Sample Course Material

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Level 2 Unit 1

The Role of the BookkeeperTypes of BusinessesThe concepts of Business Entityand Historic CostSetting up the Bank AccountThe Analysed Cash Book

1.

Introduction

You have probably bought this course because either you are a self employedbusiness person who needs to be able to keep a set of financial records in order, orbecause you are hoping to become a professional bookkeeper and develop yourskills, either to be able to work for someone else or to run your own bookkeepingbusiness and offer your services to clients.

This Unit explains the differences between bookkeepers and accountants, andintroduces the organisations who might need to see a set of accounts for a business.

It also explains the various types of businesses that operate and why it is importantto keep accurate records, and introduces the idea of creating a bank account torecord money coming in and going out of a business.

Learning Objectives

This Unit aims to:

Define the differences between a bookkeeper and an accountant Explain the different types of businesses Explains the concept of Business Entity Explain the need for keeping accurate financial records Describe the terms Income and Expenditure Develop the layout of a bank account and its entries Show how to balance an account Introduce the Analysed Bank Account

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What is bookkeeping?

BOOKKEEPING is the process of accurately recording day-to-day financialtransactions into pre-designed Books of Account. Such records will enable theowner(s) and other interested parties to monitor funds coming in and going out of thebusiness and to calculate profits and losses.

ACCOUNTANCY is making use of the complete information to hand, enabling theowner to understand the financial position of the business. The use of thisinformation also makes it possible to forecast for the future, analyse all areas of thebusiness and evaluate the business potential.

In a small company or in the case of a sole trader, there will probably be only oneperson dealing with the books. In large companies the Accounts Department maybe broken down into sections. This may mean that it is the job of one person to dealwith the wages, one to deal with the cash book etc. Where actual cash is involvedsuch as petty cash and a bank account, two people will very often be workingtogether to keep these records. This cuts down on mistakes being made and thelikelihood of theft.

A small business is likely to have an external accountant who is paid only for thetime they are dealing with the books. This being the case, a lot of money can besaved by being able to complete the books on a daily basis and then hand them tothe accountant for the end of year tax computations to be made.

Many accountants may be employed in larger organisations, but again they will all beresponsible for different areas of the business (i.e. Cost Accountants, ManagementAccountants and Financial Accountants). This allows each person to concentrate onone particular field and to produce the right results.

To qualify, an accountant needs knowledge of all basic bookkeeping processestogether with other subjects such as economics, law, taxation etc.

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Types of businesses

There are a number of different types of businesses that operate and the needs ofthe business owner and how he or she wishes to run their business will determinethe type of organisation that will be set up.

Most people start out their working life by being employed by someone else. Theyare paid a wage or salary, and Income Tax and National Insurance Contributions arededucted from their gross salary and sent to Her Majestys Revenue and Customs.This is called a PAYE (Pay as you Earn) system and is explained further in thecourse when you learn how to enter salary information into your set of accounts.They might stay employed for the whole of their working life or they might decide tostart their own business and become self employed. Note: a person can beemployed and self-employed at the same time.

The Sole Trader most small businesses start out this way. An individual wishes tobecome self-employed i.e. to work for him- or her-self and can start this up by simplydeclaring themselves to be self-employed to HMRC. The sole trader is responsiblefor all debts of the business and may have to pledge their personal effects (includingany property owned) as a guarantee against those debts. The sole trader is taxed onthe profits made and any funds taken out of the business by the owner are termeddrawings. From April 2013, the smallest of such businesses are allowed to keepsimple financial records and submit simplified tax returns.

Partnerships a partnership is two or more self-employed persons working togetherfor the purpose of running the business. Any profits or losses made are sharedbetween them in an agreed proportion and each can be required to pledge theireffects in the same way as the sole trader. A partnership is not in itself taxed on itsprofits; each partner is taxed individually on their own share of the profits and thesimplified tax returns for sole traders also apply to individual partners.

Limited Company A limited company is a legal entity in its own right andinformation concerning that company must be registered with both CompaniesHouse and HMRC. Sole traders and partnerships often become limited companies tochange their tax status. The owners then become shareholders, directors andemployees of their own company. Limited companies pay corporation tax on anyprofits made and any remaining profit may be distributed in the form of a dividend toits shareholders. Some self-employed persons decide to set up a limited company

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from the start of their business and therefore become shareholders and directors oftheir own company.

