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BUSINESS BOOKKEEPING & ACCOUNTS

Module One

CONTENTS
The Ledger - the Main Book of Account
page 7
Transactions; what is involved
The functions of accounting:
recording, analysing, presenting
Bookkeeping: the recording function
Manual bookkeeping and computerised accounting
Meanings of the terms:
assets and liabilities
debtors and creditors
income and expenditure
capital
profit and loss
Information recorded in/provided by the ledger
Ledger accounts described:
what their debit and credit sides record
rules concerning ledger accounts
The need for double-entry bookkeeping:
the receiving and giving aspects of every transaction
The basic rule of double-entry bookkeeping
Abbreviations used in ledger accounts
Entries in a ledger account examined and explained
Balancing ledger accounts:
debit and credit balances
Folios
Classes of ledger accounts:
real, personal and nominal:
what they record
rules for posting to them
specimens of each examined
Special notes on ledger accounts
Special notes on balancing ledger accounts

THE LEDGER -
THE MAIN BOOK OF ACCOUNT
Introduction
In business, guesswork is simply not good enough! The owners or
managements of every
business needs accurate and up to date
information
about the activities of their business. That
information can come only from records kept about
each and every
transaction
which occurs.
In the context of accounting, a
transaction
is any activity which involves the
exchange
of money
or moneys worth between a business and others, be they people or
organizations. A transaction
might involve a purchase or a sale, the receipt or the payment of money, the
circulation of assets
(possessions), the settlement of a debt, or anything else which has a
monetary value
.
The main functions of the process called
accounting
are:
)
Recording
the financial transactions which affect an
enterprise
(which might range from a small
one-man business to a huge public company).
)
Analysing
the transactions recorded.
)
Presenting
the records of the transactions - usually in a summarised format - in various
statements which should show clearly the
effects
of those transactions on the performance and
financial position of the enterprise.
The recording function of accounting is called
bookkeeping
.
The purpose of bookkeeping is to
provide an accurate and detailed record of
each and
every
transaction involving the exchange of
money or moneys worth between a business and other parties, whether those
are individuals or
organizations.
Those records might be made manually (by hand) in actual books or - in
large organizations -
in numerous cards or sheets, which collectively can still be thought of as
comprising very large books.
Some enterprises make use of mechanised accounting machines to make
entries
in their records,
whilst the modern method is increasingly towards the use of computers to
maintain bookkeeping
records.
Howsoever bookkeeping records are maintained, it is essential that they are
always
accurate
, that
they can be
crosschecked
when necessary, and that they are
readily available
when needed.
Although computers might have many advantages over traditional manual
bookkeeping - which is
still very widely practised - they still perform
bookkeeping
according to the
same basic rules
. In
this Program we shall therefore first study the principles of manual
bookkeeping, and relate them later
to computerised systems.
Terms Used in Bookkeeping and Accounts
Before you start studying bookkeeping, it is important that you clearly
understand the specialised
meanings of certain words and terms commonly used in bookkeeping and
accounting. At this stage,
you should learn
thoroughly
the following explanations to ensure that your progress in further stages
of the Program will be rapid and easy. Any skipping through the explanations
or an
I know it already
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attitude at this stage, can lead to misunderstanding or difficulty in your
learning other topics which
will be taught as you progress through this Program.
E
Assets
These are the
possessions
of an enterprise, that is, what it
owns
. Assets include actual cash
(currency notes and coins) and money in bank accounts; investments and,
depending on the type
and size of an enterprise, land and buildings; plant, equipment and machinery;
furniture; stocks of
goods for sale and/or stocks of materials to be utilised in manufacturing
goods; and anything else
owned by the enterprise which has monetary value, including money
owed to it
by individuals and
other enterprises, and often called
book debts
.
What are called
fixed assets
are items which an enterprise acquires (by renting, leasing or
purchasing) in order to be able to carry out its activities. They are usually
acquired with the intention
of their being retained for some time, perhaps many years. The variety of such
items is great and,
depending on the type and size of a particular enterprise, might range from
desks and chairs,
computers and other office equipment, to factory buildings, machinery and
plant, motor vehicles, etc;
in fact, any material item large or small in size or value which
assists
the enterprise to run efficiently
and profitably. In some countries fixed assets are called
working assets
because they enable the
enterprise to perform its work.
All other assets of an enterprise are called
current assets
,
and their total value is constantly
changing or fluctuating with the day to day operations of the enterprise.
