Flashcards · 4AC1 · Topic 2

Introduction to bookkeeping flashcards

45 cards on Topic 2, subtopics 2.1 to 2.7. Pick a subtopic or study them all.

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2.1 Business documentation

Why do businesses use documents?: They give evidence for every entry, let both parties check amounts, help settle disputes, give each transaction a reference number and support the audit trail.
Purchase order and sales invoice: Purchase order: sent by the buyer to ask for goods (quantity, description, agreed price). Sales invoice: sent by the seller for goods sold on credit; the buyer receives it as a purchase invoice.
Credit note: Issued by the seller for goods returned or an overcharge. It reduces what the buyer owes.
Statement of account compared with remittance advice: Statement of account: from the seller, showing the opening balance, invoices, credit notes, payments and closing balance. Remittance advice: from the buyer, showing which invoices a payment settles.
50 units at $8.00 with 25% trade discount. Amount due on the invoice?: List price 50 × 8.00 = 400.00; trade discount 25% = 100.00; amount due $300.00.
Cash receipt and petty cash voucher: Cash receipt: issued by the receiver of money (date, amount, reason, signature). Petty cash voucher: supports a small cash payment (number, item, amount, authorisation).

2.2 Books of original entry

Purpose of books of original entry: Each transaction is first recorded there, in date order, from its source document. One type per book keeps records organised, totals can be posted instead of every line, work can be shared and a permanent first record exists.
Which book records credit purchases and credit sales, and from which document?: Purchases day book, from purchase invoices. Sales day book, from sales invoices. Both record the amount after trade discount; cash sales and purchases never go in a day book.
Purchases returns book and sales returns book: source documents: Purchases returns book: credit notes received from suppliers. Sales returns book: credit notes issued to customers.
The three columns on each side of a three-column cash book: Discount, cash and bank. Debit side: discount allowed, cash received, bank receipts. Credit side: discount received, cash paid, bank payments. Discount columns are totalled, not balanced.
Contra entry in the cash book: Cash paid into the bank is debited in the bank column and credited in the cash column, marked C on both sides.
Petty cash float of $150.00; $112.50 is spent. Balance before reimbursement, and the reimbursement?: Balance 150.00 − 112.50 = $37.50. Reimbursement equals the amount spent, $112.50, restoring the float.
What is the journal used for?: Non-routine items: buying a non-current asset on credit, writing off an irrecoverable debt, correcting errors and opening entries. Each entry has a date, debit, credit, amounts and a narrative.

2.3 Ledger accounting

Nominal, receivables and payables ledgers: what each holds: Nominal: every account that is not a credit customer or supplier (assets, liabilities, capital, drawings, income, expenses). Receivables: one account per credit customer. Payables: one account per credit supplier.
Debit and credit rules for each type of account: Assets, expenses and drawings increase on the debit side. Liabilities, capital and income increase on the credit side. Decreases go on the opposite side.
Goods are returned to a supplier. Which account is debited and which credited?: Debit the supplier’s account; credit Purchases returns.
A loan is received into the bank. Debit? Credit?: Debit Bank; credit Loan.
Debit entries of $6,200 and $1,150, credit entry of $2,400. Balance?: Debits 7,350 − credits 2,400 = $4,950 debit balance: Balance c/d on the credit side, Balance b/d on the debit side.
Customer and supplier accounts: normal balances: A customer account is normally a debit balance, a supplier account normally a credit balance.
Nominal ledger compared with personal ledgers: Sales, rent and bank belong to the nominal ledger. Named customers belong to the receivables ledger and named suppliers to the payables ledger.
Sales compared with sales returns: A return is not a negative sale entered in the Sales account. It has its own account, and the customer account is credited.
Purchases compared with assets: Goods bought to resell go to Purchases. Equipment bought to keep and use goes to its own asset account.