Limited Liability Partnership There are occasions when a group of people workingtogether in a partnership need a limited liability but do not wish to operate as alimited company. Groups of solicitors or accountants will often work in this way.Profits are shared in the same way as for a standard partnership but the partnersbenefit from limiting their liability for the debts of the business.

Not-for-profit organisations Such organisations are formed for the benefit ofindividuals with some common interest. For example a sports and social club, aParent/Teacher Association or a group of individuals wishing to raise funds tosupport a particular activity. Funds are raised through membership subscriptions orfund raising activities and any surplus made is used for the benefit of theorganisation rather than its members. Some not-for-profit organisations can becomeregistered charities.

The concept of Business Entity

Regardless of the type of business that is opened it is important to understand thatthe business affairs of the owner should be kept separate from his or her personalaffairs. This is the first of the accounting concepts that you will meet throughout yourstudies and it is important to understand that it is only business transactions that canform a part of business accounts. Accounting records reflect the financial activities ofa specific business entity, separate and distinct from the people who finance it orwork in it.

The concept of Historic Cost

Historic cost is the second concept that you will meet and this is purely a simpledefinition of what historic cost represents. You will learn more about this in the nextlevel of your studies.

Historic cost records items that are purchased as their purchase price and not theircurrent market value. For example, buying a large item such as a car or piece ofmachinery means that the price paid for the item in the accounts is what is recordedrather than what it might fetch if it were sold at a later date.

Why We Need To Keep Records

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Failing to keep proper records means that there is no way of checking the financialposition of the business. This, in extreme circumstances, can lead to prosecutionunder the Insolvency Act and being charged with the offence of failing to keepproper books of account.

There is a wide variety of organisations that have the right to look at your financialrecords.

First and foremost are the people involved with the collection of the countrys taxes:

HM Revenue & Customs - Tax Assessment (income tax, corporation tax orVAT) is calculated on a regular basis and relies on the accounts to make fairassessments of money owed to the government

There are others who may wish to see business records. These will include:

The Bank and other Financial Institutions - If the business were in need offunds for some reason, the accounts would need to be presented forinspection, to check on the viability of the business

The Suppliers (Creditors) - Accounts may also need to be inspected to checkthe credit-worthiness of the business

Limited Company Shareholders - Year-end accounts have to be supplied to allshareholders and investors. These accounts will confirm whether or not thebusiness is a good investment

Owners - They need to be able to see at a glance whether the company isprofitable or not

Company Management - They need to keep a check on the accounts so thatthey can report accurately on the financial situation. This will also help them tomake the right judgement about any future plans

Trade Unions and Employees - It is important for the people who are employedto understand the financial position of the company. It is also a marvellousboost to staff morale when good profits can be reported

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Capital

Most businesses, regardless of their type require money or equipment of some sortto start operating. The amount of money needed will depend on the nature of thebusiness. A sole trader working from home may require very little money whilst alimited company taking on rented premises and needing a large amount ofmachinery to operate will need considerably more.

These start up funds, put in by the owner(s) are called Capital. Other funds mighttake the form of a bank loan or a mortgage.

This capital is often turned into Assets (which are things a business owns). Thebusiness will also generate Liabilities, (which are things a business owes). Hencethe Capital of the business will be translated, in a very simple way, to these assetsand liabilities.

At this stage it is useful to give some additional definitions on assets and liabilities.

Assets are things which the business owns.

Fixed Assets are the items which are bought to assist in the running of the business(premises, motor vehicles, equipment etc).

Current Assets are items which the business owns but which quickly change invalue from day to day e.g. cash in the bank, stock, amounts owed by debtors.

Liabilities are amounts which the business owes. These can also be divided intotwo categories.

Current Liabilities are short-term and are normally paid off within one year, e.g.bank overdraft, creditors.

Long term Liabilities are items which last for more than one year, e.g. bank loans,mortgages etc.

All of these will be covered in further detail as you work through the course.

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The Accounting Equation

This can be summed up by a very simple statement

Capital = Assets Liabilities

(ie the things the business owns less the things it owes)

The formal Accounting Equation turns this around and states it as

Assets = Capital + Liabilities,Financial transactions

Each time a business buys or sells something, or offers a service, or pays someonewages, or carries out any of a huge variety of functions, it undertakes a businesstransaction. Normally each business transaction involves money in some way and assuch is called a Financial Transaction.

Every such transaction that is made will have two elements something comes intothe business and something goes out.

In many cases it is easy to see what comes in and what goes out

For example:

selling goods - money comes in and goods go out buying a car - money goes out and the car comes in

However, in some cases, the other half of the transaction is less straightforward.An alternative way to look at it is to say that when money goes out, instead ofsomething coming into the business a benefit is gained.