Current assets include stocks
of goods and/or raw materials, cash and bank balances, debts owing to the
enterprise, etc, whose
total values change daily as purchases and sales are made, as bills are paid
and as customers pay
their debts.
E
Liabilities
These are any sums, measured in monetary value, which an enterprise
owes to others
,
that is,
they are the
debts
of the enterprise. Liabilities might include the values of goods, materials or
services
provided by suppliers but not yet paid for; or goods, materials or services paid
for by customers but
not yet provided to them; as well as bank overdrafts, and loans made to the
enterprise by banks and
other financial institutions, etc.
E
Debtors
These are people and organizations who
owe money or moneys worth to
the enterprise.
Debtors are mainly customers who have been supplied with goods or services

on credit
,
that is,
without having had to pay for them at the time of sale. But they can also be
those to whom the
enterprise has loaned money and those who have been paid in advance for
goods or services not
yet provided (e.g. insurance cover is usually paid in advance for a whole
year).
Those who incur debts to a business as the result of its normal business
activities are commonly
called its

trade debtors
.
As mentioned earlier, debts owing
to
an enterprise are
assets
; and sums
owed by trade debtors (book debts) are therefore classed as current assets.
E
Creditors
These are people and organizations
to whom
an enterprise owes money or moneys worth.
Creditors might be suppliers who have supplied goods, materials or services
on credit, that is, without
demanding payment at the time of supply, or might be people or organizations
who have paid in
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advance (e.g. rent paid in advance to a landlord); both groups of whom are
commonly referred to
as
trade creditors
.
Other creditors might be banks or other financial institutions which have
loaned money to the
enterprise, or banks which have permitted the enterprise to
overdraw
its current account (a matter
which is dealt with fully in Module 10). As we have already stated, all sums
owed to creditors are
liabilities
of an enterprise.
E
Capital
This is an essential prerequisite of any business enterprise; whatever its
intended or eventual size
it will require
initial capital
to enable it to commence its operations. Initial capital requirements will,
of course, vary considerably, but
money
will be needed to acquire the necessary fixed assets as well
as the relevant current assets - stocks of raw materials and/or goods for sale.
Sufficient capital - called
working capital
-
will also be required to
finance
the enterprise, that
is, to meet all the expenses which will be incurred (e.g. rent, salaries,
electricity, advertising, and many
others) until sufficient income from initial production and/or sales is generated.
The amount of an enterprises working capital at any point in time is the total
value of its current
assets
less
the total value of its current liabilities.
E
E
E
E
E
Income and Expenditure
The term
income
refers to all the money, in whatever form,
received
by an enterprise; whilst
expenditure
is all the money, in whatever form,
paid out
by the enterprise to enable it to keep
running - its
expenses
.
Profit
Enterprises - which in the private sector are often called
businesses
- are started and run to make
profits or
gains
for their owners. Any person involved with bookkeeping and accounting needs
to
know what profit is and how it arises. A simple example will help to make the
concept clear:
A shoemaker sells a pair of shoes he has made, and with the money he
receives for it he
buys food or clothing or buys materials or pays the rent of his workshop. What
he has done
is to
exchange
his materials and labour for the materials and labour of other people; what we
call
money
is only the
medium
which makes the exchange easier. In order to produce his
shoes, the shoemaker has to make use of three items: land, labour, and
capital, which are called
the
factors of production
.
Without
land
there would be no place or workshop for the shoemaker to work.
Without his
labour
no shoes would be made.
Without
capital
there would not be the money which he needs to pay the rent of his workshop,
to buy leather, tools, nails, etc, from which to produce more shoes, and to
feed and clothe
himself until the next shoes are made and sold.
The shoemaker must be sure in advance that his production will bring back
the money he spent
on materials, on labour, and on rent and bring a
return
on the capital employed; and it is that
return
or
gain
which is called
profit
.
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Put simply, we can see that capital is really the result of previous production; if
the shoemaker
works so well that he sells his products for more money than his immediate
needs, he can use that
extra money as capital to finance more production. We return to the
consideration of profit in Module
8, but at this stage it should be noted that the opposite of making a profit is
incurring a
loss
.
The Ledger
The books which are the subject of bookkeeping are referred to as the
books of account
.
The
main book of account is the
ledger
.
In a summarised form the ledger records - and can provide -
all the following information:-
*
The total income of the business, and in general the different sources from
which it is derived.
