LEDGERS (Bookkeeping)

A ledger is a collection of books, receipts and counterfoils collected by the business to account for everything to do with trading. It is from these ledger entries that the Trial Balance is created.

Every transaction involves a debit entry in one account and a credit entry in another account.

Debit the account that receives the goods, services or money.

Credit the account that gives the goods, services or money.

DEBIT the receiver

CREDIT the giver

An INVOICE

What is an Invoice?

To inform a buyer of how much they owe and when they must pay.

Who completes it?

The seller

What happens to it?

It must be checked by the Finance Department who will then pay it at the appropriate time and file it.

Why must it be accurate?

Errors can result in the wrong amount being paid or a delay in payment.

A CREDIT NOTE

What is a Credit Note?

It is a refund document that reduces the amount owed by the buyer

Who completes it?

The seller

What happens to it?

The buyer checks it and files with the relevant Invoice

Why must it be accurate?

If not then mistakes can be made and wrong amounts will be paid.

1. March 1^st. Mr McGowan starts up a Computing Business with £5,000 of his own money.

The two accounts that are going to be affected are:

• CAPITAL account

• BANK account

Capital Account

Bank Account

2. Mr McGowan bought a Motor Van for 2,000 by cheque on March 2nd.

The two accounts that are affected are:

• BANK

• MOTOR VAN

Bank Account

Motor Van Account

PURCHASES of goods on credit

3. Mar 3^rd Mr McGowan bought £250 of goods on Credit from C McAlpine.

The accounts affected:

• PURCHASES (McGowan is receiving the goods)

• C. McALPINE

Purchases Account

C. McAlpine Account

CASH Purchases

4. Mr McGowan bought goods 50 cash on Mar 4^th.

The accounts affected:

• PURCHASES

• CASH

Purchases Account

Cash Account

SALES of goods on credit

5. March 5^th. Mr McGowan sells goods worth £350 to G Shute.

The accounts affected are:

• G SHUTE

• SALES

G. Shute Account

Sales Account

CASH Sales

6. On March 6^th Mr McGowan sold goods to R Alexander worth £50.

The accounts affected are:

• CASH

• SALES

Cash Account

Sales Account

SALES Returns

7. On March 7^th G Shute sends back £50 worth of goods to Mr McGowan.

Accounts affected:

• SALES RETURNS

• G SHUTE

G. Shute Account

Sales Returns Account

PURCHASES Returns

8. On March 8^th Mr McGowan returns £50 worth of goods to C McAlpine.

Accounts affected are:

• C. McALPINE

• PURCHASES RETURNS

C. McAlpine Account

Purchases Returns Account

Expenses

9. Mr McGowan paid £300 Wages in cash on March 9^th.

Accounts affected:

• WAGES

• CASH

Wages Account

Cash Account

Other types of expenses:

• Telephone

• Electricity

• Insurance

• Rent

Drawings

11. On 11 March, Mr McGowan decides to take out £100 cash from the business.

The accounts affected are:

• DRAWINGS

• CASH

Drawings Account

Cash Account

Incomes

12. On March 12^th Mr McGowan receives £80 for renting out the flat above his shop. It is paid in cash on the 12^th of each month.

Accounts affected:

• CASH

• RENT RECEIVED

Cash Account

Rent Received Account

*Note some other examples of Incomes are:

• Commission Recieved

Other Transactions

13. On March 13^th, Mr McGowan bought Office Furniture from Office World plc worth £200.

Accounts affected:

• OFFICE FURNITURE

• OFFICE WORLD PLC

Office Furniture Account

Office World plc Account

Other types of Transactions include:

• Stationery

Sales & VAT

Remember VAT (Value Added Tax) is a sales tax. It is currently at 17.5%.

14. On March 14^th Mr McGowan has bought a new Duplex Laser Printer from Arthur & Sons for office use. It cost £117.50. (£100 plus £17.5 VAT)

Accounts affected are:

• OFFICE FURNITURE

• VAT

• ARTHUR & SONS

Office Furniture Account

VAT Account

Arthur & Sons Account

On the same day (14^th March) Mr McGowan bought 10 mouse mats for £11.75 (£10 plus £1.75 VAT) from Haggarty Stores. These items were for resale.

The Accounts affected are:

• PURCHASES

• VAT

• HAGGARTY STORES

Purchases Account

VAT Account

Haggarty Stores Account

Loans

15. On March 15^th, wealthy businessman C. MacLeod gave a loan of 6,000.

Accounts affected:

• BANK

• C. MacLEOD

Bank Account

C. MacLeod (Loan) Account

Discount Allowed

16. Discount allowed are cash discounts offered to customers when they pay their accounts within the time limit specified.

For example, Mr McGowan’s customer Phil Ivey bought goods on credit worth £326, with a 5% discount subject to paying the bill in full within 1 month. On Mar 1^st and on Mar 16th paid in full.

Accounts affected:

• PHIL IVEY

• DISCOUNT ALLOWED

• BANK

Phil Ivey Account

Discount Allowed Account

Bank Account

Discount Received

17. The same is true of when we buy from suppliers on credit. This is Discount Received.

Mr McGowan buys goods costing £185 on the 3^rd March from Phil Laak. There is a 5% discount subject to the bill being settled within 28 days from date of invoice. Mr McGowan paid it on March 17^th.

Accounts affected:

• PHIL LAAK

• PURCHASES

• BANK

• DISCOUNT RECEIVED

Phil Laak Account

Purchases Account

Bank Account

Discount Received Account

More Capital

18. On the 18^th March, Mr McGowan added 1,000 capital in cash.

Accounts affected:

• CAPITAL

• CASH

Capital Account

Cash Account

Bad Debts

19. On the 19^th March a supplier of Mr McGowan called Chris Ferguson who owes him £180 has went bust. The money owed will never be recovered. We have to make a provision for Bad Debts.

The accounts affected will be:

• CHRIS FERGUSON

• BAD DEBTS

Sales Account (we are just showing this to let you see where the figures come from)

Chris Ferguson Account

Bad Debts Account

Depreciation

20. On March 20^th a Delivery Van previously purchased for £1500 has deteriorated by £400.

The accounts affected will be:

• DELIVERY VEHICLE

• DEPRECIATION ON DELIVERY VEHICLE

Delivery Vehicle Account

Depreciation on Delivery Vehicle Account

Balances

21. If you are ever given a question which has existing balances, create ledger accounts for each balance. This is a rare occasion where there will not be two transactions.

i.e.

Phill Hellmuth on March 21^st has the following balances:

Sales 20,000

Capital 5,000

Bank 4,000

Sales Account

Capital Account

Sales Account