For example:

Paying wages money goes out and your employees time is gained by thebusiness i.e. you receive the benefit of your employees time and labour

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Paying rent money goes out and you receive the benefit of using thepremises you are renting

With money coming in it can be slightly more complicated.

For example:

Receiving a loan money comes into the bank and the business owes thebank both the principal and interest on the loan.

The business now has a liability which means that, at some stage in the future, themoney will need to go out but not necessarily immediately.

One of the most difficult things to understand in the early stages of bookkeeping iswhich part of the transaction is the in or benefit part and which is the out orliability part. For now we will make this easy and stick to some simple transactions,all of which include the handling of money.

It is always fairly straightforward to see whether the money is coming in or going out if you receive money it is coming in and if you spend money then it is going out. Touse a more sophisticated terminology, money coming in is termed income andmoney going out is termed expenditure.

Income and Expenditure

Whatever the size of a business, the one undeniable fact is that the owner will needto keep a close record of income and expenditure (money received and money paidout).

Income arises from the sale of goods or the provision of a service. Income willnormally (for small businesses) be in the form of cash, cheques, debit or creditcards. Quite often the cheques will be banked immediately, and the cash kept by theowner to pay small bills etc.

However, there is a danger in not banking the cash promptly, as there is a stronglikelihood that these amounts will not be recorded and the details will be omitted fromthe books.

Expenditure

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Expenditure falls into two main categories

Capital Expenditure is money spent on fixed assets that will remain in the businessfor some considerable time.

Revenue Expenditure is money spent on day-to-day items like rent, wages, goodspurchases for resale etc

The Bank Account

Before looking at how the bank account works in our set of accounts it is useful tolook at the services that banks offer to their customers the main ones are listedand briefly described below:

Current Accounts

These are everyday accounts used for general banking. Each bank or buildingsociety in the UK has a unique number called a sort code. It is in the form of sixdigits, the first two of which identify the bank, the remaining four identify the branch.Each customer has an account number which consists of eight digits, so acombination of the sort code and the account number will be unique to each account.

Each bank also has an international SWIFT code which identifies it and eachaccount has a unique IBAN (International Banking Account Number) for internationaluse. This is a combination of letters to identify the bank and numbers that consist ofthe sort code and account number.

Most banks currently offer free banking services for personal accounts but oftencharge for business accounts, although new accounts may be offered a free bankingperiod of up to two years.

Statements

Bank statements will be issued regularly which include details of all receipts andpayments made. There is often a charge made for receiving paper statements butwith the increase in online banking, statements can be downloaded from the bank atno cost to the account holder.

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Paying funds into an account

Money is paid into an account in the form of:

Cheques or cash received these will be paid in over the counter using apaying in slip. Banks will issue paying in-books with the name of the businessalready entered, or individual slips can be used at the bank itself. Details onpaying in slips should include:

o Dateo Branch nameo Account name into which the money is being paido Signature or name of the person paying ino Reference (which might then appear on the statement)o Sort Code and account numbero Amount either notes, coins or cheques to be listedo Summary of the above on a side slip which will be initialed and

stamped by the bank and retainedo List of individual cheques paid in on the reverse of the form

Note: if using a paying in book supplied by the bank some of the items abovewill already have been entered. Banks will often make a charge for this service.

There might be a delay in up to three working days for cheques to be clearedinto the account for use by the account holder.

Amounts may be paid into the bank by other than the account holder if theyhave all the details of the account such as the account name, the sort code andthe account number.

BACS Transfer money is transferred directly into the account by thecustomer. This service is often free of charges. Money normally arrives into theaccount cleared for use immediately.

Withdrawing funds from an account

Money is withdrawn from the account in a number of ways:

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Cheques banks will issue a cheque book for each account if required. Thisform of payment is becoming less used and may be withdrawn entirely in thefuture. Cheques must contain the following:

o Date of issueo Name of payee (to whom the money is being sent)o Amount in both words and figureso Signature of the account holder

Note: banks often charge for this service

BACS Transfer all banks now offer online banking by logging into your bankonline you can set up a direct transfer from your account to the payeesaccount. Most banks now operate a faster payment service which means thatthe money will arrive almost instantly into the recipients account. Note: thisservice is often free to users

CHAPS Payment used to transfer large amounts of money quickly oftenwhen the amount is higher than allowed via a BACS transaction. There willalways be a charge for this service

Debit cards banks offer a debit card service a card with a magnetic strip isissued which can be used at a point of sale (till). The card is entered into themachine and a PIN number entered to finalise and authorise the payment.Recent innovations allow touch only payment where the amount is less than20 and no PIN needs to be entered. Debit cards can also be used online tomake payments from internet sites. Each card has a 16-digit number on thefront and this plus the expiry date and a three-digit security number on the backof the card. Some cards also include the valid from date and/or an issuenumber. Cards can also be used to withdraw cash from a cash machine.Money taken from an account using a debit card normally goes out of theaccount either the same day or the next day depending on the time of thetransaction.

