How To Understand The Book

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1 BUSINESS BOOKKEEPING & ACCOUNTS STUDY GUIDE FOR MODULE ONE (A full Study & Training Guide will accompany the Study or Training Manual(s) you will receive soon by airmail post.) This Study Guide - like all our Training Materials - has been written by professionals; experts in the Training of well over three million ambitious men and women in countries all over the world. It is therefore essential that you:- Read this Study Guide carefully and thoroughly BEFORE you start to read and study Module One, which is the first Study Section of a CIC Study or Training Manual you will receive for the Program for which you have been enrolled. Follow the Study Guide exactly, stage by stage and step by step - if you fail to do so, you might not succeed in your Training or pass the Examination for the CIC Diploma. STAGE ONE Learning how to really STUDY the College s Study or Training Manual(s) provided - including THOROUGHLY READING this Study Guide, and the full Study & Training Guide which you will soon receive by airmail post. STAGE TWO Studying in accordance with the professional advice and instructions given. STAGE THREE Answering Self-Assessment Test Questions/Exercises. STAGE FOUR Assessing - or having someone assess for you - the standard of your answers to the Self- Assessment Test/Exercises. STAGE FIVE Preparing for your Final Examination. STAGE SIX Sitting the Final Examination. Remember: your CIC Program has been planned by experts. To be certain of gaining the greatest benefit from the Program, it is essential that you follow precisely each one of the SIX stages in the Program, as described above. STAGE ONE is your thorough reading of this Study Guide 1

2 ABOUT CIC STUDY and TRAINING MANUALS A CIC Study or Training Manual (which comprises 4 or 6 Modules - the first Module of which follows) supplied by the College as part of your Course or Program is NOT simply a text book. It must therefore not be read simply from cover to cover like a text book or another publication. It MUST be studied, Module by Module, exactly as explained in the following pages. Each CIC Study or Training Manual has been designed and written by specialists, with wide experience of teaching people in countries all over the world to become managers, administrators, supervisors, sales and accounting personnel, business-people, and professionals in many other fields. Therefore, it is in your own best interests that you use the Study or Training Manuals in the way CIC s experts recommend. By doing so, you should be able to learn easily and enjoyably, and master the contents of the Manuals in a relatively short period of time - and then sit the Final Examination with confidence. Every Study Manual and Training Manual is written in clear and easy to understand English, and the meanings of any uncommon words, with which you might not be familiar, are fully explained; so you should not encounter any problems in your Studies and Training. But should you fail to fully grasp anything - after making a thorough and genuine attempt to understand the text - you will be welcome to write to the College for assistance. You must state the exact page number(s) in the Study or Training Manual, the paragraph(s) and line(s) which you do not understand. If you do not give full details of a problem, our Tutors will be unable to assist you, and your Training will be delayed unnecessarily. Start now by reading carefully the following pages about Stages Two, Three and Four. Do NOT, however, start studying the first Study or Training Manual until you are certain you understand how you are to do so. STEP 1 STAGE TWO - STUDYING A CIC MODULE Once you have read page 1 of this document fully and carefully, turn to the first study section - called Module One - of Study or Training Manual One. (Note: In some Manuals the term Chapter is used instead of Module ). Read the whole of Module One at your normal reading pace, without trying to memorise every topic covered or fact stated, but trying to get the feel of what is dealt with in the Module as a whole. STEP 2 Start reading the Module again from the beginning, this time reading more slowly, paragraph by paragraph and section by section. Make brief notes of any points, sentences, paragraphs or sections which you feel need your further study, consideration or thought. Try to absorb and memorise all the important topics covered in the Module. STEP 3 Start reading the Module again from its start, this time paying particular attention to - and if necessary studying more thoroughly - those parts which were the subject of your earlier notes. It is best that you do not pass on to other parts or topics until you are certain you fully understand and remember those parts you earlier noted as requiring your special attention. Try to fix everything taught firmly in your mind. 2

