Basic Concepts 1

Basic Accounting
BASIC ACCOUNTING
Contents Page
Objectives ..............................................................................................................................2
Session 1 - The Origin of Accounts ....................................................................................3

Questions!! (1) .....................................................................................................................3
Session 2 - The Principles of Accounting .........................................................................4
The Purpose of Accounting .................................................................................................4
Session 3 - Basic Terminology............................................................................................6
Questions!! (2) .....................................................................................................................6
Questions!! (3) .....................................................................................................................7
Session 4 - Double Entry Book Keeping.............................................................................8
Questions!! (4) ...................................................................................................................10
Questions!! (5) ...................................................................................................................14
Session 5 - The Effect Of Profit And Loss On Capital.....................................................17
Questions!! (6) ...................................................................................................................18
Session 6 - Balancing Off Accounts .................................................................................20
Questions!! (7) ...................................................................................................................21
Session 7 - The Trial Balance ............................................................................................22
Questions!! (8) ...................................................................................................................22
Session 8 - Trading And Profit And Loss Accounts ........................................................26
Questions!! (9) ...................................................................................................................27
Session 9 - The Balance Sheet .........................................................................................29
APPENDIX I - Glossary of Terms .......................................................................................31
APPENDIX II - Answers to Exercises.................................................................................35

Questions (1) .....................................................................................................................35
Questions (2) .....................................................................................................................35
Questions (3) .....................................................................................................................35
Questions (4) .....................................................................................................................35
Questions (5) .....................................................................................................................36
Questions (6) ....................................................................................................................37
Questions (7) .....................................................................................................................38
Questions (8) .....................................................................................................................38
Questions (9) .....................................................................................................................40
Questions (10) ...................................................................................................................41
SUNSYSTEMS TRAINING GUIDE SU003 V1.4 1

BASIC ACCOUNTING
Objectives
At the end of the day, delegates should be able to understand the basics of book keeping
and accountancy. This will enable accountancy orientated problems to be worked through
logically and with understanding. They should be able to:
• Understand the origins of accounting
• Understand the fundamental principles of accounting
• Understand the principles of double entry book keeping
• Understand the composition of basic financial reporting
Recommended for
• All personnel with little or no knowledge of bookkeeping who need this for their job.
• Personnel wishing to attend other SU courses, but lack accounting experience.

BASIC ACCOUNTING
Session 1 - The Origin of Accounts
The book keeping method has been developed over Annual income: twenty pounds;
centuries. It is most easily explained by following this annual expenditure: nineteen
development..... ninety six; result: happiness.
Annual income: twenty pounds;
Public and private book keeping first began in ancient annual expenditure: twenty
Egyptian, Greek and Roman times. In the public sector, pounds naught and sixpence;
the development of community organisations in these result: misery.
civilisations was accompanied by the need for (Mr Micawber in David
appointed officials to account for their use of public
Copperfield, Charles Dickens)
funds. In other words, they were obliged to keep
records of, and account for, income and expenditure,
and to have these records checked (audited) by other officials.
On the other hand, in the private sector merchants and landowners would ask their agents
to present an account of activities relating to the business or property. It became the
custom for the owners to hire professional examiners of accounts - auditors - to check the
accounts. These accounts were often presented verbally, and the term ’auditor’ comes from
the Latin audire, to hear.
These accounts were merely lists of income and expenditure, the sort of simple accounts
that are still used or small organisations, such as clubs, today. However, by the fifteenth
century, the larger Italian merchants had outgrown this system. Much of their wealth was
tied up in stocks of merchandise, so they needed a system that could cope with valuations
of assets and wealth as well as simple records of purchases and sales. A system was
developed that could not only deal with different types of business transactions, but was
also self-checking - the double entry system. This system, first described by Pacioli in
1494, still forms the basis of bookkeeping and accounts as we know them today.
Questions!! (1)
a) Where does the term ‘auditor’ come from?
b) What sort of simple accounts are still used by small organisations, such as clubs,
today?
c) What system was developed to deal with different types of business transactions?
d) Who described this system and in what year?

BASIC ACCOUNTING
Session 2 - The Principles of Accounting
The Purpose of Accounting
In order to produce figures at all, it is necessary to keep

records of all the relevant financial transactions.
The transactions are summarised to give financial reports.
These show either the results over a period of time: the
amount saved, or the situation at a point in time (e.g. the
value of a house at a particular date).
A definition of the purpose of accounting might therefore be:
“To provide records of all financial transactions, so that the

financial position of a business and its relationship with the owners and interested outside
parties can be determined.”
The basic transaction recording process is the bookkeeping method. The basic books of
account are divided into ledgers, e.g. sales ledger, purchases ledger and nominal ledger.
The name derives from the days when separate books were kept for each type of
transaction. Now the entries are usually entered into a computer for all but the smallest
companies, but the ledger structure is maintained within the system. Within SunSystems
examples are Ledger Accounting, Sales Order Processing and Purchase Order Processing.
It’s probably best to start with an example using personal finance. Most of us are concerned
to manage our affairs so that our normal expenditure is covered by our wages or salary. In
other words, we would like to make a Profit - a surplus of income over expenditure - over a
period of time (week, month, year). Life is made more complicated by the fact that, as well
as income and expenditure, we may have some assets - possessions of value - or some
other form of wealth.
We shall use an illustration using two people, one called Charlie and the other called John.
Charlie and John work together and have identical income and their spending pattern is
almost identical. The one major difference between them is that Charlie rents a council flat,
whereas John is buying a house. Their income and expenditure each month is as follows:
Monthly Transactions
Charlie John
£ £
Income
Take home pay 500 500
Expenditure
Property costs (including rates, services etc.) 150 200
Other expenditure (food, clothes, car, etc.) 300 300
----- -----
Monthly surplus 50
=== ===
As things stand in the average year, Charlie generates a surplus of 12 x £50 = £600, which
he puts into his building society account. John on the other hand, saves nothing. Who do
you think is better off?
Answer:___________________________________________________________________
It certainly looks as though Charlie is the wealthier at the moment, but let’s take another
look. If we inspect their relative cash positions as they exist at the moment, we discover the
following:

BASIC ACCOUNTING
Current cash positions

Charlie John
£ £
Accumulated savings 5,000 -
Although they are lodged in the building society, Charlie’s savings can be classified as cash
as they are easily convertible. So, who is better of on a cash basis?
Answer:___________________________________________________________________
Again, Charlie appears to be in the better position. Finally, let us judge them by the assets
they own (ignoring the contents of their properties - televisions, furniture and so on - which
are roughly comparable).
Assets owned at the present time

Charlie John
£ £
Second-hand car 1,000 1,000
Cash (in building society) 5,000 -
Property Value - 30,000
Less: Amount owing on mortgage - (10,000)
_____ 20,000
Total Assets 6,000 21,000
Now which one do we consider to be the better off?
Answer__________________________________________________________________
From this example you can see that there are several different ways of measuring finance.
Charlie, for example, has a greater annual surplus than John, and much better cash
resource. John, on the other hand, could be called the wealthiest, because, given time, he
could realise much greater value than Charlie. Although this example relates to individuals,
the principles will apply to any financial undertaking. As you can see, all of the views are
correct. We have just looked at them from different angles.

