Basic Bookkeeping - Lesson 2

Question 1

What is the basic rule of double-entry bookkeeping?

Answer 1

The basic rule of double-entry bookkeeping is:

DEBIT the account RECEIVING the value and
CREDIT the account giving the value.

Question 2

If a business has made £1,200 from cash sales, where has that come from?

Answer 2

Although the cash account has clearly received £1,200 in cash, the answer as far as the business is concerned, is that the value has come from Sales.

Sales have given the value of £1,200.

Question 3

When the business pays out wages of £1000, where is that money received?

Answer 3

Although the cash has actually gone into the pockets of it’s workers, as far as the business is concerned, it has paid out £1000 cash and Wages has received this amount.

Question 4

When a business pays out £600 for tools and equipment and £2000 for goods for resale, where is the value received?

Answer 4

The value is received by the business in the form of £600 worth of tools and equipment and £2000 worth of purchases.

Question 5

How can the arithmetical accuracy of a series of double entries be verified?

Answer 5

By balancing the accounts off and taking the total of all the debit balances and the total of all the credit balances. If a debit has been made for every credit and vice versa, the two totals will be the same.

Question 6

What is the purpose of the folio column in ledger accounts?

Answer 6

As a cross-reference within the ledger to the other half of the double-entry.

Question 7

Why is it useful to treat each account as a separate entity?

Answer 7

Because it helps you understand the reasoning behind double entry.

For example, the payment of business rates in the Cash Account is described as ‘business rates’, while in the Business Rates Account the transaction is described as ‘cash’, so providing a cross-reference.

To Cash Account the payment is for business rates, while to Business Rates Account the receipt is in the form of cash.

Question 8

How can gross profit be described?

Answer 8

The difference between the cost of goods sold and the value they are sold for.

Sales revenue less the cost of goods sold.

Question 9

What is net profit?

Answer 9

Gross profit less all expenses.

For example, business rates, fuel costs and wages.

Question 10

Why can we not say what the net profit is on a particular transaction?

Answer 10

It is not usually possible to relate general expenses such as fuel and wages to a particular transaction. So, whilst we can say what the gross profit is on a particular transaction, we cannot say what the net profit is.

Question 11

How can we calculate the net profit for a period?

Answer 11

Take all the transactions in any one period and all the costs relating to that period.

What is left of gross profit after all other expenses relevant to the sales have been deducted, us the net profit.

Question 12

Is gross or net profit shown in the balance sheet? Why?

Answer 12

The net profit is the amount the business has earned on behalf of the capital invested in it and is the figure shown in the balance sheet.

Question 13

What would be shown in a business’s Profit and Loss account?

Answer 13

Purchases and all other expense items would be shown as debit entries, while sales and all other income items would be shown as credit items.

The balance will show either the business’s profit (if income exceeds expenses) or loss (if expenses exceed income).

Question 14

Why must a business have a Profit and Loss account in it’s ledger?

Answer 14

So that it can calculate the profit or loss made by the business over a particular period.

The balances of all the expense accounts in any one period (ie all the costs relating to that period) are periodically transferred to the Profit and Loss account in order to work out how well the business has done over the trading period in question.

Question 15

What are Revenue accounts?

Answer 15

Those accounts where the value of the goods or services the business sells are recorded, e.g. the Sales account.

Question 16

What is the first step in opening the business ledger for the first time?

Answer 16

Open an account for each of the items appearing in the balance sheet.

Question 17

When opening a business ledger for the first time, how do we open an account for each of the items on a balance sheet?

Answer 17

Place the value of each asset on the debit side of it’s account and the value of each liability on the credit side of it’s account.

The date of entry will be the date on the balance sheet and the narrative in the particulars column will state ‘opening balance’.

Question 18

What is the rule for incorporating opening balances into the business’s ledger?

Answer 18

ASSETS must always be DEBIT balances and

LIABILITIES must always be credit balances.

Question 19

Explain how transactions affect asset accounts.

Answer 19

For any ASSET account we must:

DEBIT the opening value of the asset, as well as any additions in value to that asset.

CREDIT any reductions in value of that asset.

Question 20

Explain how transactions affect any source of finance or LIABILITY account.

Answer 20

CREDIT the opening value of the liability, as well as any additions in value to that liability.

DEBIT any reductions in value of that liability.

Question 21

Why must the purchase of goods for resale and the sale of those goods be recorded in separate accounts?

Answer 21

Because the prices at which they are bought and sold are different.

Question 22

Name the first two of the four possible ledger accounts each required to record an aspect of the movement of stock.

Answer 22

Debit the Purchases account as the value of the asset increased with the purchase of goods for resale.

Credit the Cash account if payment was made immediately by cash - this reduces the asset as money was paid out to buy the stock

OR Credit the account of the supplier if the goods are to be paid for in the future thus increasing the liability to this creditor of the business.

Question 23

What is stock?

Answer 23

The value of goods held by the business for resale.

Question 24

Why can’t the cost value of goods and the sales value of goods be shown in the same account?

Answer 24

Because the balance would not represent the cost of goods remaining unsold.

Question 25

How do purchases of goods for resale affect the ledger?

Answer 25

They increase the value of stock and therefore constitute a debit entry in the Purchases account in the ledger. They therefore increase the value of an asset.

The other half of the double-entry will depend on how the goods are paid for.

If the goods are paid for immediately in cash the credit will be entered in the cash account (thus reducing an asset).

If the goods are to be paid for in the future then the credit is entered in the account of the supplier (thus increasing a liability).

Question 26

When faulty goods are returned to their supplier how is this accounted for in the ledger?

Answer 26

Credit their value to a Purchases Returns account as a reduction in the value of the asset of stock.

Debit the supplier’s account with the value of the goods returned as a reduction in our liability to the supplier.

Question 27

How are sales accounted for in the ledger?

Answer 27

Sales of goods are credited to Sales account as they reduce the value of the asset of stock.

The corresponding debit entry will be in the Cash account (increasing the asset of cash) or, if it is a credit sale, to the customer’s personal account (increasing the asset account of a debtor of the business).

Question 28

When goods are returned to the business how does this affect the ledger?

Answer 28

Debit Sales Returns and credit the customer’s personal account.

Question 29

What does Purchases refer to in accounting terms?

Answer 29

The purchase of goods which the business buys with the intention of reselling at a profit in the normal course of business.

Question 30

What does Sales mean in accounting terms?

Answer 30

The sale of goods purchased by the business with the intention of reselling at a profit in the normal course of business.

Question 31

If the business sells a fixed asset where is that transaction recorded in the ledger?

Answer 31

A Sale of Fixed Assets account.

Question 32

If sales payments are made by cheque where is the corresponding debit entered?

If purchases are made by cheque which account is credited?

Answer 32

The Bank account in the ledger.

Question 33

What is the first step when opening a ledger?

Answer 33

Open accounts for the original capital, assets and liabilities on the date the business begins. Then open further asset and liability accounts as required.