Chapter 3 Flashcards
What is the purpose and role of accounting reconds?
- Contain day-to-day entries of money received and paid
- Record:
–business assets and liabilities
–sales and purchases
–amounts paid to and by the business
–the current financial position of the business
-Enable managers to produce financial statements that present fairly (give a true and fair view of) profit or loss and the assets and liabilities of the entity
How does an accounting system work?
A business will deal with a large number of documents.
The information contained in these documents has to be recorded to allow managers to obtain a sense of how the business is performing.
The information is recorded in the accounting system. A computerised accounting system is essentially a database (system for recording data in a logical manner).
Accounting systems: Sources of Data
-Invoices, sales and purchase
-Cheques, paid and received
-Credit notes, given and received
-Goods received notes and despatch notes
-Sales orders and purchase orders
-Statements
-Remittance advices
Accounting systems: sources of data - which transactions have to be recorded in the books of prime entry
-Invoices, sales and purchase
-Cheques, paid and received
-Credit notes, given and received
What is a book of prime entry?
Where transactions that are made by a business are recorded for the first time.
What are the five books of prime entry
cash book
sales day book
purchase day book
petty cash book
journal
others
sales returns daybook
purchase returns daybook
What is the cash book
Bank/cash account.
Where cash receipts/payments are recorded.
A book of prime entry.
all entries involving the payment or receipt of cash, including cash sales and cheques
What is the sales day book?
lists all sales on credit
Details of every sales invoice are recorded
NB Cash sales are not recorded in the Sales day book. Cash sales are recorded directly in the cash receipts book
What is the purchase day book?
Lists all purchases made on credit
Every invoice received will be allocated a sequential number for internal reference purposes.
NB. Cash purchases are not recorded in the Purchases day book. They are recorded directly in the Cash payments book
What is the petty cash book?
small cash transactions, e.g. purchase of stamps
Records the movement of physical cash into and out of the business.
What is the journal?
sundry transactions not initially recorded in any of the above
What is the sales returns daybook?
to record return of goods by customers
What is the purchase returns daybook?
to record return of goods to suppliers
How is the cash book structured?
The cash book is often split into two books - receipts and payments
Typically the cashbook is organised into columns containing the most popular type of transaction, to enable managers to analyse different types of receipt and payment.
What are events that trigger cash book entries?
the receipt of cheques or cash, the writing of cheques, withdrawal of cash, and standing orders, direct debits, electronic transfers and bank initiated transactions.
E.g. of a cash payment book
Date
Narrative
Total
Petty cash
discounts
purchases
payables
wages
rents, rates
e.g. of a cash receipts book
Date
Narrative
total
sales
receivables
capital
sundry receipts
What is the imprest system?
A control system for the petty cash book
At any point in time, the total of cash plus vouchers/receipts should equal the cash float (eg £100)
Steps of the imprest system?
- Managers decide the level of petty cash they need, say $100.
- When cash is removed it is replaced with a petty cash voucher.
- At the end of the period the petty cash book is filled in from vouchers.
- Petty cash is topped up to $100 from bank account
e.g. of a Sales day book?
Date
Invoice Number
Name
Amount ($)
e.g. of a purchases day book?
Date
Invoice number
name
amount ($)
Explain what is in a journal?
Used for the following transactions that are not recorded in the other books of prime entry. These are the main types of adjustments that will be made in preparing year-end accounts.
Year-end inventory adjustment
Recording irrecoverable (bad) debt write off adjustments
Recording period end accruals and pre-payments
Recording period end depreciation
Correction of errors
e.g. of a journal
The journal should include brief description to allow the user to determine the nature of the transaction
Date
Narrative
Debit
Credit
What happens once transactions have been recorded in the books of prime entry?
the totals are calculated for each accounting period and are then transferred to the nominal ledger using double entry
Define nominal ledger
Primary place where transactions are recorded from the books of prime entry. A summary of the financial affairs of a business and is effectively what is used to produce financial statements.
What does a nominal ledger contain?
The nominal ledger contains a separate ledger account for every asset, liability, source of income and expense, including sales, purchases, receivables, payables, cash and petty cash.
It is effectively a summary of the financial affairs of a business and is effectively what is used to produce financial statements
management must develop a logicial coding system for the nominal ledger - why?
Each account must have a unique code.
What are the advantages of logical coding systems?
1) Customers with same name can be identified
2) Code may be shorter than full name
3) Easy for staff to identify the type of account
What types of logical coding systems are there?
Sequence codes
Block codes
Significant digit codes
Hierarchical codes
Faceted Codes
What is a sequence code?
new items are simply allocated the next sequential prefix, meaning that the codes for similar items might be very different.
01 - Notes
02 - Texts
03 - Question Banks
04 - Bitesize Notes
What is a block code?
different groups of products or geographical regions are allocated to a block.
0001-0999 London customers
1000-1999 Cambridge customers
2000-2999 Bristol customers
3000-3999 Maidstone customers
4000-4999 Reading customers
What is a significant digit code?
which use some of the digits which are part of the description of the item being coded
100 Inventories of pens
100R Red
100B Blue
100G Green
What is a heirarchical code?
2 Statement of profit or loss
2-2 Expense
2-2-3 Indirect expense
2-2-3-7 Rent
2-2-3-7-5 Rent – Bristol
What is a faceted code
These codes consist of a number of sections, each one of which represents a different feature of the item.
For example, a particular customer may have the code “3/7/12”
where the “3” represents the country in which they are based (e.g. “3” = UK),
the “7”, represents the town (e.g. “7” = Bristol)
the “12” represents the type of product (e.g. “12” represents televisions).