BASIC ACCOUNTING
Session 3 - Basic Terminology
Finance can mean either the management of money, as in the ‘finance department’; or a
source of money; as in ‘financing’ a car purchase.
The term accounts is often used interchangeably with the term finance - the finance
department is often called the accounts department. Strictly speaking, the term accounts
refers to the books of accounts that form the basic accounting records of a business.
A debit can be money owed to us, the recording of an asset in a balance sheet account or a
payment made (money spent) that will be attributable to Profit and Loss. These payments
usually involve the running expenses of the business.
A credit is money owed by us to others, income or reserves of the company.
Questions!! (2)
Mark each of the following transactions as either a debit (D) or a credit (C)
a) An electricity bill due for payment ____

b) An invoice outstanding to us for sales of SunSystems ____
c) A bank overdraft ____
d) Components purchased for Porting and Environment ____
e) An office block in Hammersmith purchased ____
f) VAT owed to HM Customs and Excise ____
g) Cash sales made ____
The whole of financial accounting can be based on The Accounting Equation.....
Assets = Capital + Liabilities
The resources possessed by the firm are known as assets and some of these resources
will have been supplied by the owner of the business. The total amount supplied by the
owner is called capital. If some of the resources have been supplied by someone other
than the owner, the debts owed are called liabilities.
The totals of each side of the equation will always equal one another and this will be true no
matter how many transactions are entered into. The actual assets, capital, and liabilities
may change, but assets will always equal the total of capital and liabilities.
Assets consist of property of all kinds, such as buildings, machinery, stocks of goods and
also benefits such as debts owing by customers, and the amount of money in the bank
account.
Liabilities consist of money owing for goods supplied to the firm and for expenses, also for
loans made to the firm.
Capital is often called the owner’s equity or net worth. It is the amount of money that the
business owes to the owner / shareholder.

BASIC ACCOUNTING
Wealth represents the possessions or assets of a company or individual. The amount of
wealth created in a period is called the retained Profit. Profit, therefore, represents both:
• The sum remaining from trading and investment after all debts have been paid. That is,
after trading expenses, interest payable, taxation, dividends to investors and all other
costs have been paid, and
• The difference between wealth at the start of a period and wealth at the end of a period.
If a company has less wealth at the end of a period than it started out with, the company has
made a Loss in that period.
Questions!! (3)
1. Which of the following statements is wrong?
a) Assets - Capital = Liabilities

b) Liabilities + Capital = Assets
c) Liabilities + Assets = Capital
d) Assets - Liabilities = Capital
2. Which of the following is not an asset?
a) Buildings
b) Cash Balance
c) Debtors
d) Loan from B. Treive
3. Which of the following is a liability?
a) Machinery
b) Creditors for goods
c) Motor Vehicles
d) Cash at bank
4. Which of the following is wrong?
Assets Liabilities Capital

£ £ £
a) 7,850 1,250 6,600
b) 8,200 2,800 5,400
c) 9,550 1,150 8,200
d) 6,540 1,120 5,420
The accounts are reported in a variety of statements, one of which is the Balance Sheet.
Although this is not the first accounting record to be made, it is a good place to start learning
about double entry book keeping.

BASIC ACCOUNTING
Session 4 - Double Entry Book Keeping
Double entry book keeping means that each transaction is recorded twice - as a debit and a
credit. The double entry system has an account (details of transactions for that item) for
every asset, liability and for capital. The advantage of each entry being made twice is that
the value of credits should equal the total of debits at the end of a given period. This is a
basic test of accuracy. The statement of total debits and total credits is known as the Trial
Balance. From the Trial Balance we can carry on and create the Balance Sheet and the
Profit and Loss Account. For our purposes, we will start at the Balance Sheet.
On 1st May 1993, B. Blake started in business and deposited £5,000.00 into a bank account
specially opened for the business.
B. Blake
Dr. Balance Sheet as at 1 May 1993 Cr.
------------------------------------------------------------------------------------------------------------------------
Assets £ £
Cash at bank 5,000 Capital 5,000
------- -------
5,000 5,000
On 3rd May 1993, Blake buys a building for £3,000 and pays for it by cheque. The effect of
this is that the cash at bank is decreased and a new asset, buildings appears.
B. Blake
Balance Sheet as at 3 May 1993
------------------------------------------------------------------------------------------------------------------------
Assets £ £
Buildings 3,000 Capital 5,000
Cash at bank 2,000
------- -------
5,000 5,000
On 6th May 1993, Blake buys some goods for £500 from D Smith , and agrees to pay for
them some time within the next two weeks. The effect of this is that a new asset, stock of
goods is acquired, and a liability for the goods is created. A person to whom we owe money
is called a creditor.
B. Blake
------------------------------------------------------------------------------------------------------------------------
Assets £ Capital and Liabilities £
Stock of goods 500 Creditor 500
Cash at bank 2,000
------- -------
5,500 5,500
On 10th May 1993, goods which had cost £100 were sold to J Brown of the same amount,
the money to be paid later. The effect is a reduction in the stock of goods and the creation
of a new asset. A person who owes the firm money is known as a debtor. The balance
sheet now appears as:

BASIC ACCOUNTING
B. Blake
------------------------------------------------------------------------------------------------------------------------
Debtor 100
Cash at bank 2,000
------- -------
5,500 5,500
On 13 May 1993, goods which had cost £50 were sold to D. Daley for the same amount,
Daley paying for them immediately by cheque. Here one asset, stock of goods, is reduced,
while another asset, bank, is increased. The balance sheet now appears:
B. Blake
------------------------------------------------------------------------------------------------------------------------
Debtor 100
Cash at bank 2,050
------- -------
5,500 5,500
On 15 May 1993, Blake pays a cheque for £200 to D Smith in part payment of the amount
owing. The asset of bank is therefore reduced, and the liability of the creditor is also
reduced. The balance sheet now appears;
B. Blake
------------------------------------------------------------------------------------------------------------------------
Debtor 100
Cash at bank 1,850
------- -------
5,300 5,300
J. Brown, who owed Blake £100, makes a part payment of £75 by cheque on 31 May 1993.
The effect is to reduce one asset, debtor, and to increase another asset, bank. This results
in a balance sheet as follows:
B. Blake
------------------------------------------------------------------------------------------------------------------------
Debtor 25
Cash at bank 1,925
------- -------
5,300 5,300
Every transaction affects two items. Sometimes it has changed two assets by reducing one
and increasing the other. Other times it has reacted differently. A summary of the effect of
transactions upon assets, liabilities and capital is shown below.