3 Note: You may not wish to, or be able to, carry out Steps 1, 2 and 3 one after the other. You could, for instance, carry out Steps 1 and 2 and then take Step 3 after a break. STEP 4 STAGE THREE - ANSWERING SELF-ASSESSMENT TESTS When you feel that you have fully understood and learned everything taught in the whole Module (and if necessary after a further careful read through it) turn to the Self-Assessment Test set at the end of it, and read the Questions/Exercises in it carefully. You do not have to attempt to answer any or all of the Questions/Exercises in the Test, but it is best that you do so, to the best of your abilities. The reasons for this are:- By comparing your answers with the Recommended Answers printed in the Appendix at the end of the Module, you will be able to assess whether you really have mastered everything taught in the Module, or whether you need to study again any part or parts of it. By answering Questions/Exercises and then comparing your attempts with the Recommended Answers, you will gain experience - and confidence - in attempting Test and Final Examination Questions/Exercises in the future. Treat the Self-Assessment Tests as being Past Examination Papers. Professional Advice on Answering Self-Assessment Test (and Examination) Questions and Exercises 1. You may answer the Questions/Exercises in a Self-Assessment Test in any order you like, but it is best that you attempt all of them. 2. Read very carefully the first Question/Exercise you select, to be quite certain that you really understand it and what it requires you to do, because: some Questions/Exercises might require you to give full written answers; some Questions/Exercises (e.g. in English) might require you to fill in blank spaces in sentences; some Questions/Exercises (e.g. in bookkeeping) might require you to provide worked solutions; some Questions/Exercises (called multiple-choice questions ) might require you only to place ticks in boxes against correct/incorrect statements. In your Final Examination you could lose marks if you attempt a Question/Exercise in the wrong way, or if you misread and/or misunderstand a Question/Exercise and write about something which is not relevant or required. 3. Try to answer the Question/Exercise under true Test or Examination conditions, that is, WITHOUT referring back to the relevant section or pages of the Module or to any notes you have made - and certainly WITHOUT referring to the Recommended Answers. Try to limit to about two hours the time you spend on answering a set of Questions/Exercises; in your Final Examination you will have only two hours. 4. Although you are going to check your Self-Assessment Test answers yourself (or have a friend, relative or colleague assess them for you) practise writing written answers:- 3

4 in clear, easy-to-read handwriting; and in good, grammatical language. The Examiner who assesses your Final Examination answers will take into account that English might not be your national or main language. Nevertheless, to be able to assess whether you really have learned what we have taught you, he or she will need to be able to read and understand what you have written. You could lose marks if the Examiner cannot read or understand easily what you have written. 5. Pay particular attention to neatness and to layout, to spelling and to punctuation. 6. When written answers are required, make sure what you write is relevant to the Question/ Exercise, and concentrate on quality - demonstrating your knowledge and understanding of facts, techniques, theories, etc. - rather than on quantity alone. Write fully and clearly, but to the point. If you write long, rambling Final Examination answers, you will waste time, and the Examiner will deduct marks; so practise the right way! 7. When you have finished writing your answer, read through what you have written to see whether you have left out anything, and whether you can spot - and correct - any errors or omissions you might have made. Warning: some Questions/Exercises comprise two or more parts; make certain you have answered all parts. 8. Attempt the next Question/Exercise in the Self-Assessment Test in the same manner as we have explained in 1 to 7 above, and so on until all the Questions/Exercises in the Test have been attempted. Note: There is no limit on how much time you spend on studying a Module before answering the Self- Assessment Test set on it, and some Modules are, of course, longer than others. You will, however, normally need to spend between twelve and fifteen hours on the thorough study of each Module - and that time may be spread over a number of days if necessary - plus approximately two hours on answering the Self-Assessment Test on each Module. STEP 5 STAGE FOUR - ASSESSING YOUR ANSWERS When you have answered all the Questions/Exercises set in Self-Assessment Test One to the best of your ability, compare them (or ask a friend, relative or a colleague/senior at work to compare them) with the Recommended Answers to that Test, printed in the Appendix at the end of the Module. In any case, you should thoroughly study the Recommended Answers because:- As already explained, they will help you to assess whether you have really understood everything taught in the Module; and They will teach you how the Questions/Exercises in subsequent Self-Assessment Tests and in your Final Examination should be answered: clearly, accurately and factually (with suitable examples when necessary), and how they should be laid out for maximum effect and marks. 4

5 MARKS AND AWARDS To assist in the assessment and grading of your answers, the maximum number of marks which can be earned for each answer to a Self-Assessment Test Question/Exercise is stated, either in brackets at the end of each one. The maximum number of marks for any one Test is 100. Your answers should be assessed fairly and critically. Marks should be awarded for facts included in your answer to a Question/Exercise, for presentation and for neatness. It is not, of course, to be expected that your answers will be identical to all those in the Appendix. However, your answers should contain the same facts, although they might be given in a different order or sequence - and any examples you give should be as appropriate to the Questions/Exercises as those given in the relevant Recommended Answers. Add together the marks awarded for all your answers to the Questions/Exercises in a Self-Assessment Test, and enter the total (out of 100) in the Award column in the Progress Chart in the middle of the full Study & Training Guide when you receive it. Also enter in the Matters Requiring Further Study column the number(s) of any Question(s)/Exercise(s) for which you did not achieve high marks. GRADES Here is a guide to the grade your Self-Assessment Test Work has achieved, based on the number of marks awarded for it: STEP 6 50% to 59% PASS 60% to 64% HIGH PASS 65% to 74% MERIT 75% to 84% HIGH MERIT 85% to 94% DISTINCTION 95% to 100% HIGH DISTINCTION Study again thoroughly the section(s) of the Module relating to the Question(s)/Exercise(s) to which your answers did not merit high marks. It is important that you understand where or why you went wrong, so that you will not make the same mistake(s) again. STEP 7 When you receive the complete Study or Training Manual One** from the College by airmail post, revise - study again - Module One printed in it, and then turn to Module Two and proceed to study it thoroughly in exactly the same way as explained in Steps 1, 2 and 3 in this Study Guide. When you have completed your thorough study, follow steps 4, 5 and 6 for the Self-Assessment Test on Module 2. Continue in the same way with each of Modules 3, 4, 5 and 6 until you have attempted and assessed your work to Self-Assessment Test 6, and have completed the study of Study or Training Manual One. But - and this is important - study the Modules one by one; complete Steps 1 to 6 on each Module before you proceed to the next one (unless during the course of your reading you are referred to another Module). **Note: When you receive Study or Training Manual One by airmail post, it will be accompanied by a 20-page Study & Training Guide (containing a Progress Chart ) which you MUST read very carefully before starting your study of Module Two. 5

