Accounting IGCSE terms

Statement of account

A document issued by the seller of good on credit - To summarise the transactions for the month

Income Statement

A statement prepared for a trading period to shows the gross profit and profit for the year.

Receipt

A written acknowledgment of money received and acts as a proof of payment.

Cheque

A written order to a bank to pay a stated sum of money to the person or business named on the order

drawings

represents any value taken from the business by the owner of the business, for his/her personal use

liabilities

represents what a company owes

assets

resources owned by a business/ owed to the business

Sales journal

shows a list of names of the businesses to which credit sales have been made, the value of the goods sold and the date on which the sales were made.

purchases journal

shows a list of the names of businesses from which credit purchases have been made, the value of the goods purchases and the date on which the purchases were made

Sales returns journal

shows a list of the names of businesses which have returned goods previously sold on credit, the value of the goods returned and the date on which the returns were made

Statement of financial position (balance sheet)

shows the assets and liabilities of a business on a certain date

book-keeping

the detailed recording of all the financial transactions of a business

balance on ledger account

the difference between the debit side and the credit side

Why use the imprest system

- Chief is aware if exactly how much petty cash has been spent- petty cash expenditure can be controlled - Imprest system helps to reduce fraud

Why do we need books of prime entry?

- Grouping similar types of transaction- useful when posting to ledger - a lot of details are removed from the ledger - book keeping can be divided between several people

Assets can be divided into two types

-Current Assets -Non-current assets

Liabilities can be divided into two parts

-Current liabilities -Non-current liabilities

Division of ledger -Why?

-Dividing ledger into sections makes it more convenient to use (as the same type of account can be kept together ) -Task of maintaining the ledger can be divided between several people -Enables checking procedure to be introduced, thus reducing fraud.

Why offer trade discount?

-Encourages customers to buy in bulk

What are the two parts of financial statement?

-Income statement (trading + P/L section) -Statement of financial position

What are the main business documents ? (6)

-Invoice -Debit note -Credit note -Statement of account -Cheque -Receipt

The two types of inventory

-Opening inventory -Closing inventory

What can cause cheque to be dishonoured?

-When debtor does not have enough money in his/her bank account -When there is an error on the cheque (e.g: no signature/ no date/amt in word don't agree with amt in figures)

Accounting rules -Why need rules?

-must be applied by everyone who is involved with the recording of financial information. -if everyone use their own rule -->impossible to fully understand the financial position of business -->impossible to make a comparison between financial results of two or more business

Credit note

A document issued by the a seller of goods on credit - to notify of a reduction in an invoice previously issued

What are the books of prime entry? (7)

1. Cash book 2. Petty cash book 3. Sales journal 4. Purchases journal 5. Sales returns journal 6. Purchases returns journal 7. General journal / the journal

Errors (when trial balances agree)

1. Error of commission 2. Error of complete reversal 3. Error of omission 4. Error of original entry 5. Error of principle 6. Compensating error

Non current asset in increasing order of liquidity (lai -ba -pep-pa-m - enter -farm -for -free -muffin

1. Land 2. Buildings 3. Premises 4. Plants & machinery 5. Equipment 6. Furnitures 7. Fixtures & fittings 8. Motor vehicles

what are the specialised areas of the ledger when divided ?

1. Sales ledger 2. Purchases ledger 3. Nominal ledger/ general ledger 4. Cash book

Situations when trial balance fails to agree/balance

1. error of addition within the trial balance 2. error of addition within one of the ledger accounts 3. entering a different figure on the credit to that entered on the debit side when making a double entry 4. making a single entry for a transaction rather than a double entry 5. entering a transaction twice not the same side of a ledger

Statement of financial position (balance sheet)

A SOFP shows the assets and liabilities of the business at a certain date. The SOFP is not part of the double entry system.

Dishonoured cheque

A cheque received which the debtor's bank refuses to pay.

Debit note

A document issued by a purchaser of goods on credit - to request for a reduction in the invoice received. *neither supplier not customer makes any entries in their accounting records in respect of a debit note

Purchases ledger

Also referred to as the creditors ledger/ trade payables ledger -The ledger in which the accounts of the credit suppliers are maintained.

Sales ledger

Also referred to as the debtors ledger/ trade receivables ledger - The ledger in which the accounts of credit customers are maintained.