BASIC ACCOUNTING
Example of Transaction
Debit Credit
1. Buy goods on credit. Increase Asset Increase Liability
(Stock of goods) (Creditors)
2. Buy goods by cheque. Increase Asset Decrease Asset
(Stock of Goods) (Bank)
3. Pay creditor by cheque. Decrease Liability Decrease Asset
(Creditors) (Bank)
4. Owner pays more capital into the Increase Asset Increase Capital
bank. (Bank)
5. Owner takes money out of the Decrease Capital Decrease Asset
business bank for his own use. (Bank)
6. Owner pays creditor from private Decrease Liability Increase Capital
money outside the firm. (Creditors)
Questions!! (4)
Which of the following statements is correct?
Effect upon
Assets Liabilities
a) We paid a creditor by cheque +Bank - Liabilities
b) A debtor paid us £90 in cash + Cash + Debtors
c) J Hall lends us £500 (cheque) + Bank - Loan from Hall
d) Bought goods on credit + Stock + Capital
2. Complete the gaps in the table.
Assets Liabilities Capital

----------------------------------------------------------------------------
£ £ £
a) 12,500 1,800 _____
b) 28,000 4,900 _____
c) 16,800 ____ 12,500
d) 19,600 ____ 16,450
e) _____ 6,300 19,200
f) _____ 11,650 39,750
3. Identify which items are assets (A) and which items are liabilities (L) in the following list:
a) Office Machinery __
b) Loan from C. Shirley __
c) Fixtures and fittings __
d) Motor Vehicles __
e) Owing of goods __
f) Bank Balance __
4. Which of the following are shown under the wrong heading?
Assets Liabilities
-----------------------------------------------------------------------------
Loan from C. Smith __ Stock of goods __
Cash in hand __ Money owing to bank __

BASIC ACCOUNTING
Machinery __
Creditors __
Premises __
Motor Vehicles __
5. A. Smart sets up a new business. Before he actually sells anything he has bought
Motor Vehicle £2,000, Premises £5,000, Stock of Goods £1,000. He did not pay in full
for his stock of goods and still owes £400 in respect of them. He had borrowed £3,000
from D. Bevan. After the events just described, and before trading starts, he has £100
cash in hand and £700 cash at bank. Calculate the amount of his capital.
________________________________________________________________________
_________________________________________________________________________
_______________________________________________________________________
________________________________________________________________________
_________________________________________________________________________
_______________________________________________________________________
________________________________________________________________________
6. Draw up A. Foster’s balance sheet from the following as at 31 December 1993.
£
Capita 23,750
Debtors 4,950
Motor Vehicles 5,700
Creditors 2,450
Fixtures 5,500
Stock of goods 8,800
Cash at bank 1,250

BASIC ACCOUNTING
_______________________
____________________________________________
Assets £ Liabilities £
_____________________ _______ ________________________ _______

_____________________ _______ ________________________ _______
_____________________ _______ ________________________ _______
_____________________ _______ ________________________ _______
_____________________ _______ ________________________ _______
_____________________ _______ ________________________ _______
_____________________ _______ ________________________ _______
======= =======
Transactions will increase or decrease assets, liabilities or capital. The double entry rules
for accounts are:
Accounts To record Entry in the accounts
Assets an increase Debit

a decrease Credit
Liabilities an increase Credit
a decrease Debit
Capital an increase Credit
a decrease Debit
We will be recording the entries on ‘T accounts’. T Accounts are so called because you split
your page in two and put a title at the top, so it looks like a ‘T’! Who said accounting was
boring?! The left hand side is called the debit side and the right hand side is called the
credit side. This method is useful because you have to do both a credit and a debit entry, so
you can check your accounts balance at each stage of the exercise.
Example of how double entry works.
The entries for the first period are as follows:
1. £10,000 invested by the owner

2. Workshop rented during period £1,000
3. Materials purchased and used £2,000
4. Wages paid £2,000
5. Cash sales £6,000
The double entry treatment would be:

BASIC ACCOUNTING
Description Debit Credit
£ £
1. Debit cash book with cash invested 10,000
Credit owners capital account 10,000
2. Rent (Profit and Loss account) 1,000

Cash book (payment out) 1,000
3. Material (Profit and Loss account) 2,000

4. Wages (Profit and Loss account) 2,000

5. Sales income (Profit and Loss account) 6,000

Cash book (receipt in) 6,000
Referring back to the accounting equation:
Assets = Liabilities + Capital
To increase each item Debit Credit Credit
To decrease each item Credit Debit Debit
The double entry rules for liabilities and capital are the same, but they are exactly the
opposite as those for assets. This is because assets are on the opposite side of the
equation and therefore follow opposite rules. In the accounts the rule will appear as:
Any asset account Any liability account

----------------------------------------------- -------------------------------------- -
£ £ £ £
Increases Decreases Decreases Increases
+ - - +
Now we can enter some transactions:
The proprietor starts the firm with £1,000 in cash on 1 August 1993.
Effect Action
a) Increases the asset of cash in the firm Debit the cash account
b) Increases the capital Credit the capital account

BASIC ACCOUNTING
These are entered:
Cash
------------------------------------------------------------------------------------------------------------------------
£ £
1 August 1993 Capital 1,000
(Transaction (Opposite (Value)
Date) Entry)
Capital
------------------------------------------------------------------------------------------------------------------------
£
1 August 1993 Cash 1,000
Questions!! (5)
1. Complete the following table:
Account to be credited Account to be debited

a) Bought motor van for cash ____________________________________________
b) Bought office machinery on credit from J Grant and Son_____________________
c) Introduced capital in cash ____________________________________________
d) A debtor, J Beach, pays us by cheque ___________________________________
e) Paid a creditor, A.Barrett, in cash ______________________________________
2. Complete this table:

Account to be Account to be
debited credited
a) Bought machinery on credit from

A Jackson & Son
b) Returned machinery to A Jackson
and Son
c) A debtor, J Brown pays us in cash
d) J Smith lends us money, giving it to
by cheque
e) Sold office machinery for cash
3. Write up the asset and liability accounts in the records of D Coy to record these
transactions. Remember to enter the transaction date, where the opposite entry is and,
of course, the value.
1992
May 1 Started business with £1,000 cash
“ 3 Bought a motor lorry on credit from Speed and Sons for £698
“ 14 Bought office machinery by cash for £60
“ 31 Paid Speed & Sons the amount owing to them £698 in cash

BASIC ACCOUNTING
Capital
------------------------------------------------------------------------------------------------------------------------
£ £
Cash
------------------------------------------------------------------------------------------------------------------------
£ £
Speed and Sons

------------------------------------------------------------------------------------------------------------------------
£ £
Motor Lorry
------------------------------------------------------------------------------------------------------------------------
£ £
Office Machinery
-----------------------------------------------------------------------------------------------------------------------
£ £
4. Write up the asset, liability and capital accounts to record the following transactions in
the records of G Powell. Again, remember to enter the transaction details. You may
find it useful to number each transaction as you go, so you can keep track of your
entries.
1993
July 1 Started business with £2,500 in the bank
July 2 Bought office furniture by cheque £150
July 3 Bought machinery £750 on credit from Planes LTD.
July 5 Bought a motor van by cheque £600
July 8 Sold some of the office furniture for £60 on credit to J Walker and Sons
July 15 Paid the amount owing to Planes Ltd £750 by cheque
July 23 Received the amount due from J Walker £60 in cash
July 31 Bought more machinery by cheque £280