Standing orders these are regular payments which are paid out on theaccount holders instructions to the bank. The amount is the same each timeand normally on the same day of the month.

Direct Debits these are where the account holder signs an agreement to payan amount on a regular basis forms are signed and sent to the supplier whotakes the amount they require on the stipulated date. Direct debits are used topay such things as rates, telephone bills, utility bills etc where the amount

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varies each time and the claim is made by the supplier to the bank and not paidautomatically by the bank as in the case of a standing order.

Overdraft

Banks will sometimes offer overdraft facilities on current accounts which will allowthe balance to go negative at certain times. This can allow the business to gain shortterm advantages for its cash flow, allowing it to pay bills before money due in isreceived. There is often an annual fee for this service and interest will be charged onthe overdrawn balance.

Foreign Currency Accounts

If a business deals regularly in foreign transactions, it is possible to open a foreigncurrency account. Money coming into the account is held in the originating currencyand can be paid out in the same way as for sterling accounts. This often meanshigher banking charges for each transactions but does mean that the money held inthe account is not subject to fluctuating currency exchange rates. Funds can betransferred to or from foreign currency accounts to sterling accounts at the exchangerate given by the bank on the day of transfer.

Deposit Accounts

Deposit accounts are savings accounts which often attract bank interest for amountsbeing deposited over a period of time. There are usually limits on the amount ofwithdrawals that can be made in a year to gain the maximum interest available.

Loans and Mortgages

Banks will often lend money to businesses in the form of a loan or mortgage, manyof which have to be secured against assets owned such as property. There is arepayment due each month which includes a percentage of interest. plus arepayment of the principal borrowed until such time as the whole amount is paid off.Loans are often taken out over a period of five years whilst mortgages are longerterm, e.g. 25 years or more.

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Online banking

All banks offer an online banking service. Each account holder has a unique loggingin number and password and once online it is possible to make payments, checkbalances, print statements etc.

Telephone banking

Many banks offer a telephone banking service. Relevant passwords need to be setup so that the bank can identify the caller.

Mobile banking

Many banks now have mobile applications that can be downloaded to smart phonesand tablets to enable banking to be carried out on the move.

Paypal

Paypal is one online money transfer system which is used to buy items online overthe internet. It is possible to set up a paypal account which operates in a similar wayto a bank account, receiving and paying out funds until such time as a balance istransferred to a bank account. Paypal also acts as an online payment system outsidethe BACS system where funds are transferred from a bank account through theirsystem.

Credit cards

Credit cards offer a deferred form of payment. The card is used to buy items, and astatement sent at the end of the month showing everything that has been spent, andthe total amount owed to the credit card company. If the full amount is paid by thedue date, normally there are no further charges, However if only part of the total ispaid, the balance moves forward to the next month and an interest charge will belevied each month until the balance is cleared.

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Keeping a bank account in the accounting records

For the first few lessons in this book, we will assume that all money received is paidimmediately into the bank, and that all money paid out is by cheque. Later on we willdeal with how to treat cash and cheques separately and also debit and credit cardreceipts.

The simplest way to record the payments in and out of the bank is to keep a BankAccount and enter details at least weekly. The format shown below is only one of theways, and although not necessarily the simplest, it will enable you to keep on using itwhen you move on to later lessons that use a full double entry system.

This system of storing details is called a T Account because the basic layout of theaccount forms a T shape.

Bank Account

The left hand side of the T Account is used to record all items paid into the account.The right hand side is used to record all payments out of the account.

(LHS) = money in and (RHS) = money out

For reasons that will be explained later in the course, the left hand side of theaccount is called the debit side and the right hand side the credit side.

It is necessary to record three items of information for each transaction (receipt orpayment)

The date of the transactionA basic description (e.g. sales, rent, wages)The amount

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The account is normally set out as follows:

Bank AccountIN OUTDate Details Date Details

Amanda and her Business

To show you how transactions are entered into the accounts, and to build a set ofrecords, we will use a fictional business set up by Amanda Carstairs.

