Management Functions

Produced by Jones Vagi

Contents

1. Introduction

2. Very Basic Double Entry

3. Cash Transactions

4. Books of Prime Entry

5. Soletraders & Partnerships

6. Limited Companies

7. Credit Transactions

8. Accruals & Prepayments

9. Fixed Assets

10. Year-end Procedures

11. Reconciliations

12. Other Entries

1. Introduction

This tutorial is aimed at people keeping the books for a small business. However, the same principles apply, whatever the size of the business.

The concepts are also very relevant to computerised accounting systems such as Sage, which assume such knowledge.

For the very smallest business, simply keeping a cashbook, with all payments & receipts recorded is sufficient. Along with a list of debtors, creditors & closing stock at the year-end, your accountant can produce a set of accounts.

The starting point will be a simple explanation of the concept of double-entry. All the fundamental areas will be covered leading up to the trial balance at the year-end, from which a Profit & Loss Account & Balance Sheet are extracted.

Be warned that most bookkeeping courses last between a day & a full week. Covering the whole tutorial in one attempt is not recommended. A little perseverance & plenty practice are the keys to success.

2. Very Basics of Double-Entry

Double Entry

The concept of double-entry may seem alien at first, but soon becomes second nature with a little practice.

As the name suggests, every transaction involves 2 equal & opposite entries - one Debit (Dr) & one Credit (Cr).

Total Drs should equal Crs, so it provides a built-in error check. Only misclassifications are missed - that is a Dr or Cr in the wrong place - or complete omissions of an entry.

We use "T" accounts to record the entries - imagine them as the 2 opposite pages of a book (as typical in a manual system).

Drs go on the left, Crs on the right. An easy way to remember this (provided you are English or Australian) is the following diagram:

Assets & Liabilities

An asset is something you own (e.g. a car) or the right to receive something in the future (e.g. a trade debtor).

A liability is where you owe something to someone else (e.g. a bank loan or trade creditors).

Assets & liabilities are Balance Sheet items (showing the position you are in), as opposed to income & expenses, which are Profit & Loss (P&L) items.

The effect of Drs & Crs

The significance of each entry is summarised below:

In the next chapter, we look at the basic cash-transaction entries.

3. Cash Transactions

As cash is an asset, increases in cash (income) are Dr entries, whilst reductions in cash (payments) are Cr entries.

Payments

When a cash payment is made, cash decreases, so we Cr cash with the amount of the payment. The corresponding Dr is to the relevant expense or fixed asset "T" account (increase an expense or a new fixed asset).

Receipts

When cash is received, the cash balance increases, so we Dr cash. The corresponding Cr is to the sales or other income "T" account (increase income). It could also be the disposal of a fixed asset - see later.

Example

The best way to understand all this is by way of an example.

The following transactions occur, all in cash:

2.1.x5 Purchase stock for Ј2000

6.1.x5 Make sale for Ј3000

15.1.x5 Receive loan of Ј10000

19.1.x5 Purchase van for Ј9000

20.1.x5 Pay electricity bill of Ј400

We set up "T" accounts for cash, sales, loans, vehicles (fixed asset) & electricity. The convention is to include the date of the transaction, brief narrative (e.g. where the opposite entry is posted) & amount.

The cash "T" account is Credited with the 3 payments & Debited with the 2 receipts:

The "T" accounts for the income, expenses & fixed assets are also set up & the entries corresponding to the above cash entries entries as follows:

Look how the cash transactions are reflected with opposite entries in the corresponding "T"