*
The amounts involved in meeting each type of expense, and the total
expenditure incurred by the
business.
*
What assets are owned by the business, the values of each general type and
the total value of
all its assets.
*
The values of the different liabilities of the business, and the total value of all
its liabilities.
*
Who its debtors are, how much they owe to the business, and the total
amount owed to the
business.
*
Who the creditors of the business are, how much is owed to each by the
business, and the total
amount owed by the business.
*
Whether the business has made a profit or a loss during a given period of
time, and the amount
of that profit or loss.
*
The amount of working capital available to the business at any point in time.
Ledger Accounts
A ledger comprises many different sections, each of which is called an
account
.
In a ledger
book, there will usually be one account on each page of it; in a large
business each account might
have its own card or sheet - all the account-cards or account-sheets together
jointly make up the
business ledger. The following important points must be noted about ledger
accounts:-
+
Each
individual account is headed by a
name
or by a
title
.
That name or title may be the name
of a person or an organization or a type of asset, a type of liability, a type of
expense or a source
of income.
+
Only
information about transactions concerning the person, organization or item
named at its head
may be recorded in that account.
+
Each account must be kept
separate
, or treated separately, from all the other accounts in the
ledger, and there must be
only one
account in the ledger for any one particular person,
organisation or item.
+
In addition to a name or title, each account also has a number allocated to it;
that number is called
a
folio
or an
account number
. (The uses and values of folios or account numbers will be
described shortly).
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+
Each ledger account is divided into
two parts
, often called
sides
, by a line - or by two close
parallel lines - drawn down the middle of it, from top to bottom.
+
The left-hand side of an account is called its
debit
side, and it records all values
received
by the
person, organization or item named at the top, or head, of it.
+
The right-hand side of an account is called its
credit
side, and it records all values
given
(or paid)
out
by the person, organization or item named at its head.
Note:
Accounts are also used in computerised boookkeeping or accounting
systems, and they also
record the giving and receiving aspects. However, the two parts of each
account might not be
so obvious in a computerised system as in manual systems, and might not be
side by side as they
are likely to be in a ledger kept manually. For convenience we shall use the
description sides.
Practical Example
As we stated earlier, bookkeeping and ledgers (in one form or another) are
used by businesses
of all types and sizes. However, for the purpose of learning, it is easier to
examine a small business
which has relatively few transactions - and which therefore needs to make
relatively few
entries
in its books of account - than it is to examine a very large business; although,
of course, the principles
applied will be the same in both cases, and it is only the scale which differs.
For the purpose of this Program we first consider the bookkeeping required by
a business called
Market Grocers, which is owned and run by Mr A Trader.
Mr Traders business deals in groceries; some it sells on
wholesale
terms, that is, in bulk or in
fairly large quantities, to other organizations, such as restaurants, hotels, and
small kiosks. Other
goods are sold
retail
or across the counter to people who come into the shop/store from which
the business operates.
The business rents its shop/store, and the storehouse it needs to hold stocks
of goods (groceries
in this case) which it hopes to sell. Mr Trader has a storeman/delivery-man,
two shop assistants and
a clerk to assist him in running the business.
The business buys the goods which it intends to sell from the manufacturers
and producers of them.
The business owns various assets, such as shop furniture and equipment:
counters, cash registers,
shelving, etc, storage equipment: racks, shelving, etc, office furniture and
equipment: desks, chairs,
an adding machine, filing cabinet, etc, and a delivery van.
An accurate record of each and every transaction which involves the
exchange of money or
anything worth money between the business and any other person or
organization
must
be recorded
- in a summarised format at least - in its ledger.
Depending in particular on the number of customers to whom Mr Trader sells
goods
on credit
,
that is, without requiring them to pay for those goods at once, and on the
numbers of suppliers who
allow him to purchase goods from them
on credit
,
that is, without requiring him to pay for those
goods at once (sales and purchases on credit are dealt with in Module 3),
there will have to be a
number of different accounts in the ledger of the business. For example, there
will be an account
headed
sales,
which will record the values of all sales made to customers, so that Mr Trader
will
always be able to find out the total value of sales made. There will also be an
account headed
purchases,
in which will be recorded the values of all goods purchased (bought) by the
business,
and which will be able to show the total value of all purchases made.
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There will also be an account headed by the name of each general type of
asset owned, for
example,
shop furniture & equipment, office furniture & equipment, delivery van,
stocks of goods,
and so on. Similarly there will be an account for each type of expense incurred
by the business, which
might include:
rent, salaries, advertising, stationery, postage, telephone,
electricity, van
running expenses,
and so on.
