Accountancy Part 1 Notes to accompany AQA Accountancy AS-Level
The Accounting Cycle
Sole Traders vs Limited Companies NB: Sole traders do not have to file accounts with a public body (like Companies House for limited companies). However, they should prepare a Statement of Financial Position and an Income Statement each year. Maintaining proper records enables you to manage your business and also provides an audit trail for tax purposes.
Double Entry Bookkeeping It’s all about Give and Take E.G. We purchase goods (receive) for £500 by cheques (give) The receiving side is DEBIT The giving side is CREDIT
2 types of books in the double-entry system Books of Prime Entry Books of Double Entry Cash Book (receipts and payments from bank/cash) Cash Book (cash and bank) Petty Cash Book Petty Cash Book (petty cash) Sales Day Book (invoices out) Sales Ledger (customer accounts) Purchases Day Book (invoices in) Purchase Ledger (supplier accounts) Returns In Day Book (credit notes out) General/Nominal Ledger (all other accounts eg rent, wages) Returns Out Day Book (credit notes in) Private Accounts (owner’s drawings and capital) The General Journal (everything else) How they are connected Invoices Cheque stubs Paying in slips Credit notes Receipts Bank statements Delivery notes Purchase Orders Statements Remittance Notes See above See above A list of the balances after the transactions are recorded in the Books of Double Entry Income Statement: shows profit & loss for the accounting period Statement of Financial Position: shows the assets, liabilities and capital at the end of the year
• Record non-routine transactions • Record depreciation • Error correction • Transferring entries from one general ledger to another • Purchase or sale of non-current assets (in/out) Sales Control Account Purchase Control Account Total Trade Receivables Total Trade Payables Provides accuracy; prevents fraud; gives quick snapshot information to management on money due and money owing
• The general ledger is the foundation of a company’s double-entry accounting system. • General ledger accounts encompass all the transaction data needed to produce the income statement, balance sheet, and other financial reports. • General ledger transactions are a summary of transactions made as journal entries to sub-ledger accounts (as defined by the Chart of Accounts). • The trial balance is a report that lists every general ledger account and its balance, making adjustments easier to check and errors easier to locate. • In accounting, a general ledger is used to record all of a company’s transactions. • Within a general ledger, transactional data is organised into assets, liabilities, revenues, expenses, and owner’s equity. • After each sub-ledger has been closed out, the accountant prepares the trial balance. This data from the trial balance is then used to create the company’s financial statements, such as its balance sheet, income statement, statement of cash flows, and other financial reports.
A place to park errors while you correct them. Once all the errors are corrected the suspense account should disappear Typical errors requiring a suspense account to be created: • Mistyping • One-sided entry • A transaction is entered twice • Addition errors • Errors of original entry • Omission • The transaction is allocated to the wrong account/person • Transactions are entered in the wrong ledger • Debit and credit entries have been reversed
To compare the Cash Book balance with the Bank Statement balance. Identifies: • Payments awaiting clearance • Payments not yet been presented to the bank • Bank charges, standing orders, direct debits, interest, credit transfers Unpaid expenses at the end of the year NB: go on the debit side Advance payments to carry on to next year NB: go on the credit side
These are debts you know you’ll never get back. Credit them into the individual client account. How to Calculate Depreciation There are different ways to calculate depreciation, but you will only need to know the straight-line method. •
Shows the profit/loss of a company over a time period.
This shows a SNAPSHOT at a specific date of the company’s assets, liabilities and equity. This is also known as a Balance Sheet. NB: Drawings by the owner of the company will be recorded in the balance sheet as a reduction in the assets and a reduction in the owner's equity as an accounting record needs to be maintained to track money withdrawn from the business by its owners.