FINAL DECK - AAT: BA1: Chapter 1: Introduction to the accounting system Flashcards
All businesses carry out?
A wide range of FT’s on a daily basis
Common transactions include
Selling Goods and Services
Making Purchases and paying expenses
Payments in and out of the bank account
Goods and services can be sold either for:
- Immediate payment (ie. Cash Sales)
2. Later payment (ie. Credit Sales)
Examples of purchases and expenses include
A wide range of large and small transactions, some more important than others.
Eg. of Settling purchase and expenses,
- Paying by cheque or by bank transfer for goods / services supplied during the previous month
Eg. of buying an item used in the business?
A new delivery van using company credit card
Payments in and out of the bank account?
The money received by the business and the money paid out by the business will pass through the bank account.
Payments in and out of the bank account *eg.)
Cash & cheques rec’d from selling Goods & Services, paid over the counter into the bank account.
Settling the company credit card by direct debit payment from the bank account.
Paying the weekly wages through the bank account.
Drawing cash out of the bank for use in the office.
The Importance of Keeping Track
As you will see from the above examples, recording FTs will be a complex process.
A business will need to keep track of:
- Expenses & Purchases
- Wages Paid
- What each customer owes, & when the money is due
- Amounts paid into & out of the bank account.
If these transactions are not recorded accurately…
The owner of the business and other interested organisations such as the bank and the tax authorities will not know how much money the business is making (or losing!)
The Five Stage Accounting System?
INTRO PARAGRAPH
The Accounting system, which will be set in motion by all the transactions listed on the previous page, can be broken down into five stages
The Five Stage Accounting System?
HEADINGS
- FINANCIAL TRANSACTIONS (FTS)
- FINANCIAL DOCUMENTS (FDS)
- BOOKS OF PRIME ENTRY.
- LEDGER ACCOUNTS
- TRIAL BALANCE
- FINANCIAL TRANSACTIONS
The originating transaction
eg. a sale, purchase, payment
- FINANCIAL DOCUMENTS
Documents GENERATED BY THE TRANSACTION
eg. invoice, cheque
- BOOKS OF PRIME ENTRY
Place where document is first recorded in the books of the business.
(eg. Sales Day book, Cash Book, Petty Cash Book)
- LEDGER ACCOUNTS
The main accounting records of the business ususally setup as a DE (Double Entry) system
- TRIAL BALANCE
A listing of the ledger accounts (LAs), used as a checking device and a source of accounting information for the owners and managers.
Books Of Prime Entry (BoPE) include:
Day Books
Cash Books
BoPE Day Books for?
Credit Sales & Sales Returns & Credit Purchases & Purchase Returns
BoPE Cash book is for?
Recording payments into & out of the bank account.
Ledger Accounts (LAs) are?
Formal book-keeping records kept by the business and are kept in written form / on computer.
Most businesses use an accounting system based on?
The Double-Entry (DE) Book-Keeping System (BKS) whereby each FT is recorded into the accounts twice.
Book-Keeping Records are usually kept in one of two forms. These are?
Handwritten (manual) / Computerised System (SAGE)
Handwriting the accounts is the traditional method of keeping the books…
…particularly by smaller businesses.
Why do small businesses handwrite the accounts?
It is relatively straightforward & cheap to operate.
What is the main record?
The Ledger is the main record.
What is the Ledger?
A large book into which each business transaction is entered by hand into indiviual accounts.
Division of the ledger - why?
Because of the potentially large number of accounts involved, the ledger is split up into different individual ledgers. Both in Manual systems & also computer systems.
Division of the ledger - 3?
Sales Ledger
Purchases Ledger
General Ledger
Sales Ledger?
Each cust. given a personal account (PA) containing records of sales made on credit, any returned goods, & payments received.
Sales Ledger - what does this account show?
This account shows the business the amount owed to that particular customer.
Payable?
Supplier
Recievable?
Customer
General Ledger?
This collection of accounts records all other transactions of the business, such as:
Assetss, Liabilities, Owner’s capital
Expense Items - Money out
(eg. wages & rent paid)
Income items 0 - Money in
(sales & rent received)
Assets?
Things owed
eg. Premises, cars, computers
Liabilities
Items owed
eg. Overdrafts and bank loans
Owners’s capital
Amount invested in the business ny the owner
General Ledger sometimes known as?
‘Nominal ledger
As in Sage Computing
Control accounts?
Def
Many businesses Control Accounts to provide them info re: FINANCIAL STATE of organisation.
CA’s are ‘total’ accounts to provide them with info about the financial state of the organisation
Control Accounts (eg.)
Sales Ledger Control Account
Purchases ledger control account
Sales Ledger Control Account?
Contains totals of all the receivable accounts in the sales ledger
Tells business how much is owing from all their customers
Purchases Ledger (PL) Control Account
Contains totals of all the payable (creditor) accounts in the PL
Tells the business how much is owing to all their suppliers at any one time.
Trial Balance
- Final stage in accounting system
- Brings together balances of all LAs
- Laid out in 2 columns (DR & CR)
- CR = DR
Trial Balance headings
Name of business
Date it was drawn up
Recievables & Payables?
= Total Figures