Finally, there will need to be an account for each debtor who owes money to
the business, for goods
sold to them on credit and not yet paid for. And also an account for each
creditor to whom the business
owes money. Mainly creditors will be suppliers from whom the business has
purchased goods on
credit and who have not yet been paid for those goods, but if, for example, the
business has been
made a loan by a bank or by some other organization or person, an account
for each such debt or
liability will also be required in the ledger. One such account will be headed
A Trader capital,
and
will record the amount of money which Mr Trader has invested in the
business and which, in effect,
it owes to him (this concept is dealt with in detail in Module 4).
Now study Fig.1/1 carefully and note in particular its layout. The reason why
each entry has been
made in the account, that is, the interpretation of the information it contains,
will be explained shortly.
Note:
These Manuals are studied in some 200 countries around the world.
Therefore, we do
not
use the name of the currency or money of a particular country against the
amount or values of
transactions. We call them simply units (of money). You may read the word
units as being the
name of the currency in use in your own country, e.g. pounds or dollars or
francs or naira or kwacha
or ryal or shillings or dinar or rupee, or any other, or as being the name of a
currency with which you
are familiar. Similarly, although we may use the symbol

against some amounts of money, you should
regard the symbol

as referring to the currency with which you are familiar.
Fig.1/1.
a specimen ledger account
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Double-Entry Bookkeeping
Each ledger account needs two sides or parts because in
every
business transaction which
occurs - no matter how large or small in value it may be -
two
things happen at the
same time
:-
One party
receives
value, whilst at the very same time
another party
gives out
that very same value.
For example, when a business sells goods and receives the payment for them
at once - called a
cash sale
- it has given out goods but at the same time it has received money
in exchange for them.
Likewise, the customer has given out money, but at the same time he or she
has received goods
in
exchange
for that money.
The same happens in
every
business transaction, and therefore in order to record the dual or
double aspect,
TWO entries
are required somewhere in the ledger for each and every transaction
that occurs. The two entries must be:-
)
One on the
credit
side of an account - to record the
giving
aspect;
and
)
One on the
debit
side of an account to record the
receiving
aspect.
The method used to record the double aspect of each transaction is, logically,
called
double-entry
bookkeeping
. It is vital to remember always the
basic
rule
of double-entry bookkeeping, which is:-
There must be a debit entry and a
corresponding
credit entry of
the same value (and vice versa) for
every
transaction that occurs.
It is worth your noting at this stage that if there is
both a debit and an equal (corresponding) credit
entry
somewhere in the ledger for each and every transaction that takes place, the
total of all the
debit entries in the ledger
should agree
exactly with the total of all the credit entries.
Information - or entries - is rarely recorded direct into the ledger accounts.
Generally information
is
first
recorded in one of the
subsidiary
books
or
day books
-
which are collectively often called
the books of
original entry
.
The information is then transferred - or
posted
, as the process is
called in bookkeeping - to the appropriate ledger accounts in a summarised
form.
The most commonly used subsidiary books are the cash book, the sales
book, the purchases book
and the returns inwards and outwards books, which we describe in detail in
Module 2 and 3.
Before we turn to an examination of the specimen ledger account illustrated in
Fig.1/1. First note
the meanings of the following
abbreviations
(shortened words or terms) used in the specimen
account, and which will frequently be met with in bookkeeping and
accounting:-
c/f
is the abbreviation for
carried forward
and means that the figure, total or balance against which
it appears has been transferred to another place, for example from the bottom
of one page to the
top of another, or from one book or account to another.
b/f
is the abbreviation which stands for
brought forward
and means that the figure, total or balance
alongside which it appears was transferred from another place, e.g. to the top
of one page from
the bottom of another, or to one book or account from another.
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c/d
is the abbreviation for
carried down

and indicates that the balance alongside which it is written
has been transferred to a lower position on the same page.
b/d
is the abbreviation which stands for
brought down
and means that the balance against which
it is written has been transferred from a higher position on the same page.
bal
is the common abbreviation for the word
balance
,
which is the difference between the total value
of the debit entries in an account and the total value of the credit entries in it.
Interpreting the Entries
Now look again carefully at the ledger account shown in Fig.1/1. The account
appears on page
93 of Market Grocers ledger, and is headed
Clarendon Hotel Ltd.
