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Bookkeeping Basics: Do You Know What You're Doing?

What is a ledger account?

Each item in a business has its own ledger account (e.g., rent has its own account). The general ledger maintains all ledger accounts together. There is a certain overlap between the two terms, with 'general ledger' encompassing 'ledger' and 'ledger' encompassing 'ledger'.

What are the three parts of an entry in a ledger account?

An entry into a ledger account consists of three parts: the date of the transaction the name of the other account affected the pound value of the transaction What is the difference between ‘footing’ a ledger account and ‘balancing’ a ledger account?

The 'footing' of a ledger account is an informal process that usually takes place during an accounting period in pencil. Accounting periods are balanced at the end of a fiscal year through a formal process called balancing a ledger account. The balances on these accounts are included in the business's balance sheet. The procedure is then permanently recorded by the business.

What is a trial balance?

This is a list of all accounts in the general ledger at a particular point in time, which is used to check whether the general ledger is accurate. In order to complete a trial balance, all accounts must be balanced, and their balances must be transferred to the trial balance in order to ensure that there are no discrepancies. There is, however, a drawback to this method. It is possible to make an error if both the debit and credit entries of a transaction are missed, if the debit and credit entries in a transaction are reversed by mistake, if the wrong amount was used, when the wrong account was used, or if two errors cancel each other out..

The major advantages of three-column ledger accounts compared with T-form ledger accounts.

Included in a transaction would be the date and a folio column, allowing for easier tracking of the two entries. Unlike T-form ledger accounts, C-form ledger accounts do not include these items (it includes a running balance, which eliminates footing and balancing).

What are the functions and classifications of a ‘drawings’ account?

In a 'drawings' account, the owner of the business keeps track of his or her transactions - for example, when or if the owner withdraws assets, most commonly cash, for personal use, the withdrawal is listed. A Proprietorship account falls under this classification. Investing in the business generates the opposite entry to that which occurs when the owner invests.

Assets: these are items of value owned by the business.

Liabilities: these are debts owed by the business to outsiders

Proprietorship: this is the owner’s claim on the assets of the business. It is also referred to as the net worth of the business. It may consist of the capital the owner has contributed to the business plus any profits earned by the business which have not been withdrawn.

T-form balance sheet: a T-form balance sheet shows the basic balance sheet equation across the page.

Narrative form balance sheet: the narrative format is prepared in vertical form down the page.

Current assets: this heading includes all assets (i.e. cash, debtors) which are normally expected or intended to be turned into cash or used up within the next 12 months.

Non-current assets: these are longer term assets (e.g. equipment, investments); they are usually purchased with the intention of owning them for a period greater than 12 months for the purpose of generating income for the business.

Current liabilities: this includes all debts to outsiders (e.g. creditors, bank overdraft) which are due for repayment with the next 12 months.

Deferred liabilities: these are the longer term debts (e.g. long-term loan, mortgage loan) and are also known as non-current liabilities. They are debts where the repayments have been deferred over a period greater than 12 months. Long-term loans such as mortgage a loan is another typical example.

Double Entry Bookkeeping A debtor must be associated with each creditor, i.e. if someone sells something, someone else must purchase it, or if someone is paid for a service, someone else must reimburse them. This system records all payments in and out of a business. Whenever a transaction occurs, at least two entries are made into the ledger - one credit and one debit.

Keeping accurate entries makes accurate accounting much easier to prove by adding up the credit and debit columns, which should be equal. If an error was made during the entry of data into either column it will be easy to find. Double entry bookkeeping also makes record keeping more orderly and is very useful when creating profit and loss statements, or equity, assets and liabilities statements.

Single Entry Bookkeeping By comparison to double entry bookkeeping, this is a more basic system of recording data. It is generally used where detailed accounts are not required e.g. the tax statement of an individual who is a self-employed sole business who is providing a service but not goods.

A single entry recording system does not include debit and credit columns but instead simple entries for things like cash, tax paid, accounts payable and accounts receivable. Information kept in a single entry bookkeeping system may be used to create statements of income and balance sheets.

The type of records kept may vary considerably, but generally include: Cash receipts

Cash payments - expenses associated with the business Debtor accounts - a record of the amounts owed, and by whom Assets and liabilities - records of these are often poorly kept in this system This method of keeping records is less accurate and makes profit and loss statements and balance sheets more prone to error.