12
Accounts Management
Record Keeping
The following is a summary of 0-TEN notes and other information compiled.
Keeping records (or book keeping) is the first step in accounting for the performance and financial position of any business.
For definition, accounting may be defined as the process of recording, classifying and reporting, in monetary terms, the transactions of a business.
A break up of this process means.
· Recording: Documenting and systematically recording transactions into journals, where information is grouped by transaction type (ie: book keeping)
· Classifying: Posting the totals from the journals into the ledger, where information relating to individual ‘accounts’ is stored.
· Reporting: Using the balances of ledger accounts to provide end of year financial statements (ie: profit & loss statement and balance sheet.
Purpose of Bookkeeping
Bookkeeping forms the basis of any accounting system; bookkeeping / accounting systems generally have two main purposes.
1) To keep complete and easily accessible records of all transactions and events.
2) To provide timely and accurate information about:
- The financial position of a business
- The nature and amount of its assets and liabilities (eg) amounts owed by debtors and amounts owing to creditors.
- The amount of income and expenditure (gain and losses), during any stated period,
And how they have arisen.
The financial reports produced by a bookkeeping / accounting system will be of interest to:
- Owners
- Managers
- Investors
- Creditors
- Clients
- ATO (Australian Taxation Office)
Australian tax legislation makes record keeping compulsory.
QUOTE! “ Every person carrying on a business shall keep sufficient records, in the English language of his/her income and expenditure to enable his/her assessable income and allowable deductions to be readily ascertained and shall retain such records for a period of at least five years after the completion of the transactions, acts or operations to which they relate.”
Note: Period for keeping records changed from seven years to five years from the end of the financial year 1994/1995.
Ledger Accounts
A ledger is a book of second or classified record and is made up of entries posted from the journals. A list of accounts follows giving more commonly used names. The general ledger is sectioned into five basic account groupings.
Assets, Liabilities, Proprietorship, Revenue and Expense.
A basic description of each and some examples of each follow:
Asset: The assets of a business are the things the business owns. These could be Current Assets, which are required for quick use usually turned into cash within 12 months or Non-current Assets, which have been bought for use in providing income, but not conversion to cash.
(Eg) Assets that a typical building business could have are:
Current Assets
* Cash at bank * work in progress
* Cash on hand * loose tools
* Accounts receivable (debtors) * shares
* Inventories of stock / materials * investments
* Accounts prepaid
Non-current Assets
* Land and buildings * improvements
* Fixtures and fittings * plant and equipment
* Office equipment and furniture * telecommunication equipment
* Computer equipment * goodwill
* Motor vehicle
Liabilities: This is the grouping for money owed to outsiders (creditors). Liabilities are usually classified into:
· Current liabilities – money due to be paid within twelve months.
· Non-current liabilities – money not due to be repaid within the next twelve months.
Current Liabilities
* accounts payable (creditors) * expenses accrued (payable / deferred)
* Bank overdraft * group (PAYG) tax payable
* Payroll tax payable * sales tax payable
* Health fund contribution payable * provisions for holiday and sick pay
* Provision for income tax
Non-current Liabilities
* Mortgage * long-term loan
* Hire-purchase
Proprietorship: The owner’s claims on the assets of a business (or what a business owes its owner/s) is referred to as proprietorship. Proprietorship consists of the original investment, additional funds invested, plus profits, less losses and money withdrawn. Proprietorship accounts will vary depending on the type of business ownership:
Sole trader
* Capital - owner * profit and loss account
* Drawings (of cash or stock)
Partnership
* Capital (one account for each partner) eg. Capital; Jim Capital; Bob
* Current year’s profit or loss (one account for each partner)
* Drawings (one account for each partner)
* Profit and loss appropriation (optional)
Companies
* authorised capital * called-up capital
* Issued and paid-up capital * retained earnings
* Profit and loss appropriation * reserves
Revenue: Revenue or income is where the business derives inflows either from normal trading or as a result of investment. The main source of trading income is from contracting, sales of manufactured goods, or fees from trade or professional services offered. If business is to make a profit and survive, the income must be sufficient to cover direct and indirect expenses.