It is, in fact, the account for one
of Mr Traders customers who buys goods from him fairly frequently on credit.
As the account is in the name of
Clarendon,
it shows the position of transactions from the
view
of that customer
, and
not
from the view of the seller or vendor, in this case, Market Grocers. With
that in mind, we can read the account as giving,
in date order
, the following information:-
May 2 The entry is on the debit side of the account which means that
Clarendon
received
value;
in fact the customer purchased goods on credit (without paying for them at
once,
remember) worth 474.60 units. From
Markets
point of view the goods were given out, and
that aspect of the transaction will be recorded in a different account, as you
will see when
we study Module 3.
May 4 The entry is on the credit side, so therefore
Clarendon
gave out
value; the word returns
included in the entry tells us that
Clarendon
returned to
Market Grocers
goods worth 14 units
- perhaps they were the wrong type or size or brand, or were damaged or
substandard -
whatever the reason, they were not wanted and so were returned. The effect
of the return,
and the recorded entry of it in the account, is to reduce
Clarendons
debt to
Market Grocers
from 474.60 units to 460.60 units.
May 8 A debit entry recording a credit purchase of goods by
Clarendon -
whom, you will appreciate
by now,
received
the goods.
May 12
Another debit entry, which records a further credit purchase by Clarendon, this
time of goods
worth 162.50 units.
May 14 A debit entry for a fourth credit purchase, and receipt, of goods by
Clarendon,
valued at
296.20 units.
May 15 A credit entry showing at once that
Clarendon
gave out
value; the description payment
tells us that
Clarendon
paid the sum of 800 units to
Market.
A quick calculation tells us,
further, that the payment covered the values of the credit purchases of May 2
and May 8
less the value of the returns made on May 4. The payment can be said to
have been made
on account
because it did not settle the total amount owing by
Clarendon
at the date it
was made (or at least on the date on which it was received by
Market).
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Balancing a Ledger Account
After making the entry for the payment received from
Clarendon
on May 15, Mr Trader needed
to know how much was still owed to his business by
Clarendon.
To obtain that information, he carried
out a process called
balancing
.
This is what he did, step by step:-
Step 1
He added up the values of the entries on the debit side of
Clarendons
account in the ledger;
their total amounted to 1,272.70 units, and he wrote that total below the fourth
entry -
remember that Fig.1/1 shows an historical record, and that on May 15 the
other entries
shown in the account had
not yet
been made.
Step 2
He added up the values of the entries on the credit side of the account - their
total, which
was 814 units, was
deducted
or
subtracted
from 1,272.70 units to give the
balance
- the
amount still owing by
Clarendon
- of 458.70 units.
Step 3
That amount was entered on the credit side, making the totals of the entries
on both sides
equal
. The total was entered on the credit side, on the
same
line as the total of the debit
entries; and both - equal - totals were neatly underlined, or
ruled off
as the process is called.
Step 4
The balance was carried down from the credit side to the debit side, showing
that
Clarendon
had received an excess value of 458.70 units over what it had given out.
Balancing is an easy process and can be carried out on any account at any
time that it is considered
necessary to do so. It is generally carried out on the accounts of all debtors
and creditors at the end
of each month. It is also done for
all
accounts at the end of a financial year or trading year or other
accounting period, and you will learn in Module 4 the reasons why that is
done.
Let us now return to an examination of the other entries in the ledger
account:-
May 25 A debit entry recording a credit purchase by
Clarendon
of goods worth 113.40 units.
May 27 A credit entry recording the return of goods worth 21 units from
Clarendon
to
Market
-
remember, the account is credited with the value of the return because it was
given out by
Clarendon.
May 31 It is
customary for a business to send each credit customer a statement - called a
statement
of account
-
at the end of each month, stating the values of the goods purchased by the
customer during the month, the values of any payments received from the
customer during
the month, and the values of any returns of goods made by the customer
during the month
and - most importantly - the balance still owing by the customer on the last
day of the month.
Mr. Trader therefore balanced
Clarendons
account again on May 31 and the balance
calculated (458.70 plus 113.40 less 21 = 551.10 units) was brought down to
the start of the
next month.
Note that the entries above the last ruling off are
ignored
when balancing the next time
because, of course, the balance between their totals (if there is one, as was
the case with
Clarendon)
has already been carried down and is included in the next totalling.
