The Accounting System

The Accounting System

1. Common transactions

   • Selling goods and services
     • Imediate payment
       • Cash sale
   • Making purchases and paying expenses
     • Payment at a later date
       • Credit sale
   • Payments in and out the bank account

2. The five stage accounting system

   • Financial transaction
     • The originating transaction
   • Financial documents
     • Documents generated by the transaction
   • Books of prime entry
     • The place where the first document is first recorded in the businesses books
   • Ledger accounts
     • The main accounting records of the business, usually set up as a double entry system
   • Trial balance
     • A listing of the ledger accounts, used as a checking device and a source of accounting information for the owners and managers.

3. Books of prime entry

   • Day books
     • Transactions involving customers/suppliers
   • Cash book
     • Recording all payments in/out the bank account
   • Petty cash book
     • Recording all payments in/out of the cash float, used for small purchases

4. Ledgers

   • The ledger = General ledger + Sales ledger + Purchases ledger
   • A ledger is traditionally a large book into which each business transaction is entered into individual accounts
   • 'The ledger' is used to describe all the ledgers.
   • Sales ledger
     • This account shows the business the amount owed by that particular customer
   • Purchases ledger
     • This account shows the amount owed to a supplier
   • General ledger
     • Records all other transactions of the business

5. Control accounts

   • Sales ledger control account
     • Contains the totals of all the trade receivable accounts in the sales register
   • Purchases ledger control account
     • Contains the totals of the trade payable accounts in the purchase ledger

6. Financial statements

   • Profit or loss
     • Income - expenses = profit/loss
   • Financial position
     • Assets - liabilities = capital

7. Accounting terminology

   • Stock
     • Inventory
       • Goods held by a business
   • Creditor
     • Trade payable
       • A supplier you owe money to
   • Debitor
     • Trade receivable
       • A customer who owes you money
   • Profit and loss account
     • Statement of profit/loss
       • Financial statement calculating profit/loss
   • Balance sheet
     • Statement of financial position
       • Financial statement showing the value of the owners investment