BASIC ACCOUNTING
Bank
------------------------------------------------------------------------------------------------------------------------
£ £
Capital
------------------------------------------------------------------------------------------------------------------------
£ £
Office Furniture
------------------------------------------------------------------------------------------------------------------------
£ £
Machinery
------------------------------------------------------------------------------------------------------------------------
£ £
Planes Ltd
------------------------------------------------------------------------------------------------------------------------
£ £
Motor Van
------------------------------------------------------------------------------------------------------------------------
£ £
J Walker
------------------------------------------------------------------------------------------------------------------------
£ £
Cash
------------------------------------------------------------------------------------------------------------------------
£ £

BASIC ACCOUNTING
Session 5 - The Effect Of Profit And Loss On Capital
By Profit we mean the excess of revenues over expenses for a particular period. Revenues
consist of the monetary value of goods and services that have been delivered to customers.
Expenses consist of the monetary value of the assets used up in obtaining these revenues.
You can see the effect of Profit on capital by this example:
1. On 1 January the assets and liabilities of a firm are:
Assets: Motor van £500, Fixtures £200, Stock £700, Debtors £300, Cash at bank
£200
Liabilities: Creditors £600
The capital is found by the formula, Assets - Liabilities = Capital.
£500+£200+£700+£300+£200-£600=£1,300
Capital = £1,300
2. During January the whole of the £700 stock is sold for £1,100 cash. On the 31 January
the assets and liabilities have become:
Assets: Motor Van £500, Fixtures £200, Stock - , Debtors £300, Cash at Bank £1,300.
Liabilities: Creditors £600
Assets - Liabilities = Capital
£500+£200+£300+£1,300-£600 = £1,700
Profit therefore affects the capital like this:
Old capital + Profit = New capital.

£1,300 + £400 = £1,700
Capital = £1,700
A Loss would have reduced the capital: Old Capital - Loss = New Capital.
So to be able to change the capital account, it will have to be possible to calculate Profits
and Losses.
Accounts will be needed to collect together the expenses and revenues pending the
calculation of Profit, e.g. Rent account, wages account, postage account.
We now have to decide which side of the records revenues and expenses are to be
recorded. Assets involve expenditure by the firm and are shown as debit entries. Expenses
also involve expenditure by the firm and are therefore also recorded on the debit side of the
books. When we talk of assets in a Profit and Loss capacity, we are referring to
expenses. Although this may seem confusing, the expenses are the smaller assets used up
in the running of the business. Assets may therefore be seen to be expenditure of money
which has been used up in the running of the business and for which there is no benefit
remaining at the date of the balance sheet. Examples of running expenses can be
stationery and salaries. This is unlike the balance sheet assets, which are usually larger,
both in respect of physical size and of monetary value! Buildings, vehicles and bank
balances are examples of these larger assets.
Revenue is the opposite of expenses and therefore appears on the opposite side to
expenses. Revenue accounts appear on the credit side of the books. Revenue also
increases Profit, which in turn increases capital. Pending the periodical calculation of Profit,

BASIC ACCOUNTING
revenue is collected together in appropriately named accounts and until it is transferred to
the Profit calculations it will need to be shown as a credit.
A couple of examples will demonstrate the double entry required.
1. A rent of £20 is paid in cash
a) the asset of cash is decreased. This means crediting the bank account to show the
decrease of the asset,
b) The total of the expenses of rent is increased. As expense entries are shown as
debits, and the expense is rent, so the action required is the debiting of the rent
account.
Summary Credit the cash account with £20

Debit the rent account with £20.
Questions!! (6)
1. Given the following, what is the amount of Capital?
Assets: Premises £20,000, Stock £8,500, Cash £100. Liabilities: Credits £3,000,
Loan from A. Adams £4,000
a) £21,000
b) £21,600
c) £32,400
d) None of the above
2. Which of the following is correct?
a) Profit does not alter capital

b) Profit reduces capital
c) Capital can only come from Profit
d) Profit increases capital
3. Complete the following table:

Account to be Account to be
Debited Credited
a) Paid rent by cash __________________________________

b) Paid wages by cash __________________________________
c) Rent received by cheque __________________________________
d) Received by cheque refund of insurance
previously paid __________________________________
e) Paid general expenses by cash __________________________________

BASIC ACCOUNTING
5. Enter the following transactions in the necessary accounts in double entry. Remember
to enter the transaction details, and number the transactions if you feel it will help you.
1988
Jan 1 Started business with £200 in bank
Jan 2 U Surer lent us £1,000 giving us the money by cheque
Jan 3 Bought goods on credit £296 from T Parkin
Jan 6 Cash sales £105
Jan 8 Paid wages in cash £18
Bank
------------------------------------------------------------------------------------------------------------------------
£ £
Cash
------------------------------------------------------------------------------------------------------------------------
£ £
Purchases
------------------------------------------------------------------------------------------------------------------------
£ £
T Parkins
------------------------------------------------------------------------------------------------------------------------
£ £
Wages
------------------------------------------------------------------------------------------------------------------------
£ £
Capital
------------------------------------------------------------------------------------------------------------------------
£ £
U Surer
------------------------------------------------------------------------------------------------------------------------
£ £
Sales
------------------------------------------------------------------------------------------------------------------------
£ £

BASIC ACCOUNTING
Session 6 - Balancing Off Accounts
So far, all we have looked at is the entries in the books of accounts, the transactions
themselves. Every now and then we will want to look at the accounts and see what they are
telling us.
The most obvious reason for doing this is to find out how much our customers owe us in
respect of goods we have sold to them. Most firms tend to do this at the end of a month.
The account for Mr Knight will be a useful example here.
D Knight
------------------------------------------------------------------------------------------------------------------------
£ £
1 August 1993 Sales 158 28 August 1993 Cash 158
15 August 1993 Sales 206
Knight still owes the business £206 + £118 = £324 at the end of August. The business will
therefore start the next months business with this amount owing to it. To show that our firm
is carrying these outstanding items from one period to the next, the ‘balance’ on each
account is found. The ‘balance’ is the accounting term meaning the arithmetical difference
between the two sides of an account.
To balance off an account:
1) First add up the side of the account having the greatest total.
2) Second, insert the difference (the balance) on the other side of the account so as to
make both sides equal. Make sure the totals are level on each side of the account.
3) The balance has now been entered in the period which has finished, now we have to
enter it on the other side of the books to ensure that double-entry of the item is carried
out. This entry is made on the next line under the totals. If we think in terms of
SunSystems, this is where an account is a Balance forward account or an Open items
account. Going back to D Knight we can see the change.