You can therefore see that a ledger account, even one like that illustrated in
Fig.1/1 which contains
only a few entries, can give a
great
deal of information. In this and succeeding Modules you will be
shown many other ledger accounts, and will be given information about them
and the ways in which
they differ from the one we have so far illustrated; balancing will also be
considered further.
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The Folio Column
The narrow column to the left of the value column on each side of the account
is called the
folio
column
, and it contains a reference which tells us from where the entry was posted,
i.e. its source,
or where the corresponding entry - to complete the double-entry for the
transaction - will be found.
We explain fully the importance of folios and their value in Module 2.
Classes of Ledger Accounts
All the many accounts which jointly make up the ledger of a business can be
divided into three
classes, which are as follows:-
)
Real Accounts
These contain the records of all the physical or tangible assets of the
business, for example, shop
furniture, stocks of goods, delivery van, etc.
)
Personal Accounts
These are usually in the names of people or organizations, and they maintain
records of (a) the
transactions which a business has with its credit customers, showing the
amounts still owed to the
business by any of them; whilst (b) other personal accounts record the
transactions which the business
has with suppliers from whom it purchases goods on credit, and they will show
to which creditors the
business still owes money, and how much is owed to each.
)
Nominal Accounts
These keep the records of all the different types of income (sometimes called
revenue
) of the
business, and also the records of the different types of expenditure incurred
by the business in carrying
out its activities.
Now let us look at a specimen of each class of account: -
Fig.1/2
.
a specimen real account
The account shown in Fig.1/2 records the values of the different items owned
by Market Grocers
which together are classified as
shop furniture & equipment;
there might be many different items,
but as they are all used in helping the shop to run efficiently, the records of
them are kept together
in one account instead of having a separate account for each type of item.
You will appreciate that
they are all fixed or working assets.
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The first entry in the account is the balance, or total value, of shop furniture
and equipment brought
forward, from an earlier page, perhaps page 11 in the ledger. The second
entry, being on the debit
side, shows a receipt of value by the account; that is, a new set of scales was
purchased for use in
the shop, and so the total value of shop furniture & equipment is increased.
(At the same time, money
was given out to pay for the scales, and the credit entry to record that giving
aspect is recorded
elsewhere in the books - see Fig.2/1). The two values - that of the opening
entry and that of the
new one made - have been added together to show the new total value of all
the shop furniture &
equipment - 5,069.80 units.
When all the entries are on the
same side
of an account, as in Fig.1/2, there is
no
need to balance
it, because
the total of the entries on that side
is automatically the balance on that account. With real
accounts, most entries appear on the debit side; only if items are sold (thus
reducing the total value
of the assets concerned) and at the end of the accounting period, are entries
likely to be found on
the credit side. The rule for posting values to real accounts is:
Debit all values received, and credit all values given out.
Fig.1/3.
a specimen personal account
The account illustrated in Fig.1/3 is that of a supplier from whom Market
Grocers purchases goods
(for re-sale) on credit; remember that it shows transactions from the point of
view of
Fine Foods Ltd.
The earliest entry is on the credit side on May 6 and shows that Fine Foods
gave ou
t
goods worth
972.50 units - those same goods were
received
by Market, and the entry to record that aspect is
recorded elsewhere in the books, as shown in Fig.3/5).
The next entry, in date order, is on May 10 and shows that
Fine Foods
received back goods worth
37.40 units, being a return by
Market.
The next entry, again reading the account in date order, is
on the credit side for a further credit sale (giving out of value) by
Fine Foods.
On May 31 Mr Trader
paid the sum of 935.10 units to
Fine Foods
- they received the money and so their account is debited
(the payment was for the purchases made on May 6, less the value of the
returns).
After the entry for the payment, the account was balanced, and the credit
balance - representing
the amount still owed by
Market
to
Fine Foods
- was carried down to the start of the next month. Note
that had
Market
paid the total owing (621.90 units) the totals of the entries on both sides of the
account
would have been
equal
, and so there would have been
no
balance, as was the case in the account
shown in Fig.1/4.
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Fig.1/4.
a personal account with no balance
As you can see in Figs.1/1, 1/3 and 1/4, entries are generally made on
both sides
of personal
accounts, and after a personal account has been balanced the balance can
be on either the debit
side or the credit side, depending upon whether money is still owed
to
the business or
by
it - and in
some cases personal accounts might have no balance at all. The rule for
posting values to personal
accounts is:-
Debit the receiver of the value, and credit the giver of the value.