6 TRAINING MANUAL ON BUSINESS BOOKKEEPING & ACCOUNTS Module One CONTENTS The Ledger - the Main Book of Account page 7 Transactions; what is involved The functions of accounting: recording, analysing, presenting Bookkeeping: the recording function Manual bookkeeping and computerised accounting Meanings of the terms: assets and liabilities debtors and creditors income and expenditure capital profit and loss Information recorded in/provided by the ledger Ledger accounts described: what their debit and credit sides record rules concerning ledger accounts The need for double-entry bookkeeping: the receiving and giving aspects of every transaction The basic rule of double-entry bookkeeping Abbreviations used in ledger accounts Entries in a ledger account examined and explained Balancing ledger accounts: debit and credit balances Folios Classes of ledger accounts: real, personal and nominal: what they record rules for posting to them specimens of each examined Special notes on ledger accounts Special notes on balancing ledger accounts Self-Assessment Test One page 21 Recommended Answers to Self-Assessment Test One page 23 What You Will Learn in Modules 2 to 12 page 24 6

7 Introduction THE LEDGER - THE MAIN BOOK OF ACCOUNT In business, guesswork is simply not good enough! The owners or managements of every business needs accurate and up to date information about the activities of their business. That information can come only from records kept about each and every transaction which occurs. In the context of accounting, a transaction is any activity which involves the exchange of money or money s worth between a business and others, be they people or organizations. A transaction might involve a purchase or a sale, the receipt or the payment of money, the circulation of assets (possessions), the settlement of a debt, or anything else which has a monetary value. The main functions of the process called accounting are: Recording the financial transactions which affect an enterprise (which might range from a small one-man business to a huge public company). Analysing the transactions recorded. Presenting the records of the transactions - usually in a summarised format - in various statements which should show clearly the effects of those transactions on the performance and financial position of the enterprise. The recording function of accounting is called bookkeeping. The purpose of bookkeeping is to provide an accurate and detailed record of each and every transaction involving the exchange of money or money s worth between a business and other parties, whether those are individuals or organizations. Those records might be made manually (by hand) in actual books or - in large organizations - in numerous cards or sheets, which collectively can still be thought of as comprising very large books. Some enterprises make use of mechanised accounting machines to make entries in their records, whilst the modern method is increasingly towards the use of computers to maintain bookkeeping records. Howsoever bookkeeping records are maintained, it is essential that they are always accurate, that they can be crosschecked when necessary, and that they are readily available when needed. Although computers might have many advantages over traditional manual bookkeeping - which is still very widely practised - they still perform bookkeeping according to the same basic rules. In this Program we shall therefore first study the principles of manual bookkeeping, and relate them later to computerised systems. Terms Used in Bookkeeping and Accounts Before you start studying bookkeeping, it is important that you clearly understand the specialised meanings of certain words and terms commonly used in bookkeeping and accounting. At this stage, you should learn thoroughly the following explanations to ensure that your progress in further stages of the Program will be rapid and easy. Any skipping through the explanations or an I know it already 7