2.4 Capital expenditure and revenue expenditure

Capital expenditure and revenue expenditure: Capital: buying, adding to or improving a non-current asset; goes to an asset account and the statement of financial position. Revenue: running costs and keeping assets in working order; goes to an expense account and the income statement.
What is included in the cost of a non-current asset?: The purchase price plus delivery, installation and legal fees on property: anything needed to get it ready for use.
Classify: fuel for a van; fitting shelves in a new shop; repairing a broken window; adding a second floor to a warehouse: Fuel: revenue. Shelves in a new shop: capital. Window repair: revenue. Second floor: capital.
An expense is put into an asset account. Effect?: Profit is overstated and assets are overstated, and depreciation is then charged on a cost that is not an asset.
A $5,000 new guillotine is debited to repairs; depreciation should be 20% of cost. Effect on profit?: Profit is understated by 5,000 − 1,000 = $4,000, because $1,000 of depreciation should have been charged instead. Assets are also understated.

2.5 Depreciation

Causes of depreciation: Wear and tear (physical use and ageing); obsolescence (out of date); passage of time (such as a lease); inadequacy (no longer suits demand).
Straight line compared with reducing balance: Straight line: (cost − residual value) ÷ life, the same each year. Reducing balance: a percentage × carrying value at the start of the year, so the charge falls; residual value is not deducted first.
A press costs $18,400, residual value $2,400, life 5 years. Straight-line charge?: (18,400 − 2,400) ÷ 5 = $3,200 a year.
The same $18,400 press at 40% reducing balance: charges for years 1 and 2?: Year 1: 18,400 × 40% = 7,360 (carrying value 11,040). Year 2: 11,040 × 40% = $4,416 (carrying value 6,624).
Double entry for the yearly depreciation charge: Debit Depreciation expense; credit Provision for depreciation. At the year end the expense is transferred to the income statement. The asset account stays at cost.
Recording a disposal: the four entries: Dr Disposal, Cr Asset (cost). Dr Provision for depreciation, Cr Disposal (accumulated depreciation). Dr Bank, Cr Disposal (proceeds). The balancing figure is the profit or loss, to the income statement.
A machine cost $12,000, accumulated depreciation $7,500, sold for $5,200. Result?: Carrying value 12,000 − 7,500 = 4,500. Profit on disposal 5,200 − 4,500 = $700.

2.6 Irrecoverable debts

Irrecoverable debt: A specific amount owed by a named customer that the business has decided it will not receive. It is written off as an expense.
Provision for irrecoverable debts: An estimate, usually a percentage of trade receivables, of debts that may prove irrecoverable. No customer is named. A credit balance, deducted from trade receivables.
Why is a provision for irrecoverable debts needed?: Prudence: profit and assets are not overstated. Accruals: the loss arises from this year’s credit sales, so it is charged this year. Trade receivables show what is expected to be collected.
Journal to write off a debt of $330: Debit Irrecoverable debts $330; credit the customer’s account $330.
Entries for an increase and for a decrease in the provision: Increase: Dr Income statement, Cr Provision for irrecoverable debts. Decrease: Dr Provision for irrecoverable debts, Cr Income statement. Only the change is journalled.

2.7 Other receivables and other payables

Other payables and other receivables: what each covers: Other payables: expenses accrued (used, not yet paid) and income received in advance. Current liability, credit balance. Other receivables: expenses prepaid and income accrued (earned, not received). Current asset, debit balance.
Why are other receivables and other payables accounted for?: Accruals concept: expenses and income belong to the period in which they were used or earned. Otherwise profit is wrong and an asset or liability is missing from the statement of financial position.
Year-end journals for an accrued expense and a prepaid expense: Accrued expense: Dr Expense, Cr Other payables. Prepaid expense: Dr Other receivables, Cr Expense.
Year-end journals for accrued income and income received in advance: Accrued income: Dr Other receivables, Cr Income. Income in advance: Dr Income, Cr Other payables.
Wages paid $41,500; opening accrual $1,200; closing accrual $1,500. Charge for the year?: 41,500 − 1,200 + 1,500 = $41,800. The closing $1,500 is an other payable.
Commission received $3,600; $150 owed to the business at the start; $240 received in advance at the end. Income?: 3,600 − 150 − 240 = $3,210. The closing $240 is an other payable.