Fig.1/5.
a specimen nominal account recording expenditure
Fig.1/6.
a specimen nominal account recording income
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With nominal accounts, the majority of entries - if not all of them - are on only
one side. The entries
in nominal accounts recording expenditure, as is the case with Fig.1/5, are
made on the debit side
because money has been given out - to pay the expense concerned, whilst
the type of expense
recorded by the account - has received the value.
Similarly, entries in nominal accounts recording sources of income, as in
Fig.1/6, are mainly made
on their credit side, because although money has, or will, be received in
exchange for the items sold,
the accounts record the giving aspect of the transactions concerned. This
matter will become quite
clear when we consider the cash book and other books of original entry in
Modules 2 and 3.
The rule for posting to nominal accounts is:-
Debit the values of all expenses and losses,
and credit the values of all gains.
The balance on an account is the
difference
between the total value of the entries on its debit
side, and the total value of the entries on its credit side. If the total of the debit
entries is the larger
- as is the case with the accounts shown in Figs.1/1, 1/2 and 1/5 - the account
concerned is said to
have a
debit
balance
.
If, on the other hand, the total value of the credit entries is the larger - as
is the case with the accounts in Figs.1/3 and 1/6 - the account concerned is
said to have a
credit
balance
.
It is most important to bear those facts firmly in mind.
Special Notes:
E
In some cases the word debit might be abbreviated to DR, and the word
credit might be
abbreviated to CR. These abbreviations should
not
be used in written or worked answers
to Test or Examination Questions.
E
The word credit as used in bookkeeping and accounts has two different
meanings:
1. It is the name of the right-hand side/receiving part of a ledger account.
2. It means that goods or services have been sold or purchased without
payment having been
made at the time of the sale/purchase.
It is most important that you do
not
confuse two different meanings of the same word. Always read
the word carefully in the
context
(its relationship with other words in the sentence) in which it is
used.
E
Traditionally the description of each entry on the debit side of a ledger account
had to be started
with the word to, and the description of each transaction on the credit side of
a ledger account
had to be started with the word by. Some examining bodies might still
require that that is done,
but the busy bookkeeper rarely has the time in practice for such niceties
which, in any case,
contribute nothing to the accuracy or meanings of entries.
E
In practice, some accounts might contain very many more entries than we
have shown in our
examples. Nevertheless, whether an account contains one entry or hundreds,
it
must
conform
to the rules of double-entry bookkeeping we have so far taught you, and which
will be taught in
subsequent Modules of this Manual. And the same applies whether
bookkeeping is carried out
manually or by computer.
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E
ALL
entries in ledger accounts - and indeed in all books of account - must always
be made
neatly
and
accurately
. Any untidy, unclear, careless or inaccurate entries will lead to errors, and
it can be very time-wasting to trace, and correct, errors. Carelessness and
inaccuracy can, further,
lead to losses for a business and even - in extreme cases - to the loss of the
job of the person
responsible. Accuracy is just as important when making entries in - or
inputting
to - a
computerised accounting system. So
ALWAYS
be accurate in your bookkeeping work, be neat
- and take
pride
in your work and your profession.
Additional Notes on Balancing Ledger Accounts
Commit the following points to memory, as they will help you avoid making
errors in balancing
accounts manually.
As soon as both sides of an account are
equal in total value
it should be neatly
ruled off
.
If there
is
only one entry
on each side of the account (equal in value) then the
ruling off lines
should
be drawn below the entry on each side of the account; there is
no
need to write the total again (see
Fig.1/4).
However, if there is
more than one entry
on either side of the account, the values of those entries
should be totalled, the
same
total should be written on
each
side of the account, and ruling off
lines should be ruled below those equal totals (see Fig.1/7).
If there is
only one entry
in an account, there is
no need
to balance that account, because the
value of that one entry
is the balance;
do
not
rule off the account.
If
all entries
in an account are on the
same side
of it,
the total value
of those entries
is the
balance
on that account,
and so there is
no need
to balance it; the total value of the entries may
be written in, but the account should
not
be ruled off (see Figs.1/5 and 1/6).
Fig.1/7.
a personal account with no balance
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SELF-ASSESSMENT TEST ONE
Recommended Answers to these Questions - against which you may
compare your answers - will
be found on page 23. The maximum mark which may be awarded for each
Question appears in
brackets at the end of the Question. Do
NOT
send your answers to these Questions to the College
for examination.
No.1.