BASIC ACCOUNTING
D Knight
-----------------------------------------------------------------------------------------------------------------------
£ £
1 August 1993 Sales 158 28 August 1993 Cash 158
15 August 1993 Sales 206 31 August 1993 Bal c/d 324
----- -----
482 482
1 Sept. 1993 Balance b/d 324
If there is only one entry it is unnecessary to enter the total. A double line ruled under the
entry will mean that the entry is its own total and will show that the account has been closed
off for this period.
Depending on which side of the account the balance brought down sits, will decide its
name. If it is on the debit side, it is a debit balance and if it is on the credit side, it is a credit
balance.
Questions!! (7)
1. What is the balance on the following account on 31 May 1985?
C. De Freitas
-------------------------------------------------------------------------------------------------
£ £
May 1 Sales 205 May 17 Cash 300
May 14 Sales 360 May 28 Returns 50
May 30 Sales 180
a) A credit balance of £395

b) A debit balance of £380
c) A debit balance of £395
d) A nil balance on the account
2. What would the balance on the account of C De Freitas be in No. 1 above on 19 May
1985?
a) A debit balance of £265

b) A credit balance of £380
c) A credit balance of £445
d) A credit balance of £265

BASIC ACCOUNTING
Session 7 - The Trial Balance
All items recorded in all the accounts on the debit side should equal in total all the items
recorded on the credit side of the books. To see if the two sides are in balance, we
periodically draw up a Trial Balance. A trial balance is a list of balances only, arranged as
to whether they are debit or credit balances. For example:
Trial Balance as on 31 May 1986
Dr. Cr.
£ £
Purchases 309
Sales 255
Returns out 15
Returns in 16
A Lyon and son 141
M Spencer 29
Cash 57
---- ----
411 411
It may appear that the balancing of a trial balance proves that the books are correct. This is
not the case, it mearly means that certain types of errors have not been made. For
example, with a sales invoice, we would expect to debit the debtor account and credit the
sales account. This would be in balance and correct. However, if a new clerk joined and
mistakenly entered the journal (a record of a transaction and, in SunSystems, a mechanism
to enter transactions into the package) the wrong way round, we would have a credit entry
on the debtor account and a debit entry on the creditor account. Clearly this is wrong, but
the Trial Balance would not show this because the two sides are in balance. Unfortunately,
there is no easy way to get over this. The use of journal presets in SunSystems would go
some way to ensuring accuracy as would good in-house procedure notes within each
company.
Questions!! (8)
1. Which of the following best describes a Trial Balance?
a) Shows the financial position of a business

b) It is a special account
c) Shows all the entries in the books
d) It is a list of balances on the books
2. It is true that the trial balance totals should agree?
a) No, there are sometimes good reasons why they differ

b) Yes, except where the trial balance is extracted at the year end
c) Yes, always
d) No, because it is not a Balance Sheet

BASIC ACCOUNTING
3. Enter up the necessary accounts for the month of May for Big Profit Ltd. from the
following details and extract a trial balance as at 31 May 1993. Remember to give the
transaction details on the T accounts and to number the transactions if it helps you.
1993
May 1 Started firm with capital in cash of £250
May 2 Bought goods on credit from C Mendez £87
May 4 Sold goods on credit to H Spencer £176
May 6 Paid rent by cash £12
May 15 Paid carriage by cash £23
Trial Balance of Big Profit Ltd. as at 31 May 1993
Dr. Cr.
£ £
Cash _____________________________
Purchases _____________________________
Rent _____________________________
Spencer _____________________________
Carriage _____________________________
Capital _____________________________
Sales _____________________________
Mendez _____________________________
==========================

BASIC ACCOUNTING
Cash
------------------------------------------------------------------------------------------------------------------------
Purchases
------------------------------------------------------------------------------------------------------------------------
Rent
------------------------------------------------------------------------------------------------------------------------
Bank
-----------------------------------------------------------------------------------------------------------------------
Spencer
------------------------------------------------------------------------------------------------------------------------
Carriage
------------------------------------------------------------------------------------------------------------------------
Capital
------------------------------------------------------------------------------------------------------------------------

BASIC ACCOUNTING
Sales
------------------------------------------------------------------------------------------------------------------------
Mendez
------------------------------------------------------------------------------------------------------------------------

BASIC ACCOUNTING
Session 8 - Trading And Profit And Loss Accounts
The earning of Profit is usually one of the main reasons for setting up a business and the
proprietor will want to know how much Profit has been made for various reasons. For
example, he will want to be able to compare how much actual Profit he made compared to
the Profit he thought he would make. He may also want to know his Profits to help obtain a
bank loan or for income tax purposes.
Profits are calculated by drawing up a Trading and Profit and Loss account. One of the
most important uses of the Trading and Profit and Loss account is comparing the results
obtained with the results expected. Many businesses attach a great deal of importance to
their gross Profit percentage. This is the amount of Profit made, before deducting
expenses, for every £100 of sales. So that this can be easily deduced from the Profit
calculations, the account is split into two handy sections. The gross Profit is found from the
Trading account and the net Profit is found when the Profit and Loss account is prepared.
Gross Profit is the excess of sales over the cost of goods sold in the period. By taking the
figure of sales less the cost of goods sold, it can be seen that the accounting custom is to
calculate a trader’s Profits only when the goods have been disposed of and not before.
Net Profit is what remains after all other costs used up in the period have been deducted
from the gross Profit and includes any other revenue other than that from sales (discounts
received, interest earned for example).
B Swift
Trial Balance as at 31 December 1993
Dr Cr.
------------------------------------------------------------------------------------------------------------------------
£ £
Sales 3,850
Purchases 2,900
Rent 240
Lighting expenses 150
General Expenses 60
Fixtures and fittings 500
Debtors 680
Creditors 910
Bank 1,510
Cash 20
Drawings 700
Capital 2,000
--------- ---------
6,760 6,760
How do we do it ?
The first task is to draw up the Trading account using the above information. However, we
instantly hit a problem. Purchases will only equal cost of goods sold if there is no stock
remaining at the 31 December 1993. So Mr Swift would have to do a stock take at the end
of the day on the 31 December 1993 and calculate their value.
Cost of Goods sold = Purchases - Unsold stock.
Mr Swift finds he has £300 of unsold stock. The double entry would be to debit the sales
account and transfer the balance to the Trading account and credit the purchases account
and transfer the balance to the Trading account. At this point you would need to open a
stock account for the unsold stock and debit the asset of stock to it. The credit for the
closing stock should be in the Trading account, completing the double entry. We can then
carry on and draw up the Profit and Loss account.

