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BUSINESS BOOKKEEPING & ACCOUNTSModule One

CONTENTSThe Ledger - the Main Book of Accountpage 7Transactions; what is involvedThe functions of accounting:recording, analysing, presentingBookkeeping: the recording functionManual bookkeeping and computerised accountingMeanings of the terms:assets and liabilitiesdebtors and creditorsincome and expenditurecapitalprofit and lossInformation recorded in/provided by the ledgerLedger accounts described:what their debit and credit sides recordrules concerning ledger accountsThe need for double-entry bookkeeping:the receiving and giving aspects of every transactionThe basic rule of double-entry bookkeepingAbbreviations used in ledger accountsEntries in a ledger account examined and explainedBalancing ledger accounts:debit and credit balancesFoliosClasses of ledger accounts:real, personal and nominal:what they recordrules for posting to themspecimens of each examinedSpecial notes on ledger accountsSpecial notes on balancing ledger accounts

THE LEDGER -THE MAIN BOOK OF ACCOUNTIntroductionIn business, guesswork is simply not good enough! The owners or managements of everybusiness needs accurate and up to date informationabout the activities of their business. Thatinformation can come only from records kept abouteach and everytransactionwhich occurs.In the context of accounting, atransactionis any activity which involves the exchangeof moneyor moneys worth between a business and others, be they people or organizations. A transactionmight 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 amonetary value.The main functions of the process called accountingare:)Recordingthe financial transactions which affect an enterprise(which might range from a smallone-man business to a huge public company).)Analysingthe transactions recorded.)Presentingthe records of the transactions - usually in a summarised format - in variousstatements which should show clearly the effectsof those transactions on the performance andfinancial position of the enterprise.The recording function of accounting is calledbookkeeping.The purpose of bookkeeping is toprovide an accurate and detailed record of each andeverytransaction involving the exchange ofmoney or moneys worth between a business and other parties, whether those are individuals ororganizations.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 makeentriesin their records,whilst the modern method is increasingly towards the use of computers to maintain bookkeepingrecords.Howsoever bookkeeping records are maintained, it is essential that they are always accurate, thatthey can be crosschecked when necessary, and that they are readily available when needed.Although computers might have many advantages over traditional manual bookkeeping - which isstill very widely practised - they still perform bookkeepingaccording to the same basic rules. Inthis Program we shall therefore first study the principles of manual bookkeeping, and relate them laterto computerised systems.Terms Used in Bookkeeping and AccountsBefore you start studying bookkeeping, it is important that you clearly understand the specialisedmeanings 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 stagesof the Program will be rapid and easy. Any skipping through the explanations or an I know it already8BBAMOD1(03-07)Send for a FREE copy of our Prospectus book by airmail, telephone, fax or email, or via our website:International Headquarters: College House, Leoville, Jersey JE3 2DB, BritainInternational Headquarters: College House, Leoville, Jersey JE3 2DB, BritainInternational Headquarters: College House, Leoville, Jersey JE3 2DB, BritainInternational Headquarters: College House, Leoville, Jersey JE3 2DB, BritainInternational Headquarters: College House, Leoville, Jersey JE3 2DB, Britain.Telefax: +44 (0)1534 485485 Email: info@cambridgetraining.com Website: www.cambridgecollege.co.ukattitude at this stage, can lead to misunderstanding or difficulty in your learning other topics whichwill be taught as you progress through this Program.EAssetsThese are the possessionsof 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 typeand size of an enterprise, land and buildings; plant, equipment and machinery; furniture; stocks ofgoods for sale and/or stocks of materials to be utilised in manufacturing goods; and anything elseowned by the enterprise which has monetary value, including moneyowed to itby individuals andother enterprises, and often calledbook debts.What are called fixed assetsare items which an enterprise acquires (by renting, leasing orpurchasing) in order to be able to carry out its activities. They are usually acquired with the intentionof 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 assiststhe enterprise to run efficientlyand profitably. In some countries fixed assets are called working assets because they enable theenterprise to perform its work.All other assets of an enterprise are calledcurrent assets, and their total value is constantlychanging or fluctuating with the day to day operations of the enterprise. Current assets include stocksof goods and/or raw materials, cash and bank balances, debts owing to the enterprise, etc, whosetotal values change daily as purchases and sales are made, as bills are paid and as customers paytheir debts.ELiabilitiesThese are any sums, measured in monetary value, which an enterprise owes to others, that is,they are the debtsof the enterprise. Liabilities might include the values of goods, materials or servicesprovided by suppliers but not yet paid for; or goods, materials or services paid for by customers butnot yet provided to them; as well as bank overdrafts, and loans made to the enterprise by banks andother financial institutions, etc.EDebtorsThese are people and organizations whoowe money or moneys worth tothe 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 theenterprise has loaned money and those who have been paid in advance for goods or services notyet 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 commonlycalled its trade debtors. As mentioned earlier, debts owing toan enterprise are assets; and sumsowed by trade debtors (book debts) are therefore classed as current assets.ECreditorsThese 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, withoutdemanding payment at the time of supply, or might be people or organizations who have paid in9BBAMOD1(03-07)Send for a FREE copy of our Prospectus book by airmail, telephone, fax or email, or via our website:International Headquarters: College House, Leoville, Jersey JE3 2DB, BritainInternational Headquarters: College House, Leoville, Jersey JE3 2DB, BritainInternational Headquarters: College House, Leoville, Jersey JE3 2DB, BritainInternational Headquarters: College House, Leoville, Jersey JE3 2DB, BritainInternational Headquarters: College House, Leoville, Jersey JE3 2DB, Britain.Telefax: +44 (0)1534 485485 Email: info@cambridgetraining.com Website: www.cambridgecollege.co.ukadvance (e.g. rent paid in advance to a landlord); both groups of whom are commonly referred toas trade creditors.Other creditors might be banks or other financial institutions which have loaned money to theenterprise, or banks which have permitted the enterprise tooverdrawits current account (a matterwhich is dealt with fully in Module 10). As we have already stated, all sums owed to creditors areliabilitiesof an enterprise.ECapitalThis is an essential prerequisite of any business enterprise; whatever its intended or eventual sizeit will requireinitial capitalto enable it to commence its operations. Initial capital requirements will,of course, vary considerably, but moneywill be needed to acquire the necessary fixed assets as wellas the relevant current assets - stocks of raw materials and/or goods for sale.Sufficient capital - called working capital- will also be required to financethe enterprise, thatis, to meet all the expenses which will be incurred (e.g. rent, salaries, electricity, advertising, and manyothers) 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 currentassets less the total value of its current liabilities.EEEEEIncome and ExpenditureThe term incomerefers to all the money, in whatever form, receivedby an enterprise; whilstexpenditure is all the money, in whatever form, paid outby the enterprise to enable it to keeprunning - itsexpenses.ProfitEnterprises - which in the private sector are often calledbusinesses- are started and run to makeprofits or gains for their owners. Any person involved with bookkeeping and accounting needs toknow what profit is and how it arises. A simple example will help to make the concept clear:A shoemaker sells a pair of