Module 2: Recording Financial Information Flashcards
Preparation of Financial Statements
- Recording financial data;
- Journal Entries;
- Nominal Ledger;
- Trial Balance;
- Financial Statements.
Nominal ledger
Includes all of the nominal accounts (or ‘nominal ledger accounts’) used by an entity and
the details of all financial transactions which have taken place during the period in relation to those accounts i.e. every transaction which has affected the assets, liabilities, capital, income and expenses of the
entity.
The closing balances and cumulative amounts of each transaction type in each account at the end of the year
are the figures used to produce the trial balance and, ultimately, the financial statements
Chart of Accounts
The list of nominal accounts that make up the nominal ledger, based around the elements of the financial statements and varying between businesses.
Sales on Credit
When a sales invoice is raised for sales on credit in a computerised accounting system:
- a journal entry is processed automatically which updates the nominal ledger; and
- the financial information is recorded in the aged debtors ledger automatically.
Sales invoice
A document sent by the entity to a customer with a list of products/ services that the entity has sold
to them, their prices, VAT, the total amount and the date by which the customer must pay (i.e., the credit terms).
Aged debtors ledger
A subsidiary ledger, separate to the nominal ledger, which helps to keep track of balances
owed by individual customers.
Sales Invoice - JE
Dr Trade debtors (asset)
Cr P&L – sales (income)
Cr VAT account (liability)
being sales invoice
Sales invoice payment - JE
When cash is received from a customer to pay the sales invoice, the system will record the following journal entry in
the nominal ledger:
Dr Bank (asset)
Cr Trade debtors (asset)
being cash received from customer. (No net effect on assets).
Cash Sale - JE
When cash is received from a customer for cash sales in a computerised accounting system, the system will record
a combination of the two previous journal entries immediately (sales invoice and cash receipt) in the nominal ledger,
which would result in:
Dr Bank (asset)
Cr P&L – sales (income)
Cr VAT account (liability)
being cash sales.
Purchases on Credit
When a supplier invoice is received for purchases on credit in a computerised accounting system:
- a journal entry is processed automatically which updates the nominal ledger; and
- the financial information is recorded in the aged creditors ledger automatically.
A purchase/ expense and a trade creditor (liability) (a supplier that the entity owes money to) are recorded. There
may also be some VAT if the business is VAT-registered.
Supplier Invoice
A document received by the entity from a supplier with a list of products/ services that the entity
has purchased, their prices, VAT, the total amount and the date by which the entity must pay.
Supplier Invoice - JE
When a supplier invoice is received and input to the computerised accounting system, the system will record the
following journal entry in the nominal ledger:
Dr P&L – expenses (expense)
Dr VAT account (liability)
Cr Trade creditors (liability)
being supplier invoice.
Supplier Invoice Payment - JE
When cash is paid to a supplier to pay the supplier invoice, the system will record the following journal entry in the
nominal ledger:
Dr Trade creditors (liability)
Cr Bank (asset)
being cash paid to supplier.
Cash Purchase - JE
When cash is paid to a supplier for cash purchases in a computerised accounting system, the system will record
a combination of the two previous journal entries immediately (supplier invoice and cash payment) in the nominal
ledger, which would result in:
Dr P&L – expenses (expense)
Dr VAT account (liability)
Cr Bank (asset)
being cash purchases.
Manual transactions
- Depreciation charges on PPE;
- Cost of sales and inventories;
- Bad debt write-offs and allowances for doubtful debts;
- Accrued and prepaid expenses;
- Accrued and deferred income;
- Corrections, omissions and reclassifications.
The Accounting Equation (basis of double-entry bookkeeping)
Capital (‘C’) = Assets (‘A’) - Liabilities (‘L’)
and
Capital (C) = Capital introduced (‘c’) + (income ‘I’ - expense ‘E’) - Drawings (‘D’)
such that
c + (I - E) - D = A - L
DEAL CLIP (debits and credits for increases)
DEBITS D - Drawings E - Expenses A - Assets L - Losses
CREDITS C - Capital L - Liabilities I - Income P - Profit)
Double-entry Bookkeeping
- The dual effect
- DEAL and CLIP
- Journal Entry
Debits and Credits
- A debit action increases a debit account and decreases a credit account
- A credit action increases a credit account and decreases a debit account
Trial Balance
The period-end summary of balances and cumulative amounts of each transaction type within the
nominal ledger.
Identifies debit and credit
balances/cumulative amounts of each transaction type separately so that debits equal credits.
What are the amounts in the trial balance used to prepare?
The financial statements
What is the name for the financial statement showing financial position?
The balance sheet / Statement of Financial Position
What is the name for the financial statement showing financial performance?
The Profit and Loss account.
What must be done prior to the preparation of the balance sheet?
The profit and loss related accounts in the nominal ledger must be
closed and the total profit or loss for the period transferred into retained profits.
Retained Profits
This is a balance in the nominal
ledger and represents profits that have accumulated since the entity started trading. As the retained profit belongs to
the owners of the entity, it appears within the capital section of the balance sheet.
Profit and Loss account
Prepared ‘for the period ended’ to present the financial performance of the entity (i.e.,
cumulative income and expense)
Balance Sheet
Prepared ‘as at’ the period-end date to present the financial position of the entity (i.e., assets,
liabilities and capital).
The net assets balance against capital in accordance with the accounting equation.
