Chapter 1- The Accounting System Flashcards
What are financial transactions?
a money agreement between a buyer and seller to exchange an asset for payment.
Selling goods and services info
- immediate payment= cash sales
- cash can be payment made by credit/debit card as well as notes and coins
- a payment at a later date is a credit sale
What is a credit sale?
A credit sale is a payment made at a later date.
Examples of purchases and expenses:
- large and small transactions
- settling purchase invoices
- buying an item used in the business
- buying fuel for delivery van
- buying stamps for office using cash
Examples of payments in and out of the bank:
- cash
- cheques
- electronic payments
- settling company credit card by direct debit
- paying weekly wages
- drawing cash out for office
What does a business need to keep track off?
- expenses and purchases
- wages paid
- what a customer owes and when
- what is owed to suppliers and when
- amount paid in and out of the bank
What are the 5 stages of the accounting system?
- Financial transactions
- Financial statements
- Books of prime entry
- Ledger accounts
- Trial balance
Examples of a financial transaction:
- a sale
- a purchase
- a payment
Examples of financial documents:
- an invoice
- a credit note
- petty cash voucher
What are the books of prime entry?
- sales day book and sales returns day book
- purchase day book and purchase returns day book
- cash book
- petty cash book
Sales Transactions
Sales Day Book and Sales Returns Day Book:
- customer sales —>(debit & credit)
- customer returns —> (debit & credit)
Purchase Transactions
Purchase Day Book and Purchase Returns Day Book:
- purchases from suppliers —> (debit & credit)
- returns to suppliers —> (debit & credit)
Cash and Bank Transactions
Cash Book:
-payments received and payments made —> (debit and credit)
Small Cash transactions
Petty Cash Book:
- small cash payments made and cash received —> (debit and credit)
Day Books
- credit sales and sales returns which involve customers
- credit purchases and purchases returns which involve suppliers
Cash Books
-records payments into and out of the bank
Petty Cash Book
-records payments in and out of a cash float used for small payments and purchases
What is a Ledger Account?
-the formal accounting record for financial transactions involving customers and suppliers and business assets, expenses, income, liabilities and capital
What is a ledger?
-a book where business transactions are entered into individual accounts
What is a sales ledger?
-customer individual accounts which contains sales made on credit, returned goods or payments received
What is a purchase ledger?
-suppliers personal accounts which contains purchases made on credit, returned goods and payments made to suppliers
What is a general ledger?
- this ledger contains all other transactions made by the business such as assets, liabilities, owners capital, expenses items and income items
What are assets?
- items owned by a business
- e.g a delivery van
What are liabilities?
- items owed by a business
- e.g a bank loan
What is capital?
-the investment made in a business by the owner(s)
What is a control account?
- a control account is contained in the general ledger and used for information about the financial state of a business
- they summarise a number of other accounts
Examples of control accounts:
- sales ledger control account
- purchase ledger control account
What is a sales ledger control account?
- contains the total of all trade receivable (debtors) accounts in the sales ledger
- shows how much all customers owe
What is a purchases ledger control account?
- contains the total of all trade payables (creditors) accounts in the purchase ledger
- shows how much a business owes to its suppliers
What is a trade receivable? (Debtor)
-a customer who owes a business money
What is a trade payable? (Creditor)
-a supplier a business owes money to
What is the trial balance?
- a list of balances of the ledger accounts drawn up into 2 columns (debit and credit)
- the totals should be the same
What are the two financial statements?
- statement of profit or loss
- statement of financial position
What is a statement of profit or loss?
- shows day to day business income received over a given period, shows expenses incurred, cost of production and running costs
- equation: income minus expenses = profit
- if income is > than expenses = profit
- if income is < than expenses= loss
What is a statement of financial position?
- gives a snapshot of a business at a certain date and shows the value of owners investment
- Accounting equation: Assets minus liabilities = Capital
What is a financial document?
- a term given to a doc which results from a financial transaction
- for example an invoice
What is a cash sale?
-a sale where a payment is made straightaway
What are double-entry accounts?
-ledger accounts set up on the double- entry system (debit and a credit entry) are made for each transaction
What is the ‘dual effect’?
- every transaction will be recorded in two accounts
- one account will be debited (receive value)
- one account will be credited (give value)
Debit
- gains value
- records an asset
- records an expense
Credit
- gives value
- records a liability
- records an income item
In and Out rule
- In= Left= Debit
- Out= Right= Credit