8 attitude at this stage, can lead to misunderstanding or difficulty in your learning other topics which will be taught as you progress through this Program. Assets These are the possessions of an enterprise, that is, what it owns. Assets include actual cash (currency notes and coins) and money in bank accounts; investments and, depending on the type and size of an enterprise, land and buildings; plant, equipment and machinery; furniture; stocks of goods for sale and/or stocks of materials to be utilised in manufacturing goods; and anything else owned by the enterprise which has monetary value, including money owed to it by individuals and other enterprises, and often called book debts. What are called fixed assets are items which an enterprise acquires (by renting, leasing or purchasing) in order to be able to carry out its activities. They are usually acquired with the intention of their being retained for some time, perhaps many years. The variety of such items is great and, depending on the type and size of a particular enterprise, might range from desks and chairs, computers and other office equipment, to factory buildings, machinery and plant, motor vehicles, etc; in fact, any material item large or small in size or value which assists the enterprise to run efficiently and profitably. In some countries fixed assets are called working assets because they enable the enterprise to perform its work. All other assets of an enterprise are called current assets, and their total value is constantly changing or fluctuating with the day to day operations of the enterprise. Current assets include stocks of goods and/or raw materials, cash and bank balances, debts owing to the enterprise, etc, whose total values change daily as purchases and sales are made, as bills are paid and as customers pay their debts. Liabilities These are any sums, measured in monetary value, which an enterprise owes to others, that is, they are the debts of the enterprise. Liabilities might include the values of goods, materials or services provided by suppliers but not yet paid for; or goods, materials or services paid for by customers but not yet provided to them; as well as bank overdrafts, and loans made to the enterprise by banks and other financial institutions, etc. Debtors These are people and organizations who owe money or money s worth to the enterprise. Debtors are mainly customers who have been supplied with goods or services on credit, that is, without having had to pay for them at the time of sale. But they can also be those to whom the enterprise has loaned money and those who have been paid in advance for goods or services not yet provided (e.g. insurance cover is usually paid in advance for a whole year). Those who incur debts to a business as the result of its normal business activities are commonly called its trade debtors. As mentioned earlier, debts owing to an enterprise are assets; and sums owed by trade debtors (book debts) are therefore classed as current assets. Creditors These are people and organizations to whom an enterprise owes money or money s worth. Creditors might be suppliers who have supplied goods, materials or services on credit, that is, without demanding payment at the time of supply, or might be people or organizations who have paid in 8

9 advance (e.g. rent paid in advance to a landlord); both groups of whom are commonly referred to as trade creditors. Other creditors might be banks or other financial institutions which have loaned money to the enterprise, or banks which have permitted the enterprise to overdraw its current account (a matter which is dealt with fully in Module 10). As we have already stated, all sums owed to creditors are liabilities of an enterprise. Capital This is an essential prerequisite of any business enterprise; whatever its intended or eventual size it will require initial capital to enable it to commence its operations. Initial capital requirements will, of course, vary considerably, but money will be needed to acquire the necessary fixed assets as well as the relevant current assets - stocks of raw materials and/or goods for sale. Sufficient capital - called working capital - will also be required to finance the enterprise, that is, to meet all the expenses which will be incurred (e.g. rent, salaries, electricity, advertising, and many others) until sufficient income from initial production and/or sales is generated. The amount of an enterprise s working capital at any point in time is the total value of its current assets less the total value of its current liabilities. Income and Expenditure The term income refers to all the money, in whatever form, received by an enterprise; whilst expenditure is all the money, in whatever form, paid out by the enterprise to enable it to keep running - its expenses. Profit Enterprises - which in the private sector are often called businesses - are started and run to make profits or gains for their owners. Any person involved with bookkeeping and accounting needs to know what profit is and how it arises. A simple example will help to make the concept clear: A shoemaker sells a pair of shoes he has made, and with the money he receives for it he buys food or clothing or buys materials or pays the rent of his workshop. What he has done is to exchange his materials and labour for the materials and labour of other people; what we call money is only the medium which makes the exchange easier. In order to produce his shoes, the shoemaker has to make use of three items: land, labour, and capital, which are called the factors of production. Without land there would be no place or workshop for the shoemaker to work. Without his labour no shoes would be made. Without capital there would not be the money which he needs to pay the rent of his workshop, to buy leather, tools, nails, etc, from which to produce more shoes, and to feed and clothe himself until the next shoes are made and sold. The shoemaker must be sure in advance that his production will bring back the money he spent on materials, on labour, and on rent and bring a return on the capital employed; and it is that return or gain which is called profit. 9

10 Put simply, we can see that capital is really the result of previous production; if the shoemaker works so well that he sells his products for more money than his immediate needs, he can use that extra money as capital to finance more production. We return to the consideration of profit in Module 8, but at this stage it should be noted that the opposite of making a profit is incurring a loss. The Ledger The books which are the subject of bookkeeping are referred to as the books of account. The main book of account is the ledger. In a summarised form the ledger records - and can provide - all the following information:- The total income of the business, and in general the different sources from which it is derived. The amounts involved in meeting each type of expense, and the total expenditure incurred by the business. What assets are owned by the business, the values of each general type and the total value of all its assets. The values of the different liabilities of the business, and the total value of all its liabilities. Who its debtors are, how much they owe to the business, and the total amount owed to the business. Who the creditors of the business are, how much is owed to each by the business, and the total amount owed by the business. Whether the business has made a profit or a loss during a given period of time, and the amount of that profit or loss. The amount of working capital available to the business at any point in time. Ledger Accounts A ledger comprises many different sections, each of which is called an account. In a ledger book, there will usually be one account on each page of it; in a large business each account might have its own card or sheet - all the account-cards or account-sheets together jointly make up the business ledger. The following important points must be noted about ledger accounts:- Each individual account is headed by a name or by a title. That name or title may be the name of a person or an organization or a type of asset, a type of liability, a type of expense or a source of income. Only information about transactions concerning the person, organization or item named at its head may be recorded in that account. Each account must be kept separate, or treated separately, from all the other accounts in the ledger, and there must be only one account in the ledger for any one particular person, organisation or item. In addition to a name or title, each account also has a number allocated to it; that number is called a folio or an account number. (The uses and values of folios or account numbers will be described shortly). 10