Current liabilities

Amounts owed which are due for repayment within the next 12 months. E.g: account payable, short-term bank loan, wages payables

Non-current liabilities

Amounts owed which are not due for repayment within the next 12 months. E.g: Mortgage, Long term bank loan, and debentures.

cash discount

An allowance given to a customer when an account is settled within a time limit set by the supplier. -Encourages customers to pay their accounts promptly -Slightly lesser amount, but is paid earlier so available for use within business

Transferring ledger account totals to income statement

Anything appearing in the income statement must have a double entry in another account. - when something is deducted from a debit item in the income statement this is equal to a credit entry, so a debit entry is required in the ledger. Vice versa for deduction from credit item in the income statement

Calculating cost of sales

Cost of sales= Opening inventory + Purchases - Closing Inventory

Sequence of SOFP

Assets Non-current Assets( Intang -->tangible) Current assets Capital and liabilities Capital Non-current liabilities Current liabilities

Accounting Equation

Assets = Liabilities + Owner's Equity

Non-current assets

Assets which are obtained for use and not for resale, which helps the business earn revenue Two types of non current assets: -Tangible -Intangible

trade receivables

represent the amount owed to the business by its credit customers (debtors)

Cash book - what to take note?

Cashbook contains the main cash book and petty cash book. ***- Since it is part of the double-entry system, it represents the ledger accounts for both bank and cash. HOWEVER, -It is also a book of prime entry because it is one of the books where transactions should be entered before entered in the ledger

Invoice

Document issued by suppliers of goods on credit - showing details, quantities and prices of goods supplied.

Contra entry (for cash book)

Entry which appears on both sides of the cash book (c)

Intangible non-current assets

Long term assets which do not have material substance (cannot be seen or touched), but have a value. E.g: goodwill, brand names, trademarks etc. - Shown before tangible NCA in SOFP

Tangible non-current assets

Long-term assets which are obtained for use rather than for resale-help business earn profit. E.g. :Land, Equipment, machinery etc

Profit and entries in capital

If a business makes a profit, it is credited to the capital account as it increases the owner's capital. If a business makes a loss it is debited to the capital account as it reduces the owner's capital

Current asset in increasing order of liquidity (Isaac the big cat)

Inventory Trade receivables Bank Cash

Closing inventory

Inventory at the end of a given period. Shown as a deduction from the debit entries in the income statement (which is equal to a credit entry), so this must be debited in the inventory account.

Calculating net purchases

Net Purchases= Purchases- Purchases returns + Carriage Inwards- Goods for own use

Bank overdraft

Occurs when more has been paid out of the the bank than was put into the bank account. (Interest is charged by bank for amount overdrawn)

Current assets (convertible within a year)

Short term assets, whose amounts are constantly changing - either assets in the form of cash or which can be converted into cash easily. Bought with the intention of resale.

Purchases returns journal

Shows a list of the names of businesses to which goods, previously purchased on credit, have been returned, the value of the goods returned and the date on which the returns were made

Good will

The amount by which the value of a business as a whole exceeds the value of the separate assets and liabilities

Gross profit

The difference between the selling price and the cost of those goods. Gross profit = Selling price of goods- Cost of sales

Discount allowed

The discount a business allows its credit customers (debtors) when they pay their accounts within a set time

Discount received

The discount a business receives from credit suppliers (creditors) when it pays their accounts within a set time

Profit for the year

The final profit after any income has been added and the gross profit and running expenses have been deducted. Profit for the year= Gross profit + Other income- Other Expenses

Trading section

The part of the income statement in which the gross profit of the business is calculated. -concerned with buying and selling, and purpose is to calculate profit earned on goods sold

Profit and loss section

The part of the income statement in which the profit for the year of the business is calculated. -Concerned with profits and losses -The purpose is to calculate the final profit after all running expenses and other items of income.

Trade discount vs cash discount

Trade discount does not appear in the ledger accounts (may be shown in BOPE for information purposes only) .Trade discount needs to be deducted before recorded in the accounts. Cash discount(received or allowed) need to be recorded.