What is the meaning of the term assets? In what ways do the fixed assets
of a business
differ from its current assets? (maximum 20 marks)
No.2.
What are the differences between the debtors and the creditors of a
business? Who are
the debtors and creditors of a small trading business likely to be in general?
(maximum 20 marks)
No.3.
State exactly the wording of the basic rule of double-entry bookkeeping.
Explain why that rule
is necessary, and why it must be strictly complied with in recording every
transaction which occurs
in business. (maximum 20 marks)
No.4.
A business called
Carib Catering Supplies
has a number of credit customers. Below are
its transactions with one of them during the month of June. Rule up a ledger
account, and record
each transaction - in date order - into the account for
Beachview Hotel
in the ledger of
Carib Catering
Supplies,
and balance the account at the end of the month.
(maximum 20 marks)
June 6 Sold goods on credit to
Beachview Hotel
worth 277 units.
June 8 Sold goods on credit to
Beachview Hotel
worth 199 units.
June 10 Received back from
Beachview Hotel
goods worth 22 units.
June 15 Received a payment of 454 units from
Beachview Hotel.
June 16 Sold goods on credit to
Beachview Hotel
worth 210 units.
June 22 Sold goods on credit to
Beachview Hotel
worth 306 units.
June 25 Received back from
Beachview Hotel
goods worth 26 units.
No.5.
Place a tick in the box
against the
one correct
statement in each set.
(a)
A transaction takes place when:
1
an entry is made in a ledger account.
2
a debit entry and a corresponding debit entry have been made.
3
one party gives out value and another party receives the same value.
4
all the entries are on the same side of a ledger account.
(b)
Real accounts:
1
actually exist in the ledger of a business.
2
record the values of the tangible assets of a business.
3
record the different types of revenue earned by a business, and the types of
expenditure
it incurs.
4
record transactions with people and organizations.
(c)
In bookkeeping a balance means:
1
the difference between the total value of the debit and the total value of the
credit entries
in a ledger account.
2
a scale used for weighing goods sold to customers.
3
there are the same numbers of entries on the debit and credit sides.
4
that a debit entry and a corresponding credit entry have been made.

RECOMMENDED ANSWERS TO
SELF-ASSESSMENT TEST ONE
No.1.
The term assets refers to anything which a business owns; its possessions,
in whatever form
those possessions might be. Some assets might be tangible items, such as
buildings, machinery
and cash, whilst other assets might be intangible, such as book debts and
investments.
Fixed assets are items which a business acquires in order to be able to run
smoothly and efficiently
and to carry out its intended activities, whether they involve the manufacture
of products, the sale
of products or the provision of services. Generally, fixed assets are acquired
with the intention of
their being retained for some considerable time, and they are not bought and
sold in the course of
normal business activities.
Current assets, on the other hand, are constantly changing in value in the
normal course of a
business activities; they include such possessions as cash, stocks of goods,
and debts owed to the
business by trade debtors.
No.2.
Debtors are the people and/or organizations which owe money to a business,
whilst creditors
are the people and/or organizations to whom a business owes money.
In general, the debtors of a small business are likely to be mainly customers
to whom it has sold
goods or services on credit, and who have not yet paid for those goods or
services. In a smaller
number of cases debtors might also include people or organizations to whom
the business has paid
in advance of receiving the goods or services paid for; for example, there are
times when a business
has to pay a deposit before it is supplied with its requirements, whilst
sometimes certain expenses,
such as rent and insurance premiums, have to be paid a month or longer in
advance - the recipients
of such payments are debtors of the business for the values of any goods or
services not yet provided.
The creditors of a small business are likely to be people or organizations who
have supplied it with
goods or services for which it has not yet made payment. Others might be
those who paid in advance
for goods or services not yet provided, or who have loaned money to the
business, e.g. a bank.
No.3.
The wording of the basic rule of double-entry bookkeeping is:-
There must be a debit and a corresponding credit entry (and vice versa)
of the same value for every transaction that occurs.
The rule is necessary, and must always be strictly complied with, because in
every business
transaction that occurs, no matter how large or small it might be, two things
always happen at one
and the same time: one party to the transaction receives value, whilst the
other party gives out that
value. To record that dual aspect of every transaction, two entries are required
in the ledger; one
of those entries must be a debit entry, whilst the other - of an identical value -
must be a credit entry.
The debit entry records the receiving aspect, whilst the credit entry records
the giving aspect.