11 Each ledger account is divided into two parts, often called sides, by a line - or by two close parallel lines - drawn down the middle of it, from top to bottom. The left-hand side of an account is called its debit side, and it records all values received by the person, organization or item named at the top, or head, of it. The right-hand side of an account is called its credit side, and it records all values given (or paid) out by the person, organization or item named at its head. Note: Accounts are also used in computerised boookkeeping or accounting systems, and they also record the giving and receiving aspects. However, the two parts of each account might not be so obvious in a computerised system as in manual systems, and might not be side by side as they are likely to be in a ledger kept manually. For convenience we shall use the description sides. Practical Example As we stated earlier, bookkeeping and ledgers (in one form or another) are used by businesses of all types and sizes. However, for the purpose of learning, it is easier to examine a small business which has relatively few transactions - and which therefore needs to make relatively few entries in its books of account - than it is to examine a very large business; although, of course, the principles applied will be the same in both cases, and it is only the scale which differs. For the purpose of this Program we first consider the bookkeeping required by a business called Market Grocers, which is owned and run by Mr A Trader. Mr Trader s business deals in groceries; some it sells on wholesale terms, that is, in bulk or in fairly large quantities, to other organizations, such as restaurants, hotels, and small kiosks. Other goods are sold retail or across the counter to people who come into the shop/store from which the business operates. The business rents its shop/store, and the storehouse it needs to hold stocks of goods (groceries in this case) which it hopes to sell. Mr Trader has a storeman/delivery-man, two shop assistants and a clerk to assist him in running the business. The business buys the goods which it intends to sell from the manufacturers and producers of them. The business owns various assets, such as shop furniture and equipment: counters, cash registers, shelving, etc, storage equipment: racks, shelving, etc, office furniture and equipment: desks, chairs, an adding machine, filing cabinet, etc, and a delivery van. An accurate record of each and every transaction which involves the exchange of money or anything worth money between the business and any other person or organization must be recorded - in a summarised format at least - in its ledger. Depending in particular on the number of customers to whom Mr Trader sells goods on credit, that is, without requiring them to pay for those goods at once, and on the numbers of suppliers who allow him to purchase goods from them on credit, that is, without requiring him to pay for those goods at once (sales and purchases on credit are dealt with in Module 3), there will have to be a number of different accounts in the ledger of the business. For example, there will be an account headed sales, which will record the values of all sales made to customers, so that Mr Trader will always be able to find out the total value of sales made. There will also be an account headed purchases, in which will be recorded the values of all goods purchased (bought) by the business, and which will be able to show the total value of all purchases made. 11

12 There will also be an account headed by the name of each general type of asset owned, for example, shop furniture & equipment, office furniture & equipment, delivery van, stocks of goods, and so on. Similarly there will be an account for each type of expense incurred by the business, which might include: rent, salaries, advertising, stationery, postage, telephone, electricity, van running expenses, and so on. Finally, there will need to be an account for each debtor who owes money to the business, for goods sold to them on credit and not yet paid for. And also an account for each creditor to whom the business owes money. Mainly creditors will be suppliers from whom the business has purchased goods on credit and who have not yet been paid for those goods, but if, for example, the business has been made a loan by a bank or by some other organization or person, an account for each such debt or liability will also be required in the ledger. One such account will be headed A Trader capital, and will record the amount of money which Mr Trader has invested in the business and which, in effect, it owes to him (this concept is dealt with in detail in Module 4). Now study Fig.1/1 carefully and note in particular its layout. The reason why each entry has been made in the account, that is, the interpretation of the information it contains, will be explained shortly. Note: These Manuals are studied in some 200 countries around the world. Therefore, we do not use the name of the currency or money of a particular country against the amount or values of transactions. We call them simply units (of money). You may read the word units as being the name of the currency in use in your own country, e.g. pounds or dollars or francs or naira or kwacha or ryal or shillings or dinar or rupee, or any other, or as being the name of a currency with which you are familiar. Similarly, although we may use the symbol against some amounts of money, you should regard the symbol as referring to the currency with which you are familiar. Fig.1/1. a specimen ledger account 12