Typical income accounts of builders are:
* building contracts receipts * sundry income
* contracting fees * bad debts recovered
*sub-contractors fees * gain on disposal of non-current assets
* Commission income * discount received
* Sales of manufactured goods * dividend income
* rent income * interest received
Expenses: Expenses are of two types:
· Direct expenses – those expenses that can be assigned or identified as relating to a particular job;
· Indirect expenses – those expenses that cannot be assigned or identified as relating to a particular job.
Indirect expenses are fixed costs and are also known as builder’s overhead. They include the operating costs of running a business from a head office and they continue for as long as you are open for business. These indirect expenses (builder’s overhead) are usually expressed as a percentage of annual turnovers.
Direct expenses
* Purchase of stock / materials * equipment operating costs * meal allowance
* Direct labour wages * sub-contractors’ payments * protective clothing
* Delivery expenses * electricity to site * sick leave costs
* Equipment hire cost * holiday pay, plus loading *unrecoverable warranty
* Minor tools replacement * superannuation for workers *workers’ comp. insurance
Indirect expenses / overheads
* Depreciation of plant and equipment * general expenses for the office
* Insurance on builders’ office * leasing costs for company vehicles
* Licences and registration fees * office utilities expenses
* Long service leave for staff * motor vehicle expenses
* Repair and maintenance of vehicles * subscriptions and memberships
* Office supplies and sundry expenses * recruitment and training
* Advertising * bad debts * bank charges
* Rates * accounting fees * payroll tax
* Office manager’s salary * rent
Double Entry Bookkeeping: This relates to the fact that every business transaction affects at least two accounts in the general ledger. For every debit, there is an equal credit entry.
Therefore, when keeping a set of accounts, it is fair to say that some accounts will run with a debit balance and some with a credit balance. Each transaction will affect two accounts, sometimes more and the total of the debits will be equal to the total of the credits. The principle behind this rule is simply to make the bookwork balance.
The rule of double entry bookkeeping is to apply the following rules to your relevant accounts.
Asset Accounts – have a debit balance
Expenses Accounts – have a debit balance
Liability Accounts – have a credit balance
Proprietorship (Owners equity) – have a credit balance
Income (Revenue) Accounts – have a credit balance
These rules are applied to T-Shaped ledger format, so that the debits are on the left hand side and the credits are on the right.
Some other ways of looking at these rules are shown below and on the following page:
The information on the previous page can be summarised as shown below.
Debit Credit
Increases Decreases
Debit Credit
Decreases Increases
Rules of double entry illustrated in another way.
Another way of showing the rules of double entry is below.
If we now have a look at some simple T- ledger accounts, you can see illustrated how the double entry bookkeeping system is applied.
(See extra and out for clarification)
Another simple example is to think of your bank account. If you have money in the bank, when you receive a statement from them it will say you have a credit balance. This is a credit balance from the banks point of view, you have effectively lent the bank money and they owe the money to you. Meaning your account is a liability of the bank; liabilities from our rules have a credit balance.
Now in your own bookkeeping system your bank account or “cash at bank” you regard as an asset, apply the rules again and asset accounts have a debit balance. If you were to make a sale in your business, obviously you have just made money, but, when you record that money in your “cash at bank” account it is run with a debit balance, look back at the rules “debit side increases an asset account”, so when you look at the balance in that asset account it has increased by the amount of the sale, effectively showing “you’ve made money” as we mentioned first.
When looking at the balance in an account a credit balance is indicated as (CR) and a debit balance is indicated with (DR).
Classify each of the following ledger accounts by indicating their account type, and give the normal balance of each account. The pages following this are examples of transfer of records to journals etc.