The imprest system

Under this system the petty cashier starts each period (week, fortnight, month) with a fixed amount of money , known as the float. During the period, payments are made out of this cash and recorded in the petty cash book. At the end of the period, after the petty cash book is balanced, the chief manager will provide the petty cashier with enough cash to restore the balance to the amount of imprest. The petty cashier therefore starts each period with the same amount of cash

Analysis columns

Used to divide payments into different categories

Error of omission

When a transaction has been completely omitted from the accounting records- neither debit nor credit entry has been made

Error if principle

When a transaction is entered using the correct amount on the correct side, but in the wrong class of an account

Error of commission

When a transaction was entered using the correct amount on the correct side, but in the wrong account of the same class

Error of original entry

When an incorrect figure is used when a transaction is first entered in the accounting records. The double entry will therefore use the incorrect figure

Entries for purchases journal

When good are purchased on credit: - enter date, supplier name and invoice total in the purchases journal -credit the supplier's account in purchases ledger with invoice total At the end of the month -debit the purchases account in the nominal ledger with purchases journal total

Entries for purchases returns journal

When good are returned to credit supplier - enter the date, name and credit note total in the purchases returns journal - debit the supplier's account in the purchases ledger with credit note total At the end of the year -credit purchases account in the nominal ledger with the purchases returns journal total

Entries for sales returns journal

When goods are returned: -enter date, customer name and credit note total in SRL - credit customer's account in sales ledger At the end of the month : -debit *sales returns account* in nominal ledger with the *sales returns journal total*

Entries for sales journal

When goods are sold on credit: - Debit customer's account in sales ledger with the invoice total. -enter date, customer name, and invoice in sales ledger At the end of the month: -credit *sales account* in nominal ledger with **sales journal total**(not individual transaction) - credit entry form double entry for the individual debit entries in the sales ledger

Error of complete reversal

When the correct amount is entered in the correct accounts, but the entry has been made on the wrong side of each account (x2 amount)

Compensating error

When two or more errors cancel each other out

Trading business

a business which buys and sells goods SOFP of service business is exactly the same as SOFP of trading business.

Service business

a business which do not buy and sell goods ( e.g: accountant, hairdresser, travel agent etc) - Only Profit and loss section of the income statement and SOFP are prepared Commission received -->the main income Profit from operation --> Only when there is loan interest

trial balance

a list of balances on the accounts in the ledger at a certain date- used to assist in locating errors and for preparing financial statement

Trade discount

a reduction in the price of the goods: the rate often increases according to quantity purchased. shown as deduction in invoice but subtracted before entered into account

trade payables

represent the amount owing by the business to its credit supplier (trade creditor)

What is the purpose of a petty cash book?

a. lists the transactions for transferring to ledger accounts b. acts as a ledger account for petty cash transaction -Reduces number of entries in the cash book -Allows chief cashier to concentrate on more important tasks, as well as providing training

The accounting principles (9)

business entity, consistency, duality, going concern, historic cost, matching, materiality, money measurement , prudence, realisation

Sole trader

business owned and operated by one person Adv: do not ned to share profits made, quick decision Disadv: no one to share decision-making and workload - capital is restricted to what the investor can invest

Two column cashbook

cash account and bank account moved from the ledger and showing a separate book known as the cash book

carriage inwards

cost of bringing goods to the business

carriage outwards

cost of delivering goods from the business to customers

carriage

cost of transporting goods

inventory

goods or stock of goods a business has available for resale.

Three column cash book

has cash account and bank account, and an extra money column on each side to record cash discounts

Nominal (general)ledger

ledger where all the other accounts are maintained

Consistency principle

means that accounting methods must be used consistently for one accounting period to next. -e.g: ways of calculating depreciation If principle is not applied, comparison of financial results is impossible, and profit if particular year can be distorted

Principle of duality

means that every transaction is recorded twice- once on debit side and once on credit side.

Business entity principle

means that the business is treated as being completely separate from the owner of the business. -the personal assets /spending of owner does not appear in the business's accounting record unless it is concerning both owner and business

double-entry bookkeeping

process by which accounting transactions are recorded; each transaction must have an offsetting transaction (process of making a debit entry and a credit entry for each transaction)

Books of prime entry (aka book of original entry/ subsidiary books)

the place in which transactions are recorded before being entered in the ledger. - Books of prime entry assist in the collating and summarising of accounting information , useful when preparing control account

capital

the total resources provided by the owner and represents what the business owes the owner.

Opening inventory

the value of how much product exists at the start of a given period Debit balance in inventory -->credit to the inventory account and transferred to the debit of income statement.

Petty cash book

used to record low-value (petty) cash payments I.e: Postages, stationery, cleaning, travelling expense etc.

accounting

using book keeping records to prepare financial statement and to assist in decision-making