Amanda has recently completed a degree in computer studies and intends to starther own business. She will work from home and will be offering IT services to homesand businesses within her locality. This will involve buying parts for repairs, buyinghardware and software for resale to clients, servicing equipment and training in itsuse.

It is likely that she will be paid for jobs in cash, by cheque and by online banktransfer. She has arranged to buy equipment and supplies etc. from a localwholesale supplier, but for the first three months she will have to pay by chequewhen she collects her purchases. In this lesson we will show you how to recorddetails of money that Amanda receives and spends.

To start her business, on 1 January, Amanda will put 10,000 of her own money intothe bank to get her going. This money represents the initial capital she has investedin the business.

This first entry in her bank account therefore represents money coming into thebusiness so is entered into the left hand side of the bank account.

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Bank Account

Date Details Date Details

201XJanuary 1 Capital 10,000.00

Amanda has paid 10,000 into her bank account.

Hence the entry is on the left hand side of the account and represents the Capitalshe has paid in to start the business. The word Capital, entered into the detailscolumn is a brief explanation of what the transaction represents.

Note: when ruling the lines it is normal to put a double line down the centre toseparate out the two sides, and to use single lines elsewhere.

In order to run her business, Amanda will need some basic tools and equipment. On2 January she buys some equipment that costs her 800 and she issues a cheque.The money has gone out of the business and the entry will be reflected in the bankaccount as follows:

Bank Account


201XJanuary

201XJanuary

1 Capital 10,000.00 2 Equipment 800.00

The original entry remains and Amanda has now paid out 800 for Equipment. Theequipment will stay in the business for some time and any type of expenditure forsuch items is termed Capital Expenditure. Such items will not be re-sold tocustomers but form the Fixed Assets of the business. The term Fixed Assets will beexplained in greater detail later.

On 4 January she buys 100 worth of parts from her supplier. As these supplies areto be used up on the job she has undertaken, they are called Purchases. Inbookkeeping, the term purchase is only used for items that are bought to be re-sold

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Amandas bank account will now look like this:

Bank AccountDate Details Date Details

201XJanuary

201XJanuary

1 Capital 10,000.00 2 Equipment 800.004 Purchases 100.00

Buying goods that are to be used up in the day-to-day running of the business istreated differently to buying items which will remain in the business for a long timesuch as the equipment above. Expenditure on items that will be used up within ashort time is termed Revenue Expenditure.

Amanda finds her first customer, Ben. She has agreed to repair his PC. She chargeshim 175 on 6th January for completing the job.

Any money charged by a business for work carried out or goods supplied are calledSales. Amandas bank account will now be:

Bank AccountDate Details Date Details 201X

January201X

January1 Capital 10,000.00 2 Equipment 800.006 Sales 175.00 4 Purchases 100.00

Whilst Amanda is working, she obviously has to pay her own living expenses. She isperfectly entitled as a sole trader to take money out of the business for herself,providing that she identifies it as such. Money taken out of an account by thebusiness owner for their own use is called Drawings.

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If Amanda takes out 100 on 6th January, the account will now look like this:


January 1 Capital 10,000.00201X

January 2 Equipment 800.006 Sales 175.00 4 Purchases 100.00

6 Drawings 100.00

Remember when you need to make an entry ask yourself the following question:

Is money coming INTO the account or is it going OUT?

If it is coming IN, then make the entry on the left hand side of the bank account

If it is going OUT then make the entry on the right hand side of the Account

NOW IT IS TIME TO START PRACTISING YOURSELF!

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Level 2 Unit 1 Task 1

John Dower opens up a business selling computer software online. These are thedetails of his first months transactions. Start a new bank account and make theappropriate entries. All payments out are by cheque

April 201X

1 Started business with 3,000.00 in the bank5 Received a cheque for 7,000.00 being a loan from the bank6 Paid 1500.00 to a design company for the first stage of his new website

10 Bought a new computer and printer for 3,500.00 paid for by cheque (use thedetails Computer Hardware)

12 Bought software for resale (use the details Purchases) 486.5020 Bought further software for resale for 270.0025 Paid for stationery for the business 85.6530 Received a cheque for his first sale of software 125.50

Required:

Enter the details above into the bank account.

When you have finished you can check your answer with that given in the answersection which starts at the end of Unit 9 (page A-1).

If you are happy with the result then work through the next section.