BASIC ACCOUNTING
The Trading and Profit and Loss account will appear as follows:
B Swift
Trading And Profit And Loss Account For The Year Ended 31 December 1985
£ £
Purchases 2,900 Sales 3,850
Less Closing Stock 300
------
Cost of goods sold 2,600
Gross Profit c/d 1,250
------ -------
3,850 3,850
==== ====
Gross Profit b/d 1,250

Rent 240
Lighting Expenses 150
General Expenses 60
Net Profit 800
------- --------
1,250 1,250
==== =====
Please note that not all of the items in the trial balance have been used in the Trading and
Profit and Loss account. The remaining balances are assets or liabilities or capital, they are
not expenses or sales. These are used when the Balance Sheet is drawn up.
Questions!! (9)
1. Gross Profit is:
a) excess of sales over cost of goods sold
b) Sales less purchases
c) Cost of goods sold + opening stock
d) Net Profit less expenses of the period
2. Net Profit is calculated in the:
a) Trading Account
b) Profit and Loss account
c) Trial Balance
d) Balance Sheet
Questions continue over the page…

BASIC ACCOUNTING
3. From the following trial balance prepare a Trading and Profit and Loss Account.
Trial Balance as at 31 December 1993

Dr Cr.
------------------------------------------------------------------------------------------------------------------------
£ £
Sales 18,462
Purchases 14,629
Salaries 2,150
Motor Expenses 520
Rent 670
Insurance 111
General Expenses 105
Premises 1,500
Motor Vehicles 1,200
Debtors 1,950
Creditors 1,538
Cash at Bank 1,654
Cash in hand 40
Drawings 895
Capital 5,424
------- --------
25,424 25,424
Stock at 31 December 1993 was £2,548.
Trading and Profit and Loss Account for the period ending 31 December 1993
£ £
_____ ______
_____
--------
_____
_____
-------- ----------
===== ======
_____
_____
_____
_____
_____
_____
_____
-------- ----------
===== ======

BASIC ACCOUNTING
Session 9 - The Balance Sheet
After the Trading and Profit and Loss Accounts have been completed, a statement is drawn
up in which the remaining balances in the books are arranged according to whether they are
asset, liability or capital balances. This statement is called a Balance Sheet. The assets
are shown on the left hand side and the liabilities on the right hand side.
The Balance Sheet is not part of the double entry system, whereas the Trading and Profit
and Loss Account is. The Balance Sheet is a list of the balances remaining after the
Trading and Profit and Loss Accounts have been prepared. So, items are not transferred
from accounts to the Balance Sheet, and accordingly entries are not made in the various
accounts when a Balance Sheet is drawn up.
Using the example of B Swift that we worked on for the Trading and Profit and Loss
Account, we can now go on and draw up the Balance Sheet.
B Swift
Balance Sheet as at 31 December 1993
Fixtures and fittings 500 Capital 2,000
Stock 300 Less drawings (700)
Debtors 680 -------
Bank 1,510 1,300
Cash 20 Profit 800
Creditors 910
------- -------
3,010 3,010
All of these balances still remain in the accounts, no entries were made in the accounts for
the purpose of drawing up the Balance Sheet
Questions!! (10)
1. Which is the BEST definition of a Balance Sheet?
a) An account proving the books balance

b) A record of closing entries
c) A listing of balances
d) A statement of assets
2. Draw up the Balance Sheet from the Trial Balance and Trading and Profit and Loss
Account used for the last series of questions.

BASIC ACCOUNTING
------------------------ ------------------------
------------------------ ------------------------
----------------------- ------------------------
----------------------- ------------------------
----------------------- ------------------------
----------------------- ------------------------
============== ==============

BASIC ACCOUNTING
APPENDIX I - Glossary of Terms
Account
A statement showing the amount of money due by one party to another.
Accruals
Expenses which are known, but which are not due until the end of a specific period
of time.
Assets
See Fixed Assets and Current Assets.
Balance Sheet
A statement showing, in the form of a list, the value of a company’s assets and
liabilities at a particular date. The Balance Sheet of a company must give a true
and fair view of the company’s financial position.
Bank Reconciliation
A statement used to achieve agreement between the bank statement and the bank
account in the nominal ledger.
Bank Statements
Details issued by a bank to customers holding current accounts, showing the
amounts received and paid out on their behalf.
Budgets
Estimates of income and expenditure which are planned by an organisation for a
specified future period.
Capital
Initially capital is the funding that is needed to start a business. The funding is
needed to provide for initial expenditure, such as renting or purchasing premises,
paying for raw materials and wages and so on. The money to finance a business
may come from three places:
• from the owners (like own savings)
• from bank loans or similar lenders
• once the business is established, from Profits retained in the business
Capital Expenditure
Capital Expenditure is expenditure on fixed assets.
Capital Reserves
A capital reserve is retained Profit that has been retained because of a legal
restriction on the amount of Profit that can be paid out.
Cash Book
A basic accounts book in which all of the cash receipts and payments are recorded.
Cash Flow
The regular supply of cash which is necessary to meet the weekly or monthly
financial obligations of a firm.
Control Account
An account where a grand total is held of a number of individual ledger totals, for
example, debtor accounts. It is used for checking purposes.
Current Assets
These are funds used for the everyday operation of the business in terms of:
• raw materials, components and packaging for the production process
• goods and services purchased to maintain the fixed assets and allow the
process to run
• labour to operate the process and run the business
If we stop our company at any moment in time, we are likely to have working capital
invested in:

BASIC ACCOUNTING
• Stocks
∗ raw materials and components
∗ work in progress (W.I.P) particularly with long processes such as with
aerospace projects
∗ finished Goods
• Trade debtors (money owed by customers)
• Bank and cash (any surplus funds).
The more money we have tied up in these areas the less we have available to
invest in the growth of fixed assets. It is important therefore to keep stocks and
debtors as low as possible.
Current Liabilities
In the course of everyday operations, we not only invest funds as shown above, but
we also create liabilities - sums of money that we owe. If we buy goods and
services on credit we owe our suppliers or trade creditors. Other creditors may
include sums owed to the tax man and the shareholders. Current liabilities
represent a reduction in the need for working capital.
Creditors
A party to whom money is owed as a result of a credit transaction. The person who
owes the money is the debtor.
Credit
An entry which signifies payment received or money owed by us to others.
Debenture
A commercial loan similar to a mortgage.
Debit
An entry which records a sum of money owed to us or money spent (a payment
made).
Debtor
A person or organisation that owes money.
Depreciation
A regular charge against income for the decline in value of assets.
Dividends
Profit paid out to shareholders, their equivalent to interest.
Excess of income over expenditure
This is the term used to describe Profit in non-Profit making organisations, such as
charities.
Fixed Assets
Fixed assets are those assets purchased and owned by the business. They
represent the means be which the company earns its Profits. The term fixed is
used because they are not for sale in the normal course of business. They will
include items such as land, buildings, plant and machinery, office equipment, motor
vehicles and computers. Such items are tangible fixed assets because they can be
seen and touched. There is another type of fixed asset called intangible fixed
assets. The most common intangible fixed asset is goodwill.
Goodwill
Goodwill often arises on the purchase of a business. In addition to tangible fixed
assets, a further sum may be paid out for the goodwill generated by the previous
owner. In other words, a value is put on the efforts of the previous owner to build up
trade and encourage custom, which obviously has a value to the new owner.
Investments
When a company is established, it may be in a position where it cannot Profitably
invest more money within the business as it stands. The directors of the business
will then look outside the business to invest funds generated within the business. If
the money surplus is likely to be short term (that is, the money will be required by
the business again in the near future) short term investments will be made which
can easily be reconverted back to cash as the need arises. If the surplus is
continuing and long term, the directors will want to invest for the long term to get the
most Profitable return on investment. Investments considered might include:
• buying shares in other companies
• purchasing other companies outright
• making long term loans