13 Double-Entry Bookkeeping Each ledger account needs two sides or parts because in every business transaction which occurs - no matter how large or small in value it may be - two things happen at the same time:- One party receives value, whilst at the very same time another party gives out that very same value. For example, when a business sells goods and receives the payment for them at once - called a cash sale - it has given out goods but at the same time it has received money in exchange for them. Likewise, the customer has given out money, but at the same time he or she has received goods in exchange for that money. The same happens in every business transaction, and therefore in order to record the dual or double aspect, TWO entries are required somewhere in the ledger for each and every transaction that occurs. The two entries must be:- One on the credit side of an account - to record the giving aspect; and One on the debit side of an account to record the receiving aspect. The method used to record the double aspect of each transaction is, logically, called double-entry bookkeeping. It is vital to remember always the basic rule of double-entry bookkeeping, which is:- There must be a debit entry and a corresponding credit entry of the same value (and vice versa) for every transaction that occurs. It is worth your noting at this stage that if there is both a debit and an equal (corresponding) credit entry somewhere in the ledger for each and every transaction that takes place, the total of all the debit entries in the ledger should agree exactly with the total of all the credit entries. Information - or entries - is rarely recorded direct into the ledger accounts. Generally information is first recorded in one of the subsidiary books or day books - which are collectively often called the books of original entry. The information is then transferred - or posted, as the process is called in bookkeeping - to the appropriate ledger accounts in a summarised form. The most commonly used subsidiary books are the cash book, the sales book, the purchases book and the returns inwards and outwards books, which we describe in detail in Module 2 and 3. Before we turn to an examination of the specimen ledger account illustrated in Fig.1/1. First note the meanings of the following abbreviations (shortened words or terms) used in the specimen account, and which will frequently be met with in bookkeeping and accounting:- c/f is the abbreviation for carried forward and means that the figure, total or balance against which it appears has been transferred to another place, for example from the bottom of one page to the top of another, or from one book or account to another. b/f is the abbreviation which stands for brought forward and means that the figure, total or balance alongside which it appears was transferred from another place, e.g. to the top of one page from the bottom of another, or to one book or account from another. 13

14 c/d is the abbreviation for carried down and indicates that the balance alongside which it is written has been transferred to a lower position on the same page. b/d is the abbreviation which stands for brought down and means that the balance against which it is written has been transferred from a higher position on the same page. bal is the common abbreviation for the word balance, which is the difference between the total value of the debit entries in an account and the total value of the credit entries in it. Interpreting the Entries Now look again carefully at the ledger account shown in Fig.1/1. The account appears on page 93 of Market Grocers ledger, and is headed Clarendon Hotel Ltd. It is, in fact, the account for one of Mr Trader s customers who buys goods from him fairly frequently on credit. As the account is in the name of Clarendon, it shows the position of transactions from the view of that customer, and not from the view of the seller or vendor, in this case, Market Grocers. With that in mind, we can read the account as giving, in date order, the following information:- May 2 May 4 May 8 The entry is on the debit side of the account which means that Clarendon received value; in fact the customer purchased goods on credit (without paying for them at once, remember) worth units. From Market s point of view the goods were given out, and that aspect of the transaction will be recorded in a different account, as you will see when we study Module 3. The entry is on the credit side, so therefore Clarendon gave out value; the word returns included in the entry tells us that Clarendon returned to Market Grocers goods worth 14 units - perhaps they were the wrong type or size or brand, or were damaged or substandard - whatever the reason, they were not wanted and so were returned. The effect of the return, and the recorded entry of it in the account, is to reduce Clarendon s debt to Market Grocers from units to units. A debit entry recording a credit purchase of goods by Clarendon - whom, you will appreciate by now, received the goods. May 12 Another debit entry, which records a further credit purchase by Clarendon, this time of goods worth units. May 14 A debit entry for a fourth credit purchase, and receipt, of goods by Clarendon, valued at units. May 15 A credit entry showing at once that Clarendon gave out value; the description payment tells us that Clarendon paid the sum of 800 units to Market. A quick calculation tells us, further, that the payment covered the values of the credit purchases of May 2 and May 8 less the value of the returns made on May 4. The payment can be said to have been made on account because it did not settle the total amount owing by Clarendon at the date it was made (or at least on the date on which it was received by Market). 14