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Balancing the Account

Making entries into the books, and tracking money going in and out of the businessis one thing, but every business owner needs to know how much money they haveavailable at any one time. Remember if you write out a cheque and do not haveenough money in the bank to cover it, the cheque may bounce and you will incurbank charges which will not help the situation.

The amount of money the business has in its bank at any time is called the Balance.The process of calculating this figure is therefore called Balancing the Account.

Remember, if the left hand side of the account shows all money paid in, and the righthand side of the account shows all money which has gone out, the differencebetween the two will be the amount of money left i.e. the balance.

If the left hand side is greater than the right hand side then less money has beenspent than received, and the business will still have money in the bank. If the righthand side is greater than the left hand side then more has been spent than receivedand the business will be in an overdraft situation i.e. it owes the bank money!

Let us calculate how much Amandas has in her account, before you learn how tobalance it in bookkeeping terms.

Amanda has paid in the following amounts: 10,000 + 175 = 10,175Amanda has paid out the following amounts: 800 + 100 + 100 = 1,000

Hence Amanda will have 10,175 - 1,000 = 9,175 left in her account

Remember the in it is important.

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The way to balance the account is as follows:

1. Add up the total of both sides and make a note of the two figures on a rough pieceof paper

2. Decide which is the larger amount: the left hand side or the right hand side

3. In Amandas case it is the left hand side (10,175)

4. Enter this figure as the total on the left hand of the account (leave at least oneclear line before entering the amount)




6 Drawings 100.00

10,175.00

Note: put a single line over the figure and a double line under it. The two lines meanthat this is a final total and so the amounts shown above will not be included in futureentries.

5. Enter this total on the same line on the right hand side of the account.




6 Drawings 100.00

10,175.00 10,175.00

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Note: if you look at the right hand side of the account the three entries do not add upto 10,175.

6. Now subtract the total of the right hand side (calculated in 1 above) from the10,175 and enter it above the line on the right hand side. Note that this figurecomes to 9,175.




6 Drawings 100.00Balance c/f 9,175.00

10,175.00 10,175.00

Finally we need to carry this balance forward (c/f) to the opposite side. We nowknow how much money is in the account at the start of the next period. Note that weuse the terms balance c/f (carried forward) above the total and balance b/f (broughtforward) below the total.

Bank Account

Date Details Date Details 201X




10,175.00 10,175.00

Jan 6 Balance b/f 9,175.00

Note: sometimes the terms carried down (c/d) / brought down (b/d) are used inplace of c/f and bf. Either is acceptable but do not mix the two.

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It is usual to balance accounts regularly, say at month end. Therefore the balanceswould be dated at the last day of the month.

However, it is also common practise for the balance c/f to be dated on the day theaccounts are balanced, then because this balance is brought forward to the start ofthe next day, the balance b/f entry is dated 1 day later.

You may see both methods used throughout this course.

Note we calculated that there is money in the bank and our balance brought down ison the left hand side of the account which is the in side (remember above we saidto remember that Amanda has 9,175 in her account).

Sometimes, however, it is the right hand side of the account which is the larger.

This is an example of a bank account which in overdraft.

In the example shown below, the right hand side is 2,300 and the left hand side1,300. In this case enter the largest total on both sides and introduce the missingbalance on the smaller side (left hand side) bringing the balance down onto the righthand side. In this case you owe the bank 1,000. The balance is on the right handside which means that more money has gone out than in. You are in an overdraftsituation.

Bank AccountDate Details Date Details

201XJanuary 1 Capital 1,000.00

201XJanuary 2 Equipment 2,000.00

6 Sales 300.00 4 Purchases 200.007 Balance c/f 1,000.00 6 Drawings 100.00

2,300.00 2,300.00

7 Balance b/f 1,000.00

Earlier in the lesson we mentioned that the left hand side of the account is used toshow money coming in or a benefit to the business.

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We also said that the right hand side is used to show money going out of thebusiness. But there is another use for this side it records a liability that thebusiness has assumed. The above credit balance on the account means that thebusiness is in overdraft and owes the bank money i.e. the business has assumed aliability to the bank for the amount of the overdraft.

Level 2 Unit 1 Task 1a

Now balance the account you set out in Task 1. When you are happy that you havedone it correctly, answer the next two questions, checking your answers with thosegiven.


Write up the Bank Account for Mr Arnold for the month of September from thefollowing details. Balance off at the end of the month and carry the balance forward.