BASIC ACCOUNTING
• investing in government stocks.
Invoice
A business document sent by the seller to the buyer, giving full details of the goods
or services sold, such as quantity, quality, price and delivery.
Journal
A day book which is used to record transactions as soon as they occur. It is usually
divided into specific areas such as sales, purchases and cash.
Ledgers
The principal record book used in business to summarise transactions concerning
its creditors and debtors and other assets and liabilities.
Liabilities
Sums of money that we owe. See also current liabilities and long term liabilities.
Long Term Liability
This type of liability is usually required when additional funding for the business is
required. If the owners do not wish to issue further shares and so divide ownership
further, they can arrange commercial loans. These loans may be from banks, from
mortgages on properties, or debentures. A guarantee is usually required. In a new
company this may be a personal guarantee from the owner (which extends their
liability beyond the limit of their share investment). In a mature company, the loans
are normally secured against the company assets. These are called charges on
assets and give priority to the lender in terms of recovering his loan should the
business fail.
Limited Liability
The word ‘limited’ means that the owners of the company are only liable for the
debts of the company up to the value of their share investment. In other words, the
most a shareholder can lose, if a venture or business fails, is the share capital he
has invested in the business.
Loss
An excess of expenditure over income in a period. A decrease in the wealth of a
company.
Net Current Assets
Current assets - current liabilities = net current assets. Also called Working Capital.
Order
A business document ordering goods or services. It will specify the types and
quantities of goods, although not necessarily the charges.
Owners’ Equity
This is the same as share capital.
Petty Cash
A small fund which is issued to cover all the minor expenses of a business, e.g.
minor travel expenses, postage stamps and small items of stationery.
Prepayments
Expenses that are not due until the end of the period, but have been paid early.
Profit
An excess of income over expenditure in a period. An increase in a company’s
wealth over a period of time.
Profit and Loss Account
A record compiled at regular intervals of all the Losses and expenses (debit side),
balanced on the credit side by the items of gain or Profit, the objective being to
calculate the net Profit of a business.
Regulatory bodies
These are organisations who set standards for accountants and accountancy
bodies. They will issue documents on recommended practice for certain areas, e.g.
treatment of stock.
Remittance
Money in any form sent from one person to another.
Revenue Reserves
A voluntary retention of Profit kept in the business to fund future growth. It may be
held as cash or as assets.
Share Capital

BASIC ACCOUNTING
Businesses that are set up as limited companies (Ltd) or as public limited
companies (Plc) have owners that are called shareholders. The total value of
capital provided by shareholders in a company is known as the share capital or the
owners equity.
Trade Creditors
Suppliers to whom we owe money.
Transaction
An entry made through a journal into an account.
Trial Balance
The statement of total debits and total credits is known as the trial balance.
VAT
Value Added Tax. A tax which is based on the value added to a good or service by
a firm or individual. The cost of materials or product purchased from another firm is
deducted from the selling price of the product and the tax is based on this
difference.
Working Capital
See Net Current Assets
Sources: Frank Wood - Business Accounting 1

John Harrison - Finance for the Non-Financial Manager

BASIC ACCOUNTING
APPENDIX II - Answers to Exercises
Questions (1)
1. Audire
2. Income and expenditure lists
3. Double entry book keeping
4. Pacioli in 1494
The Principles of Accounting
(i) Charlie
(ii) Charlie
(iii) John
Questions (2)
a) C
b) D
c) C
d) D
e) D
f) C
g) C
Questions (3)
1. C
2. D
3. B
4. C
Questions (4)
1. A
2. a) 10,700
b) 23,100
c) 4,300
d) 3,150
e) 25,500
f) 51,400
3. a) A
b) L
c) A
d) A
e) L
f) A
4. Loan from C Smith

Creditors
Stock of Goods

BASIC ACCOUNTING
5. Assets: Motor 2,000 Liabilities: Loan 3,000
Premises 5,000 Creditors 400
Stock 1,000
Bank 700
Cash 100
------ ------
8,800 3,400
==== ====
Capital = 8,000 – 3,400

= 5,400
6. A Foster
Balance Sheet as at 31December 1993
Assets Liabilities
Fixtures 5,500 Capital 23,750
Motor 5,700 Creditors 2,450
Stock 8,800
Debtors 4,950
Bank 1,250
-------- --------
26,200 26,200
===== =====
Questions (5)
1. a) Dr. Motor Van Cr. Cash

b) Dr. Office Mch Cr. J Grant
c) Dr. Cash Cr. Capital
d) Dr. Cash Cr. J Beach
e) Dr. A. Barnett Cr. Cash
2. a) Dr. Machinery Cr. A Jack

b) Dr. A Jack Cr. Machinery
c) Dr. Cash Cr. J Brown
d) Dr. Cash Cr. J Smith
e) Dr. Cash Cr. Office Machinery.
3. Capital Cr. 1.5.92 Cash £1,000.00
Cash Dr. 1.5.92 Capital £1,000.00

Cr. 14.5.92 Office Machinery £ 60.00
Cr. 31.5.92 Speed & Son £ 698.00
Speed & Son Dr. 31.5.92 Cash £ 698.00

Cr. 3.5.92 Motor Lorry £ 698.00
Motor Lorry Dr. 3.5.92 Speed & Son £ 698.00
Office Mach. Dr. 14.5.92 Cash £ 60.00
4. Bank Dr. 1.7.93 Capital £2,500.00

Cr. 2.7.93 Office Furniture £ 150.00
Cr. 5.7.93 Motor Van £ 600.00
Cr . 15.7.93 Planes Ltd £ 750.00
Cr. 31.7.93 Machinery £ 280.00
Capital Cr. 1.7.93 Bank £2,500.00
Office Furn. Dr. 2.7.93 Bank £ 150.00

BASIC ACCOUNTING
Cr. 8.7.93 J Walker £ 60.00
Machinery Dr. 3.7.93 Planes Ltd £ 750.00

Dr. 31.7.93 Bank £ 280.00
Planes Ltd Dr. 15.7.93 Bank £ 750.00

Cr. 3.7.93 Machinery £ 750.00
Motor Van Dr. 5.7.93 Bank £ 600.00
J Walker Dr. 8.7.93 Office Furniture £ 60.00