15 Balancing a Ledger Account After making the entry for the payment received from Clarendon on May 15, Mr Trader needed to know how much was still owed to his business by Clarendon. To obtain that information, he carried out a process called balancing. This is what he did, step by step:- Step 1 Step 2 Step 3 Step 4 He added up the values of the entries on the debit side of Clarendon s account in the ledger; their total amounted to 1, units, and he wrote that total below the fourth entry - remember that Fig.1/1 shows an historical record, and that on May 15 the other entries shown in the account had not yet been made. He added up the values of the entries on the credit side of the account - their total, which was 814 units, was deducted or subtracted from 1, units to give the balance - the amount still owing by Clarendon - of units. That amount was entered on the credit side, making the totals of the entries on both sides equal. The total was entered on the credit side, on the same line as the total of the debit entries; and both - equal - totals were neatly underlined, or ruled off as the process is called. The balance was carried down from the credit side to the debit side, showing that Clarendon had received an excess value of units over what it had given out. Balancing is an easy process and can be carried out on any account at any time that it is considered necessary to do so. It is generally carried out on the accounts of all debtors and creditors at the end of each month. It is also done for all accounts at the end of a financial year or trading year or other accounting period, and you will learn in Module 4 the reasons why that is done. Let us now return to an examination of the other entries in the ledger account:- May 25 A debit entry recording a credit purchase by Clarendon of goods worth units. May 27 A credit entry recording the return of goods worth 21 units from Clarendon to Market - remember, the account is credited with the value of the return because it was given out by Clarendon. May 31 It is customary for a business to send each credit customer a statement - called a statement of account - at the end of each month, stating the values of the goods purchased by the customer during the month, the values of any payments received from the customer during the month, and the values of any returns of goods made by the customer during the month and - most importantly - the balance still owing by the customer on the last day of the month. Mr. Trader therefore balanced Clarendon s account again on May 31 and the balance calculated ( plus less 21 = units) was brought down to the start of the next month. Note that the entries above the last ruling off are ignored when balancing the next time because, of course, the balance between their totals (if there is one, as was the case with Clarendon) has already been carried down and is included in the next totalling. You can therefore see that a ledger account, even one like that illustrated in Fig.1/1 which contains only a few entries, can give a great deal of information. In this and succeeding Modules you will be shown many other ledger accounts, and will be given information about them and the ways in which they differ from the one we have so far illustrated; balancing will also be considered further. 15

16 The Folio Column The narrow column to the left of the value column on each side of the account is called the folio column, and it contains a reference which tells us from where the entry was posted, i.e. its source, or where the corresponding entry - to complete the double-entry for the transaction - will be found. We explain fully the importance of folios and their value in Module 2. Classes of Ledger Accounts All the many accounts which jointly make up the ledger of a business can be divided into three classes, which are as follows:- Real Accounts These contain the records of all the physical or tangible assets of the business, for example, shop furniture, stocks of goods, delivery van, etc. Personal Accounts These are usually in the names of people or organizations, and they maintain records of (a) the transactions which a business has with its credit customers, showing the amounts still owed to the business by any of them; whilst (b) other personal accounts record the transactions which the business has with suppliers from whom it purchases goods on credit, and they will show to which creditors the business still owes money, and how much is owed to each. Nominal Accounts These keep the records of all the different types of income (sometimes called revenue ) of the business, and also the records of the different types of expenditure incurred by the business in carrying out its activities. Now let us look at a specimen of each class of account: - Fig.1/2. a specimen real account The account shown in Fig.1/2 records the values of the different items owned by Market Grocers which together are classified as shop furniture & equipment ; there might be many different items, but as they are all used in helping the shop to run efficiently, the records of them are kept together in one account instead of having a separate account for each type of item. You will appreciate that they are all fixed or working assets. 16

17 The first entry in the account is the balance, or total value, of shop furniture and equipment brought forward, from an earlier page, perhaps page 11 in the ledger. The second entry, being on the debit side, shows a receipt of value by the account; that is, a new set of scales was purchased for use in the shop, and so the total value of shop furniture & equipment is increased. (At the same time, money was given out to pay for the scales, and the credit entry to record that giving aspect is recorded elsewhere in the books - see Fig.2/1). The two values - that of the opening entry and that of the new one made - have been added together to show the new total value of all the shop furniture & equipment - 5, units. When all the entries are on the same side of an account, as in Fig.1/2, there is no need to balance it, because the total of the entries on that side is automatically the balance on that account. With real accounts, most entries appear on the debit side; only if items are sold (thus reducing the total value of the assets concerned) and at the end of the accounting period, are entries likely to be found on the credit side. The rule for posting values to real accounts is: Fig.1/3. a specimen personal account Debit all values received, and credit all values given out. The account illustrated in Fig.1/3 is that of a supplier from whom Market Grocers purchases goods (for re-sale) on credit; remember that it shows transactions from the point of view of Fine Foods Ltd. The earliest entry is on the credit side on May 6 and shows that Fine Foods gave out goods worth units - those same goods were received by Market, and the entry to record that aspect is recorded elsewhere in the books, as shown in Fig.3/5). The next entry, in date order, is on May 10 and shows that Fine Foods received back goods worth units, being a return by Market. The next entry, again reading the account in date order, is on the credit side for a further credit sale (giving out of value) by Fine Foods. On May 31 Mr Trader paid the sum of units to Fine Foods - they received the money and so their account is debited (the payment was for the purchases made on May 6, less the value of the returns). After the entry for the payment, the account was balanced, and the credit balance - representing the amount still owed by Market to Fine Foods - was carried down to the start of the next month. Note that had Market paid the total owing ( units) the totals of the entries on both sides of the account would have been equal, and so there would have been no balance, as was the case in the account shown in Fig.1/4. 17