September 201X

1 Mr Arnold starts a business with 5,000 in the Bank.2 Bought office furniture for 1,000 paying by cheque.3 Received a loan of 5,000.00 from the Bank.4 Bought goods for resale (purchases), paid by cheque 2,800.

10 Cash sales 600 banked.17 Cash sales 750 banked.22 Paid rent 250 by cheque.26 Banked takings from sales 1,100.28 Withdrew 200 from the bank for personal use.

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Molly Bertram offers a dog walking service to local dog owners. She already hassome clients and decides that she does not need to invest any money to get started.Record the following transactions in Molly Bertrams bank account. At the end,balance the account and bring the balance down.

October 201X

8 Banks money from first weeks work 75.0010 Pays for printing of leaflets by cheque 25.0015 Banks money from second weeks work 85.5022 Pays for insurance premium by cheque 50.0025 Banks money from third weeks work 80.7530 Bought waterproof gloves and hat paid by cheque 15.0031 Banked money from fourth weeks work 75.00

ON-GOING WORK JOE LEWEY

Your pack includes a revision section entitled Joe Lewey. Here you will find a set ofaccounts, based on a business over a period of one year, to be worked through inorder to gain experience in bookkeeping. At this stage you can complete the work forUnit 1 (part 1), or if you prefer, complete the entire section in one go when you havefinished all the Units.

Whichever you choose, once you have finished the work for the Unit, turn to theanswers at the back of the book and check them through thoroughly.

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The Analysed Cash Book

Some businesses find it more convenient to maintain a cash book, rather than asimple bank account, where the income and expenditure is analysed or split upunder different headings. This is because at some stage, the business will need toknow how much it has spent on various items such as purchases, stationery, wagesetc. It is quite difficult to see this easily from the bank account as described earlier.

Remember we said earlier that each transaction had two elements somethingcoming in and something going out. By analysing the expenditure into columns youcan see the second half of this working.

It is still important to keep the income and expenditure columns as before, so thatyou can calculate how much money is in the account. The analysis of income andexpenditure is in addition to this.

Businesses that use this system can purchase analysis paper which is divided into anumber of columns. There is still a left hand side and a right hand side as before, butsometimes, because the paper is wide the pages are often kept separately.

Look at Amandas bank account from earlier.




6 Drawings 100.00

The income side consists of only the capital paid in to start the business and onesale. In a simple business like Amandas the majority of income items will be forsales so there is no need to analyse the left hand side of the account.

However there will be a number of types of expenditure so it will be useful to showthe right hand side in some form of analysed sheet.

Keep the main account the same and add columns to the right hand side,transferring the items into each column as they are entered into the account.

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Analysed Cash BookDate Details Date Details Assets Purchases Drawings

201XJan 1 Cap 10,000.00

201XJan 2 Equipment 800.00 800.00

6 Sales 175.00 4 Purchases 100.00 100.00

6 Drawings 100.00 100.00

Balancing an analysed cash book

When balancing an analysed cash book, treat the main section of the account in thesame way as before.

Analysed Cash Book

Date Details Date Details Assets Purchases Drawings

201XJan 1 Capital 10,000.00

201XJan 2 Equip 800.00 800.00

6 Sales 175.00 4 Purch 100.00 100.00

6 Drawings 100.00 100.00

Bal c/f 9,175.00

10,175.00 10,175.00

6Balance b/f

9,175.00

Finally, draw a single line under the analysis columns and sub total these. Do notrule off underneath as you will carry on adding the columns after further transactions.

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Analysed Cash Book

Date Details Date Details Assets Purchases Drawings

201XJan 1 Capital 10,000.00

201XJan 2 Equip 800.00 800.00

6 Sales 175.00 4 Purch 100.00 100.00

6 Drawings 100.00 100.00

Bal c/f 9,175.00

10,175.00 10,175.00 800.00 100.00 100.00

6Balance b/f

9,175.00

The following shows a further example of some analysed expenditure, this time withmore than one entry in each column. Note that for the entry on 11 January, the totalcheque was written out for 120 but this consisted of 100 of goods that werebought for resale, and 20 of sundries that are being used in the business.

