Lesson 1

Question 1

How can bookkeeping be defined?

Answer 1

Bookkeeping can be defined as the method of recording the financial aspects of all business transactions so that the financial position of the business can be ascertained.

Question 2

What is the difference between bookkeeping and accounting?

Answer 2

Bookkeeping consists of keeping accurate records of all financial transactions.

Accounting goes beyond this; it refers to the use to which the records are put.

That is, the analysis and interpretation of the records in such a way that they reveal clearly how successfully or otherwise the business is operating.

Question 3

What is the purpose of accounting?

Answer 3

To plan for the development of the business and to make decisions on the various possible courses of action.

Question 4

What does accounting call for that bookkeeping does not?

Answer 4

A greater understanding of the financial transactions and an ability to make use of the information that has been collected as an aid to managing the business as efficiently and effectively as possible.

Question 5

Businesses can be classified by how they are owned. One kind of business is the sole trader. Can you describe the nature of ownership here?

Answer 5

A sole trader is a very common type of business in which one person owns the business. This person may employ people to help in the running of the business, but the proprietor is the sole owner, is entitled to all the profits and is responsible for all the debts of the business.

Question 6

What is a partnership?

Answer 6

A partnership is a type of business where the business is owned jointly by more than one person.

Question 7

What is a limited company?

Answer 7

A limited company is a type of business where the business is owned by shareholders, who appoint a director or directors to run the business.

Question 8

What are the two aspects of every business transaction?

Answer 8

The two aspects of every business transaction are the giving of value and the receiving of value.

Question 9

What is the purpose of bookkeeping?

Answer 9

The purpose of bookkeeping is to measure, in money terms, the way in which the business has been run.

Question 10

Which two factors will the managers or owners of a business consider when looking at the bookkeeping records?

Answer 10

The first is whether they are operating at a profit and, if so, whether that profit is satisfactory.

The second is whether they will be able to pay their bills when they become due. That is, whether they will have sufficient ready cash, when required, to keep the business operating.

Question 11

What is the purpose of the accounting equation?

Answer 11

The accounting equation is the most fundamental rule of business bookkeeping and helps to explain the dual concept of the giving and receiving of value.

The totals of the two sides of the equation must equal each other. On one side are the resources possessed by the business (the assets) whilst on the other side are the sources from which these resources are obtained (capital and liabilities).

ASSETS = CAPITAL + LIABILITIES

Question 12

What is a business’s capital?

Answer 12

The total amount of resources supplied by the owner of a business is known as capital. This represents the value of the investment in the business.

If we assume that all the resources have been supplied by the owner, then the following equation will represent the business’s situation:

ASSETS = CAPITAL (e.g. The purchase price of the business)

Question 13

What are a business’s assets?

Answer 13

Assets are a business’s resources. That is, anything of value owned by a business.

ASSETS = Anything of value owned by the business.

Some, or perhaps all, of a business’s assets will have been supplied by the owner of the business.

Assets could also be buildings, shop fittings, machinery, motor vehicles, office furniture and equipment, stocks of goods, cash and money in the bank.

Another asset is money owed to the business by customers to who the business has sold goods on credit. They are debtors of the business, which is a value owned by the business.

Question 14

What are debtors?

Answer 14

Debtors are people who owe the business money for goods sold on credit. For example, if a business sells goods to it’s customers on credit, i.e. they take the goods and agree to pay later, then until the customers pay they are in debt to the business. In other words they are debtors of the business, which is a value owned by the business.

Question 15

What are liabilities? Describe a situation which would result in a business having a liability.

Answer 15

Liabilities are amounts owed by a business.

If the resources of a business are contributed partly by someone else, the amount which the business owes to that person is known as a liability.

An example of a liability could be a bank loan.

Question 16

How would a business having liabilities change the accounting equation?

Answer 16

As the business’s assets have been paid for partly by the owner’s capital and partly by incurring liabilities, the equation would now be:

ASSETS = CAPITAL + LIABILITIES

Question 17

What are creditors?

Answer 17

A person to whom the business owes money.

If a business buys goods on credit, i.e. it receives the goods and is allowed time to pay for them, then this is a debt which the business owes to it’s suppliers. The suppliers are creditors of the business.

This represents a value owed by the business and the creditors are therefore a further liability of the business because they represent money the business owes which it must repay at a later date.

Question 18

What are current assets?

Answer 18

Current assets are assets which the business expects to sell or convert into cash within a twelve month period.

For example, a hotel with a quantity of food to sell would expect to sell that food quickly and therefore convert it into cash within within a short period.

Another example would be payment owed to the business from it’s credit customers.

Question 19

What are fixed assets?

Answer 19

Fixes assets are assets not intended for resale in the normal course of a business’s activities.

Items of a more permanent nature such as motor vehicles, buildings, machinery etc are owned so that the business can conduct it’s affairs and are not for resale within a normal trading period.

Question 20

How can the net worth of a business be represented?

Answer 20

The capital of a business can be regarded as it’s net worth i.e. the total value of those items which the business owns (current assets plus fixed assets) less the total value of the outstanding debts of the business to it’s credit suppliers (current liabilities).

Fixed Assets + Current Assets - Liabilities = Capital

Question 21

Define a balance sheet and explain why this is the traditional method of displaying such information.

Answer 21

A balance sheet is a list of all the assets and liabilities of a business at a particular point in time.

Because the accounting equation must balance, this method shows the two sides of the accounting equation. In any business the value of capital and liabilities which make up the sources of finance will always equal the value of assets.

Question 22

Where a two-sided balance sheet is used, what is the preferred method and why.

