Financial Accounting Revision Notes

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Transactions are entered into ledgers within the books of account

The information within the ledgers can be transferred to either the BS or P&L account at the end of the year

Accounts are either updated with Debit (Dr) or Credits (Cr)

- Debits are used to record expenditure on assets or expenses

- Credits are used to record income or liabilities

Ledger Account

Dr

Cr

Expenses

Income

Assets

Liabilities

Every transaction must be entered into the ledger accounts twice e.g. if you bought a vehicle for cash, you would debit (increase) assets and credit (decrease) cash.

Most transactions will eventually be either Dr or Cr to the Ledger ‘Bank Account’.

Transactions starting from the entry into the bank account:

Bank Account

Money in

Money out

Introduce £1000 into the Business in order to start the Business

Bank Account

1000

Capital Account

1000

Pay £500 electricity by cheque

Electricity Account

500

Bank Account

500

Make a sale of £800

Bank Account

800

Sales

800

The Bank Account would now look:

Bank Account

Capital 1000

Electricity 500

Sales 800

The Journal:

- this document is used to record transactions before updating ledger accounts

- list of all the items to be debited and credited

Items of a credit nature will not be recorded in the Bank Account immediately e.g.

Debtors

Sales

Purchases

Creditors

Bank

Debtors

Creditors

Bank

DR

2000

500

2000

500

CR

2000

500

2000

500

Debtor and Creditor accounts allow double entry to take place even though money has not changed hands.

Balancing Accounts:

- Add up the amounts on each side of the account to find the totals

- Enter the larger figure as the total for both the debit and the credit sides

- For the side that does not add up to this total, calculate the figure that makes it add up by deducting the smaller amount from the larger amount

- Enter this figure so that the total adds up can call it the balance carried down (Balance c/d)

- Enter the balance brought down on the opposite side below the total figure.

Note: the balance brought down is usually dated one day later than the balance carried down as one period has closed and another has started

Example:

Bank

Capital 1000

Bank Loan 1000 1000

2000

Balance b/d 1500

Computer 500

Balance c/d 1500

2000

Trial Balance:

- This is a summary of all the balances on all of the ledgers

- Dr balances are recorded in a single column as are Cr balances

- Trial balance will be completed before the final accounts are updated

Accounting for Stock (Inventory)

- Stock is considered as a current asset

- Can be a raw material, work in progress, finished product etc

Director’s legal duty:

- to count and value stock held at the year end

- Companies Act 1985 / 2006

Auditor’s duty:

- to ensure stock is correctly accounted for

- audit guideline

Stock appears on the BS and twice in P&L account

Cost of Sales Formula example:

Opening Stock

Purchases

(minus)

Closing