Analysed Cash Book

Analysis Columns

Date Details Date Details Sundries Purchases Rent Drawings

201XJan

201XJan

1 Balance b/f 5,000 2 Sundries 50 50

6 Sales 650 6 Purchases 2,100 2,100

10 Sales 950 6 Rent 200 200

7 Drawings 200 200

8 Purchases 1,000 1,000

11 Sundries 120 20 100

12 Balance c/f 2,930

6,600 6,600 70 3,200 200 200

Jan 13 Balance b/f 2,930

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By adding up the analysis columns, it is possible to find the total spent on each typeof expense in a given period.

e.g. Sundries = 70 (50 + 20)Purchases = 3,200 (2,100 + 1000 + 100)Rent = 200Drawings = 200

Its practice time again the information from task 1 is re-created below reproducethe information in the form of an analysed cash book and then continue with theremaining tasks


John Dower opens up a business selling computer software online. These are thedetails of his first months transactions. Start a new bank account and make theappropriate entries. All payments out are by cheque

April 201X

1 Started business with 3,000.00 in the bank5 Received a cheque for 7,000.00 being a loan from the bank6 Paid 1,500.00 to a design company for the first stage of his new website

10 Bought a new computer and printer for 3,500.00 paid for by cheque (use thedetails Computer Hardware)

12 Bought software for resale (use the details Purchases) 486.5020 Bought further software for resale for 270.0025 Paid for stationery for the business 85.6530 Received a cheque for his first sale of software 125.50

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Draw up an analysed cash book, using analysis columns for Rent, Equipment,Purchases, Office Expenses and Drawings and enter the following transactions forNorman Todd:

April1 Started with capital of 2,000 paid into business bank account2 Paid a cheque for shop rent 5003 Bought equipment - 600 by cheque4 Purchased stock for resale by cheque 4505 Returned some equipment unused. A cheque for 200 was received and paid

into the bank.7 Sold goods for 75 - the money was paid into the bank9 Bought business stationery (office sundries) for 12 paid by cheque

17 Received a loan of 500 from J Blunt the cheque was banked24 Sold more stock for 320 and the money is paid into the bank27 Bought goods for resale by cheque 13528 The telephone bill (Office Sundries) of 18 was paid by cheque30 Drew a cheque for personal use for 300

ON-GOING WORK JOE LEWEY

Turn to your practice work book and complete the work for Unit 1 (part 2). When youare happy with what you have done, complete assignment 1 and send yourcompleted work to your tutor.

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LEVEL 2 UNIT 1 ASSIGNMENT

PART A

David has set up an analysed cash book for his business, with analysed expenditurecolumns for drawings, purchases, wages, insurance, general expenses andcreditors.

The following receipts and payments were put through the bank account for themonth of May 201X

May1 Balance brought forward 2502 Cash sales banked 1,7253 Cash sales banked 4655 Drawings 2509 Cash sales banked 390

10 Paid R Stuart cheque for purchases 97511 Paid wages 10012 Paid insurance premium 45016 Paid cash sales into bank 40017 Received cheque for purchases returned 3518 Paid general expenses by cheque 5023 Cash sales banked 50024 Received cheque from Bamett for sales made 24327 Paid for general expenses by cheque 4828 Paid wages by cheque 10029 Cash sales banked 46530 Paid general expenses by cheque 5031 Drawings 250

REQUIRED

1. Enter the above transactions into an analysed cash book and balance theaccount at 31 May 201X

2. Give a brief explanation of why analysis columns are useful and give two otherexpenditure columns that David might use in his bank account

3. What does a brought down credit balance in a bank account signify?

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PART B

Select the correct answer to the following questions:

1 Money paid into a bank account by the owner to open a business is calleda) Depositb) Loanc) Capitald) Drawings

2 Income from sales is recorded on which side of the bank accounta) Left hand sideb) Right hand sidec) It could be on either sided) It is neither side

3 A bank account has the following entries: capital invested 500, sales 360,purchases 75, drawings 100, telephone expenditure 35. What will be thebalance on the accounta) 860b) 210c) 650d) 1070

4 A brought down balance on the right hand side of a bank account meansa) The business has money in the bankb) The business has an overdraft at the bankc) The bank has a zero balanced) None of the above

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5 Which of the following bank accounts is balanced correctly?a)


201XJan

201XJan

1 Capital 5,000.00 2 Equipment 300.004 Sales 175.00 3 Purchases 100.00


5,175.00 5,175.00

b)


201XJan

201XJan


Balance c/f 2,675.00 6 Drawings 100.00Balance c/f 7,350.00

7,850.00 7,850.00

6 Balance b/f 7350.00 6 Balance b/f 2675.00

c)


201XJan

201XJan



5,175.00 5,175.00

6 Balance b/f 4,675.00

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d)


201XJan

201XJan


6 Drawings 100.00

5,175.00 Balance 2675.006 Balance b/f 2,675.00

Documents

Sample Course Material