bad balance credit transfer

Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS INTRODUCTION Dictionary Accounts Ledger Assets Financial records, where business transactions are entered. T accounts The set of accounts for the business Items owned by the business Liabilities Capital Items owed by the business The amount of the owners stake in the business Debtors Individuals or businesses who owe money to the business Creditors Individuals or businesses to whom the business owes money Purchases Goods bought, either on credit or for cash, which are intended for resale later Credit purchases Cash purchases Petty cash Sales Goods bought, with payment made at later date Good bought and paid for immediately Low value purchases, often for expenses The sale of goods, whether for cash or credit, in which the business trades Credit sales Cash sales Turnover Goods sold with payment to be received at an agreed date in the future Goods sold with immediate payment received by cash, cheque or credit card The total of sales, both cash & credit for a particular time period 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 1 of 17 Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS Dictionary Profit The gain made by a business from selling goods or services during a particular time period Expenses The costs of running a business, e.g. wages, rent, rates, telephone Trial Balance List of balances of all double entry accounts. 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 2 of 17 Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS DOUBLE ENTRY Dictionary Ledger accounts Debit entry Where double entry book-keeping transactions are recorded The account which gain value, records an asset or an expense Credit entry Capital The accounts which gives value, or records a liability or income The amount of money invested in the business by the owner (or owners) Fixed Asset item purchased by a business for use on a semi permanent basis Capital expenditure The purchase of fixed assets for use by the business Revenue Expenditure Drawings The expenses incurred in the day to day running of the business Money taken from a business by the owner in the form of cash or cheque (or sometimes goods) for personal use Purchases account Used to record the purchase – whether on credit or for cash – of the goods in which the business trades Sales Account Used to record the sale – whether for cash or credit- of the goods in which the business trades Credit Purchases Credit Sales Goods bought, with payment to be made at a later date Goods sold, with payment to be received at an agreed date in the future Purchase returns Sales returns Where a business returns goods to the creditor (supplier) Where the debtor (customer) returns goods 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 3 of 17 Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS Dictionary Carriage inwards The cost of carriage paid on purchases (added to Cost of Sales) Carriage outwards The cost of carriage paid on sales (added to distribution costs) Settlement (Cash) discount Discount allowed An allowance off the invoice amount for quick settlement Settlement discount allowed to debtors (expense) Discount received Settlement discount received from creditors (income) 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 4 of 17 Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS BALANCING ACCOUNTS AND THE TRIAL BALANCE Dictionary Balance of account Trial balance The total of the account to date List of balances of every account forming the ledger, distinguishing between those accounts which have debit balances and those which have credit balances. Error of omission Business transaction completely omitted from the accounting records Reversal of entries Debit and credit entries made on the wrong side of the accounts Mispost/error of commission Error of principle Transaction entered to the wrong person’s account Transaction entered to the wrong type of account Error of original entry Compensating error Wrong amount entered incorrectly in accounts Where two errors cancel each other out BALANCING AN ACCOUNT 1. Total both sides ( pencil) 2. Enter larger balance in total line 3. Calculate the difference a 4. Enter difference on opposite side, next to total line, narration balance c/f or c/d 5. Total up that side and check agrees to original total Enter balancing figure on opposite side, narration balance b/f or b/d 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 5 of 17 Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS THE EXTENDED TRIAL BALANCE Dictionary Final accounts Accounting statements, comprising the profit & loss account and balance sheet, produced at least once a year, which give information to the owner(s) and other interested parties on how the business is progressing. Profit & Loss A/C Trading account Balance Sheet Shows the net profit or loss of the business for the accounting period Used by the businesses that buy and sell goods: part of the profit & loss account. Shows the assets, liabilities and capital of the business at the end of the accounting period Extended Trial Balance A spreadsheet format used to produce the final accounts 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 6 of 17 Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS SOLE TRADER FINAL ACCOUNTS Dictionary Conventional format Sole trader The proper form of final accounts used by accountants A person who is in business on his/her own Service sector business Gross profit Net profit Assets A business which supplies services, e.g. secretarial agency, estate agent Sales minus cost of sales, i.e. profit made before overheads are deducted Gross profit minus overheads, i.e. the profit which belongs to the owner of the business Items owned by the business, split between fixed assets and current assets Liabilities Capital Items owed by the business, split between current liabilities and long term liabilities The owner’s investment in the business 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 7 of 17 Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS ACCRUAL & PREPAYMENTS Dictionary Accrual of expenses An amount due in an accounting period which is unpaid at the end of the period- accrual is a credit in the Balance Sheet Prepayment of expenses A payment made in advance of the accounting period to which it relates-prepayment id a debit in the balance sheet Accrual of income Income of a business due in an accounting period which is unpaid at the end of the period-accrued income is a debit in the Balance Sheet Prepayment of Income Income of the business which has been paid in advance of the accounting period to which it relates Prepaid income is a credit in the balance sheet Goods for own use Where the owner of the business takes some of the goods in which the business trades for his own use. Income & expenditure accounting Recording the amounts that should have been received and paid during an accounting period Receipts and payments accounting Recording the actual amounts that have been received and paid during an accounting period without taking note of accruals and prepayments. Accrued Expenses Dr Expense A/C Cr Accruals Prepaid Expenses Dr Prepayments Cr Expense A/C Accrued Income Dr Accrued Income Cr Income A/C Prepaid Income Dr Income A/C Cr Prepaid Income A/C 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 8 of 17 Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS DEPRECIATION Dictionary Depreciation The estimate of the amount of loss in value of fixed assets over the estimated useful life. Straight Line Depreciation A fixed percentage is written off the original cost (less any residual or scrap value) of the asset each year. Reducing Balance Depreciation Depreciation Account A fixed percentage is written off the reduced balance each year Used to record the annual depreciation charge, which is debited to P/L A/C for one or more classes of fixed asset. Provision for Depreciation Account Use to record the amount of accumulated depreciation for an asset or class of fixed asset – a credit balance Depreciation Policy The method and rate of depreciation used by a business for each class of fixed asset Asset Disposal Account Depreciation Charge Dr Cr Used to calculate any profit or loss on disposal on sale of a fixed asset. Depreciation A/C Provision for Depreciation A/C Disposal of Fixed Asset Transfer asset Dr Disposal of Fixed Asset A/C Cr Fixed Asset A/C Transfer Accumulated Depreciation Dr Provision for Depreciation A/C Cr Disposal of Fixed Asset A/C Cash Proceeds Dr Bank A/C Cr Disposal of Fixed Asset A/C Balance off and transfer balance to P/L A/C as Profit or Loss on disposal 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 9 of 17 Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS BAD DEBTS Dictionary Bad Debt A debt owing to a business which it considers will never be paid Bad Debts written off account Provision for Doubtful Debts The account to which amounts of account balances written off as bad are transferred An estimate by a business of the likely percentage of debtors which may go bad during any one accounting period – A credit in the Balance Sheet Provision for bad debts: adjustment account Provision for bad debts account Bad debts recovered VAT Relief Used to record the annual change in the bad debts Used to record the accumulated total of the provision for bad debts Where a former debtor, whose account has been written off as bad, makes good. Only claimed when debt is more than six months old. Write off of Bad Debt Dr Bad Debts Written Off Cr Debtors Control A/C (adjust memorandum a/c) Then :Dr P/L A/C Cr Bad Debts written off Provision for Bad Debts Dr Provision for bad debts: adjustment A/C Cr Provision for bad debts Then:Dr P/L A/C Cr Provision for bad debts: adjustment A/C Increasing the provision Dr Provision for bad debts: adjustment A/C Cr Provision for bad debts Decreasing the provision Dr Provision for bad debts Cr Provision for bad debts: adjustment A/C 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 10 of 17 NB % of debtors reflected in credit balance on provision for bad debts a/c Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS ACCOUNTING CONCEPTS Dictionary Business entity concept Final accounts record and report on the activities of one particular business Money measurement concept Historical cost concept Duality In final accounts all items are expressed in terms of money Assets & liabilities are recorded in the accounts at the actual amount of the transaction Each financial