Cr. 23.7.93 Cash £ 60.00
Cash Dr. 23.7.93 J Walker £ 60.00
Questions (6)
1. B
2. D
3. a) Dr. Rent Cr. Cash

b) Dr. Wages Cr. Cash
c) Dr. Bank Cr. Rent Received
d) Dr. Bank Cr. Insurance
e) Dr. General Expnses Cr. Cash
4.
Bank Dr. 1.1.88 Capital £ 200.00
Dr. 2.1.88 U Surer £1,000.00
Capital Cr. 1.1.88 Bank £ 200.00
U Surer Cr. 2.1.88 Bank £1,000.00
Purchases Dr. 3.1.88 T Parkin £ 296.00
T Parkin Cr. 3.1.88 Purchases £ 296.00
Sales Cr. 6.1.88 Cash £ 105.00
Cash Dr. 6.1.88 Sales £ 105.00

Cr. 8.1.88 Wages £ 18.00
Wages Dr. 8.1.88 Cash £ 18.00

BASIC ACCOUNTING
Questions (7)
1. C
2. A
Questions (8)
1. D
2. C
3. Capital
31.5.93 Balance c/d £ 250.00 1.5.93 Cash £ 250.00

-------------- --------------
£ 250.00 £ 250.00
======== ========
1.6.93 Balance b/d £ 250.00
Cash
1.5.93 Capital £ 250.00 6.5.93 Rent £ 12.00

15.5.93 Carriage £ 23.00
31.5.93 Balance c/d £ 215.00
------------- --------------
£ 250.00 £ 250.00
======= ========
1.6.93 Balance b/d £ 215.00

BASIC ACCOUNTING
C Mendez
31.5.93 Balance c/d £ 87.00 2.5.93 Purchases £ 87.00

------------ -------------
£ 87.00 £ 87.00
======= ========
1.6.93 Balance b/d £ 87.00
Sales
31.5.93 Balance c/d £ 176.00 4.5.93 H Spencer £ 176.00
------------ --------------
£ 176.00 £ 176.00
======= ========
1.6.93 Balance b/d £ 176.00
H Spencer
4.5.93 Sales £ 176.00 31.5.93 Balance c/d £ 176.00

------------- -------------
£ 176.00 £ 176.00
======= =======
1.6.93 Balance b/d £ 176.00
Rent
6.5.93 Cash £ 12.00 31.5.93 Balance c/d £ 12.00
------------- --------------
£ 12.00 £ 12.00
======= ========
1.6.93 Balance b/d £ 12.00
Carriage
15.5.93 Cash £ 23.00 31.5.93 Balance c/d £ 23.00

------------- --------------
£ 23.00 £ 23.00
======= ========
1.6.93 Balance b/d £ 23.00
Purchases
15.5.93 Cash £ 87.00 31.5.93 Balance c/d £ 87.00

------------- --------------
£ 87.00 £ 87.00
======= ========
1.6.93 Balance b/d £ 87.00

BASIC ACCOUNTING
Trial Balance as at 31 May 1993
Debit Credit
Cash.................................................................... 215.00
Purchases........................................................... 87.00
Rent.................................................................... 12.00
Spencer............................................................... 176.00
Carriage............................................................... 23.00
Capital................................................................. 250.00
Sales................................................................... 176.00
Mendez................................................................ 87.00
---------- ----------
513.00 513.00
====== ======
Questions (9)
1. A
2. B
3.
Trading and Profit and Loss Account for the period ending 31 December 1993
Purchases 14,629 Sales 18,462

less closing stock ( 2,548)
---------
12,081
Gross Profit 6,381

---------- ----------
18,462 18,462
====== ======
Salaries 2,150 Gross Profit 6,381

Motor Expenses 520
Rent 670
Insurance 111
General Expenses 105
Net Profit 2,825
----------- -----------
6,381 6,381
====== ======

BASIC ACCOUNTING
Questions (10)
1. C
2.
Premises 1,500 Capital 5,424

Motor Vehicles 1,200 less drawings ( 895)
Stock 2,548 --------
Debtors 1,950 4,529
Cash at bank 1,654 Profit 2,825
Cash at hand 40 Creditors 1,538
-------- --------
8,892 8,892
===== ====

Basic Concepts 1

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Basic Accounting

Session 1 - The Origin of Accounts ....................................................................................3

APPENDIX I - Glossary of Terms .......................................................................................31

APPENDIX II - Answers to Exercises.................................................................................35

SUNSYSTEMS TRAINING GUIDE SU003 V1.4 1

• Understand the origins of accounting

• Understand the fundamental principles of accounting

• Understand the principles of double entry book keeping

• Understand the composition of basic financial reporting

• Personnel wishing to attend other SU courses, but lack accounting experience.

SUNSYSTEMS TRAINING GUIDE SU003 V1.4 2

SUNSYSTEMS TRAINING GUIDE SU003 V1.4 3

The Purpose of Accounting

In order to produce figures at all, it is necessary to keep

A definition of the purpose of accounting might therefore be:

“To provide records of all financial transactions, so that the

SUNSYSTEMS TRAINING GUIDE SU003 V1.4 4

Current cash positions

Assets owned at the present time

Cash (in building society) 5,000 -

Property Value - 30,000

Less: Amount owing on mortgage - (10,000)

Total Assets 6,000 21,000

Now which one do we consider to be the better off?

SUNSYSTEMS TRAINING GUIDE SU003 V1.4 5

A credit is money owed by us to others, income or reserves of the company.

a) An electricity bill due for payment ____

The whole of financial accounting can be based on The Accounting Equation.....

Assets = Capital + Liabilities

SUNSYSTEMS TRAINING GUIDE SU003 V1.4 6

1. Which of the following statements is wrong?

a) Assets - Capital = Liabilities

2. Which of the following is not an asset?

3. Which of the following is a liability?

4. Which of the following is wrong?

Assets Liabilities Capital

SUNSYSTEMS TRAINING GUIDE SU003 V1.4 7

SUNSYSTEMS TRAINING GUIDE SU003 V1.4 8

SUNSYSTEMS TRAINING GUIDE SU003 V1.4 9

2. Complete the gaps in the table.

Assets Liabilities Capital

4. Which of the following are shown under the wrong heading?

SUNSYSTEMS TRAINING GUIDE SU003 V1.4 10

6. Draw up A. Foster’s balance sheet from the following as at 31 December 1993.

SUNSYSTEMS TRAINING GUIDE SU003 V1.4 11

_____________________ _______ ________________________ _______

Accounts To record Entry in the accounts

Assets an increase Debit

Example of how double entry works.

The entries for the first period are as follows:

1. £10,000 invested by the owner

The double entry treatment would be:

SUNSYSTEMS TRAINING GUIDE SU003 V1.4 12

2. Rent (Profit and Loss account) 1,000

3. Material (Profit and Loss account) 2,000

4. Wages (Profit and Loss account) 2,000

5. Sales income (Profit and Loss account) 6,000

Referring back to the accounting equation:

Assets = Liabilities + Capital

To increase each item Debit Credit Credit

To decrease each item Credit Debit Debit

Any asset account Any liability account

Now we can enter some transactions:

b) Increases the capital Credit the capital account

_________________ _ ________________ _