18 Fig.1/4. a personal account with no balance As you can see in Figs.1/1, 1/3 and 1/4, entries are generally made on both sides of personal accounts, and after a personal account has been balanced the balance can be on either the debit side or the credit side, depending upon whether money is still owed to the business or by it - and in some cases personal accounts might have no balance at all. The rule for posting values to personal accounts is:- Debit the receiver of the value, and credit the giver of the value. Fig.1/5. a specimen nominal account recording expenditure Fig.1/6. a specimen nominal account recording income 18

19 With nominal accounts, the majority of entries - if not all of them - are on only one side. The entries in nominal accounts recording expenditure, as is the case with Fig.1/5, are made on the debit side because money has been given out - to pay the expense concerned, whilst the type of expense recorded by the account - has received the value. Similarly, entries in nominal accounts recording sources of income, as in Fig.1/6, are mainly made on their credit side, because although money has, or will, be received in exchange for the items sold, the accounts record the giving aspect of the transactions concerned. This matter will become quite clear when we consider the cash book and other books of original entry in Modules 2 and 3. The rule for posting to nominal accounts is:- Debit the values of all expenses and losses, and credit the values of all gains. The balance on an account is the difference between the total value of the entries on its debit side, and the total value of the entries on its credit side. If the total of the debit entries is the larger - as is the case with the accounts shown in Figs.1/1, 1/2 and 1/5 - the account concerned is said to have a debit balance. If, on the other hand, the total value of the credit entries is the larger - as is the case with the accounts in Figs.1/3 and 1/6 - the account concerned is said to have a credit balance. It is most important to bear those facts firmly in mind. Special Notes: In some cases the word debit might be abbreviated to DR, and the word credit might be abbreviated to CR. These abbreviations should not be used in written or worked answers to Test or Examination Questions. The word credit as used in bookkeeping and accounts has two different meanings: 1. It is the name of the right-hand side/receiving part of a ledger account. 2. It means that goods or services have been sold or purchased without payment having been made at the time of the sale/purchase. It is most important that you do not confuse two different meanings of the same word. Always read the word carefully in the context (its relationship with other words in the sentence) in which it is used. Traditionally the description of each entry on the debit side of a ledger account had to be started with the word to, and the description of each transaction on the credit side of a ledger account had to be started with the word by. Some examining bodies might still require that that is done, but the busy bookkeeper rarely has the time in practice for such niceties which, in any case, contribute nothing to the accuracy or meanings of entries. In practice, some accounts might contain very many more entries than we have shown in our examples. Nevertheless, whether an account contains one entry or hundreds, it must conform to the rules of double-entry bookkeeping we have so far taught you, and which will be taught in subsequent Modules of this Manual. And the same applies whether bookkeeping is carried out manually or by computer. 19

20 ALL entries in ledger accounts - and indeed in all books of account - must always be made neatly and accurately. Any untidy, unclear, careless or inaccurate entries will lead to errors, and it can be very time-wasting to trace, and correct, errors. Carelessness and inaccuracy can, further, lead to losses for a business and even - in extreme cases - to the loss of the job of the person responsible. Accuracy is just as important when making entries in - or inputting to - a computerised accounting system. So ALWAYS be accurate in your bookkeeping work, be neat - and take pride in your work and your profession. Additional Notes on Balancing Ledger Accounts Commit the following points to memory, as they will help you avoid making errors in balancing accounts manually. As soon as both sides of an account are equal in total value it should be neatly ruled off. If there is only one entry on each side of the account (equal in value) then the ruling off lines should be drawn below the entry on each side of the account; there is no need to write the total again (see Fig.1/4). However, if there is more than one entry on either side of the account, the values of those entries should be totalled, the same total should be written on each side of the account, and ruling off lines should be ruled below those equal totals (see Fig.1/7). If there is only one entry in an account, there is no need to balance that account, because the value of that one entry is the balance; do not rule off the account. If all entries in an account are on the same side of it, the total value of those entries is the balance on that account, and so there is no need to balance it; the total value of the entries may be written in, but the account should not be ruled off (see Figs.1/5 and 1/6). Fig.1/7. a personal account with no balance 20