transaction is recorded by two opposite accounting entries of equal value Materiality Items with a low monetary value are not worth recording in the accounts separately Fundamental Accounting Principles (CAP-G) Consistency When a business adopts a particular accounting policy it should continue to use such methods consistently Accruals Matching expenditure with income due for the accounting period Prudence Final accounts should always, where there is any doubt, report a conservative figure for profit or the valuation of assets Going concern The presumption that the business to which the final accounts relate will continue to trade in the foreseeable future SSAP FRS Statement of standard accounting practise, part of accounting rules Financial reporting Standard: part of rules of accounting Capital expenditure Expenditure incurred on the purchase, alteration or improvement of a fixed asset Revenue expenditure Expenditure incurred on running expenses 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 11 of 17 Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS CAPITAL & REVENUE TRANSACTIONS Dictionary Fixed Assets Goodwill Those assets which are intended for use on a continuing basis in the enterprise activities The purchase cost of the connections and reputations of a business acquired Fixed Asset Register Used for control purposes: records details of purchase, depreciation, disposal of fixed assets owned by the business Hire Purchase Agreement between a finance company and a hirer which enables the hirer to have use of a fixed asset against a deposit and regular instalment payments Leasing Agreement between a finance company (lessor) and a business (lessee) which enables the lessee to have use of the fixed asset against a regular hire or rental payment. Operating Lease Finance lease A short term lease under which the asset is likely to be hired by several lessees A long term lease under which the asset is likely to be rented by only one lessee 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 12 of 17 Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS CONTROL A/Cs Dictionary Control Account A master account which controls a number of subsidiary accounts Sales ledger control a/c A master account controlling the debtors (subsidiary Sales) ledger Purchase ledger control a/c Set off/Contra entries Master account controlling the purchase (subsidiary) ledger Where balances in sales ledger and purchases ledger are to be set off against each other Memorandum a/c, Subsidiary account Stock control account An account which is not part of the double entry A master account which controls the subsidiary records of stock items 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 13 of 17 Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS THE JOURNAL Dictionary The journal A primary accounting record, used for opening entries, correcting entries, purchase and sale of fixed assets, other transfers Opening entries The transactions which open the accounts of anew business Suspense account Account in which to place an error in the Trial Balance pending further investigation Journal Format Date, Folio reference Account names Dr entry, Credit entry offset Narration 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 14 of 17 Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS INCOMPLETE RECORDS Dictionary Incomplete records A bookkeeping system in which double entry principles are not used Gross Profit Mark up Gross Profit Margin Stock loss Method Profit percentage added to buying price Profit percentage based on the selling price Loss of stock caused by fire, flood or theft. 1. Identify opening balance sheet position to calculate opening Capital 2. Prepare Control A/Cs (sales, purchases, expenses) 3. Prepare appropriate T accounts and identify balancing figure 4. Prepare P/L A/C Prepare Balance Sheet 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 15 of 17 Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS PARTNERSHIP ACCOUNTS Dictionary Partnership The relationship which subsists between persons carrying on a business in common with a view to profit Partnership Act 1890 Legislation which includes the accounting rules of partnerships Partnership Agreement Capital Account Agreement between partners which often varies the accounting rules of the PA 1890 Account which records the amount of capital contributed by each partner, usually a fixed amount which only alters where a permanent increase or decrease takes place Current Account A fluctuating account to which is credited share of profits, salary, interest on capital, share of losses, interest on drawings, drawings Appropriation A/C Section of P/L A/C which shows how the net profit is shared between partners. 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 16 of 17 Northbrook College MAINTAINING FINANCIAL RECORDS & ACCOUNTS CHANGES IN PARTNERSHIPS Dictionary Goodwill The difference between the value of a business as a whole and the net value of its separate assets and liabilities. Goodwill account An account to which goodwill, an intangible asset, is debited Premium for goodwill Amount charged to a new partner who joins an existing partnership. 7af2d147-541a-4760-b809-82259e4f4383.doc 06/02/2008 17:11:00 Page 17 of 17