Answer 22

The preferred method is now to show liabilities on the right and assets on the left.

The main advantage of the two-sided style of presentation is that it makes very clear the relationship between sources of finance and assets.

Question 23

What, in an accounting sense, is stock.

Answer 23

Stock, in an accounting sense, means finished goods ready to be sold, partially finished goods in some stage of production, and raw materials used to manufacture the product.

Question 24

How is the need to produce a balance sheet to show every transaction overcome?

Answer 24

By using the double-entry bookkeeping system.

Each class of asset and liability is given a separate account and after each transaction the balances of the two accounts affected are adjusted.

A balance sheet can easily be produced by listing the balances of each account .

Question 25

What is double-entry bookkeeping?

Answer 25

The recording of the two aspects of every business transaction in the business’s books i.e. the giving of value and the receiving of value.

In double-entry bookkeeping every transaction is recorded in at least two accounts in the ledger, one account receiving the value and one account giving the value.

Question 26

How does each transaction affect the balance sheet?

Answer 26

Each transaction affects at least two items in the balance sheet.

For example, sometimes one asset is increased and another is decreased. Sometimes two liabilities may change, one increasing and the other decreasing. Others may affect both assets and liabilities, increasing or decreasing both by the same amount.

Question 27

Which style of balance sheet is now almost universally used by accountants?

Answer 27

The vertical style.

Fixed Assets
Current Assets
Current Liabilities
Net Current Assets
Represented by:
Capital
Profit

Question 28

What does Net Current Assets represent on a balance sheet?

Answer 28

Current Assets less Current Liabilities. This gives a clearer picture of the resources available to the business.

Question 29

What is a conventional way, in bookkeeping of showing that a figure is a negative one, or one to be deducted?

Answer 29

To put it in brackets.

For example, a creditor is owed £2000 as a positive amount but the figure is put in brackets on the balance sheet as it has to be deducted against the assets.

Question 30

What is the ledger?

Answer 30

The ledger is the main book used for recording transactions. It is the most important important of any business books as it contains details of all the items which appear in the balance sheet.

Question 31

How is the double-entry principle applied to the ledger?

Answer 31

The double-entry system divides each page in the ledger down the middle.

The left-hand side is called the Debit side and the right-hand side is called the Credit side.

Question 32

What are the abbreviations of Debit and Credit and what do they mean in terms of double-entry?

Answer 32

Dr and Cr respectively.

The words Debit and Credit mean simply the left-hand side and the right-hand side respectively.

Question 33

What is the Debit side of an account used for?

Answer 33

The left-hand side of an account is used for recording the receiving of value.

Question 34

What is the Credit side of an account used for?

Answer 34

The right-hand side of the account is used for recording the giving of value.

Question 35

What is an account?

Answer 35

An account is a record of a particular type of business transaction.

For every asset and liability of the business, an account is opened in the ledger.

The word account, usually abbreviated to a/c, means a history or record of.

Question 36

What is a T Account?

Answer 36

This refers to the layout of an account. The left-hand side of the T is the Debit side and the right-hand side is the Credit side.

On each side there is a space to record the date of the transaction. There is also a space to record the Particulars where you must give a brief explanation of the transaction. There is a space to record the Amount of the transaction in monetary value and also a Folio column to give a cross-reference to the other account in the double-entry which is affected by the transaction.

Question 37

What is the Folio column in an account used for?

Answer 37

To give a convenient cross-reference to the other account in the double-entry which is affected by the transaction.

Question 38

What is the function of the cash account?

Answer 38

A cash account records all cash received by the business and all cash paid out by it.

Often these transactions will be carried out using the firm’s bank account, issuing and receiving cheques instead of cash.

Question 39

Where will cash received and paid out appear in the cash account?

Answer 39

Any cash the business receives will be shown on the debit side of the cash account.

Any cash that it pays out will be shown on the credit side.

Question 40

What are goods bought for resale known as in bookkeeping terms?

Answer 40

Purchases

Question 41

How do you balance an account?

Answer 41

By totalling all the debits and totalling all the credits.

The difference between the two totals will be the balance which, if entered on the smaller side, will make both sides the same.

Question 42

Where the debit total exceeds the credit total on an account, how is this described?

Answer 42

As a debit balance.

Question 43

When is the closing off of accounts and carrying forward of the balances normally done?

Answer 43

At the end of the month.

Question 44

After the account has been balanced, what would a double underline under the totals on each side of the account emphasise?

Answer 44

That both totals balance.

Question 45

What does the abbreviation c/d mean and when would it be used?

Answer 45

c/d means Carried Down.

It is used when the the excess amount from the larger side of the account is inserted on the smaller side if the account to balance the account. The term Balance c/d is inserted into the particulars column.

Question 46

Where would the abbreviation c/d be entered if the folio column was in use and why?

Answer 46

If the folio column is in use then c/d can be inserted in there, indicating that no other account is affected, the cross referencing being with the account itself.

Question 47

What does the abbreviation b/d mean and when is it used?

Answer 47

c/d means Brought Down.

The excess amount from the larger side of the account is ‘brought down’ (ie inserted) below the closed off total on the same side when an account has been balanced.

This indicates the value of the asset, liability, expense or income, of which the account is a record, at the start if the new trading period.

The term Balance b/d is inserted into the particulars column.

Question 48

How is an account balanced at any given point in time? What does the balance represent?

Answer 48

By inserting on that side of the account which is less, the amount which is required to make both sides of the account equal. The balance is then brought down to the next trading period.

The balance represents the value of the asset, liability, expense or income, of which the account is a record, at that particular point in time.