Chapter 1 - The Accounting System Flashcards
Why keep accounts?
Internal control - ensure all financial transactions are correctly recorded
Measuring business performance - financial reports and statements
Obtaining credit/ financing - providing lenders with current financial position of the business
Statutory requirements- provide information to HMRC
The role of the accountant
The accountants job is to check, summarise, present, analyse and interpret the accounts for the benefit of the owner.
The accounting system order
Financial documents - invoices, credit notes, bank paying in slips, cheques and BACS
Books of prime entry - Day books, journal, cash book (also used in double entry)
Double entry bookkeeping - receivables ledger, payables ledger, general ledger, cash book, revenue, expenses, assets, liabilities and capital
Trial balance - summary of all balances of the accounts
Financial statements - statement of profit or loss, statement of financial position
Return of goods - the credit note
If the buyer returns goods which are bought on credit the seller will prepare a credit note which is sent to the buyer, reducing the amount of money owed.
Books of prime entry
Sales day book - a list of credit sales made from invoices issued
Purchases day book - a list of credit purchases made from invoices received
Sales returns day book - a list of returns in from goods returned by credit customers. This is made up form credit notes issued
Purchases returns day book - a list of returns out from goods returned by the business to suppliers. Made up from credit notes received
Discounts allowed day book - a list of discounts allowed to customers for prompt payment of invoices to them
Discounts received day book - a list of discounts received from suppliers for prompt payment of invoices received from them
Cash book - the businesses record of cash and bank transactions made up form receipts, paying in slips, bacs, faster payment transfer and cheques issued
Journal - a record of non-regular transactions which are not recorded in any other book of prime entry
Division of the ledger
Receivables ledger - accounts of trade receivables, ie customers the business has sold on credit to
Payables ledger - accounts of trade payables, ie suppliers the business owe money to
Cash book - includes cash account and bank account. Cash book is also a book of prime entry for cash transactions
General ledger - the remainder of the accounts: revenue, expenses, assets, liabilities, capital
Inventory records
When supplies of the inventory are received they are entered in the inventory record and when items are sold or issued to production they are shown as issues on the inventory record.
At the financial year end the value of inventory held is recorded in the inventory account in the general ledger.
Trial balance
It sets out the balances of all the double entry accounts from the general ledger which will check the entires made and will pick up most errors. It is also the source of valuable information which is used in the preparation of the financial statements.
Financial statements
Income statement/ statement of profit or loss
Statement of financial position
