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17 pages
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5337 words
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Management Functions

December 13, 2012
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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:
*ƒ‚
*ƒ‚
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:
*ƒ‚
*ƒ‚ 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 *ƒ*‹†2000
6.1.x5 Make sale for *ƒ*‹†3000
15.1.x5 Receive loan of *ƒ*‹†10000
19.1.x5 Purchase van for *ƒ*‹†9000
20.1.x5 Pay electricity bill of *ƒ*‹†400
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:
*ƒ‚
*ƒ‚
The "T" accounts for the income, expenses & fixed assets are also set up & the entries
corresponding to the above cash entries entries as follows:
*ƒ‚ *ƒ‚
*ƒ‚ *ƒ‚
*ƒ‚
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*ƒ‚ Look how the cash transactions are reflected with opposite entries in the corresponding
"T" account. This is the basis of double-entry bookkeeping.
Closing off "T" accounts
Also notice how each account is balanced off - the carry-forward (c/f) amount makes the
total of each side equal (a balancing figure). Whenever the total of a "T" account is
referred to, it means the c/f amount. If the Dr (left) side is greater than the Cr (right) side, it
is a Dr balance (or vicetiversa).
The next section will look at how the entire bookkeeping system fits together.
4. Books of Prime Entry
The "books of prime entry" are those books in which the initial transactions are recorded.
Along with some memorandum records & "T" accounts, they form the whole bookkeeping
system as illustrated below.
You are strongly recommended to return to this section after Section 11 or 12, as you will
have a better understanding at that stage - it is included now to show how the whole
system fits together.
Click on a book or ledger to find out more.
*ƒ‚
Nominal Ledger
The Nominal Ledger (or General Ledger) consists of all the "T" accounts. All the
double-entry is within this. The cash "T" account will usually be a summary (e.g. monthly
totals) of the cashbook.
Introduction to control accounts
The debtors (people owing you money) control & creditors (people you owe) control "T"
accounts lists sales/purchases made against cash received/paid. This gives a balance equal
to the outstanding debtors/creditors. See Section 7 -
credit transactions.
The next section looks at the entries peculiar to a soletrader or partnership. If it is a
Limited Company you are dealing with, skip to Section 6.
*ƒ‚ The Cash Book
This is the most primary book of entry. Although it is called a "Cash Book", it usually lists

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