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Business transactions generate documents, these documents go into the primary
accounting records and Irom these records are placed throughout the accounting
system. The Iollowing are prime documents:
3;4.0 when a business purchases goods the company or individual the
goods where purchased Irom sends the business an invoice which outlines the
amount that is owing, when this amount is to be paid by and details oI the
goods or services that have been provided. This is also the same case when the
business receives an order Ior a good or service.
Credit Note - iI a buyer returns a good that has been bought on credit, a credit
note will be generated and sent to the buyer, the value oI the credit not will be
deducted Irom the buyers amount owing. On the credit note it outlines the
money amount and the goods or services that have been given.
Banking Transactions businesses use their bank accounts to pay in and
withdraw money at regular intervals, Irom these bank transactions paying-in
slips, cheques and BACS are Irequently used. These are then entered into the
primary accounting records.
Primary Accounting Records
The primary accounting records are used to log the prime documents Irom day to day.
The Iollowing are primary accounting records:
Sales day book this is a list oI sales made and is recorded Irom the invoices
issued
Purchases day book this is a list oI purchases made and is recorded Irom
the invoices that have been received
Sales returns day book this is a list oI the goods that have be returned and
is recorded Irom the credit notes that have been issued
Purchases returns day book this is a list oI the goods that have been
returned and is recorded Irom the credit notes that have been received
,8-44 this is a record oI the business bank account and the amount oI
cash that is held, this is recorded Irom receipts, paying-in slips, cheques and
BACS documents
Petty cash book this is a record oI the small cash purchases that have been
made by the business and is completed Irom the petty cash voucher. Small
cash purchases being ones that are made with motes and coins
1ournal this is a record oI non-regular transactions, which are not recorded
in any other primary accounting record
Double-Entry Accounts: The Ledger
The Ioundation oI the double-entry book-keeping system is the recording oI the
ledgers which are broken down into separate accounts.
Double-entry book-keeping
The double-entry book-keeping system involves the entry oI a transaction twice. II
operating a manual accounting system the book-keeper will be required to input the
transaction twice whereas iI the book-keeper is using a computer soItware package
the package will automatically enter the transaction twice.
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Accounts
The sources that are entered into the ledgers are taken Irom the primary accounting
records. Each primary accounting record will be entered into its corresponding ledger.
Division of the ledger
The Iollowing list shows the diIIerent types oI ledgers:
$,080/07 this is where the personal accounts oI the debtors are placed
Purchases ledger this is where the personal accounts oI the creditors are
placed
,8-448 the cash book is the record oI the bank account and the cash
account, the petty cash book is Ior small cash purchases. Both these books are
primary accounting records.
General (nominal) ledger this is a record oI all transactions and completes
the double-entry system
Trial Balance
The trial balance is a method used within the Double-Entry book-keeping system to
check Ior any error that may have occurred. The trial balance takes all the Iinal
balances Irom the ledgers and lists them down. II the credit and debt sides don`t
match at the end, there has been an error within the entering oI the transactions. The
trial balance is also used as a source oI inIormation when the Iinal accounts are being
prepared.
Final Accounts
The Iinal accounts oI a business are made up oI the proIit statement and the balance
sheet.
Profit Statement
The proIit statement includes the trading and proIit and loss account, iI the business
manuIacturers goods it too will be included. What this statement does is calculates the
proIit that was made and is now due to the owners oI the business aIter certain
deductions have been made Irom the income:
The manuIacturing account which shows the cost oI producing a quantity oI a
Iinished good
The trading and proIit and loss account which shows the proIit/loss aIter the
deduction oI the cost oI goods this gives you the gross proIit then the expenses
are deducted which gives the net proIit
The Iigures that are used Ior these calculations are taken Iorm the double-entry
system.
Balance Sheet
The double-entry system also contains the Iigures Ior the Iollowing:
88098these are items that the business owns, they Iall into two categories
Fixed assets these are items that were bought Ior the business use such as
buildings, vehicles etc
Current assets these are items used in the everyday running oI the business
such as stock, debtors etc
,-908 these are things that the business owes and there are two types oI
liabilities
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Current liabilities things like creditors etc
Long-term liabilities things like long-term loans
Capital this is money or assets that have been introduced by the owner(s) oI
the business and is a liability to the business because it owes it to the owner
Note: all examples of final accounts for each type of
business are shown at the end of the essay also shown
is a trial balance
The Final Accounts for a Sole Trader
The sole trader accounts are the basis oI all accounts
Legal requirements of a Sole Trader
By law a sole trader is not required to keep accounts and thus is not legally required to
publish their accounts Ior viewing by the General Public, however they must keep all
VAT receipts so that the Inland Revenue can take their tax Irom the business and the
situation regarding VAT can be sorted.
Final Accounts and the Trial Balance
The Iinal accounts oI a company are produced annually, but can also be produced at
anytime in order to inIorm shareholders and stakeholders oI how the business is
perIorming.
When starting to prepare any Iinal accounts the trial balance must be prepared by the
book-keeper. All the Iigures that have been entered onto the trial balance will be used
in the Iinal accounts. The trading, proIit and loss accounts are a part oI the double-
entry system, meaning that the records that are within these accounts have to be
recorded somewhere else Ior the double-entry system to work. However the balance
sheet is not an account it is simply a statement, which outlines the account balances
reaming aIter the trading, proIit and loss accounts have been completed.
Trading Account
The purpose oI a trading business is to by a good at one price and sell it on Ior a
proIit. The proIit that is gained is known as the gross proIit. Instead oI the gross proIit
being calculated on each item, the sales and purchases that have been recorded in the
primary accounting records will be calculated together. This also includes things like
purchase returns and sales returns.
When the end oI the Iinancial year comes around, the trading account is drawn up this
includes:
The total sales
Minus purchases
Plus purchase returns
Minus sales returns
Also included is the opening stock and the closing stock
Notes on trading account
Sales and purchases - these are only the items that the business trades
Adjustments - these are the adjustments that have happened in relation to the
stock, the opening stock, which is calculated at the start oI the year, this is
added to the purchases because it has been sold during the year. The closing
stock on the other hand will be deducted Iorm the purchases because it has still
yet to be sold. The closing stock will then become the opening stock Ior the
next Iinancial year
Cost of sales - this is the cost to the business oI the goods that have been sold.
To calculate the cost oI sales you do the Iollowing:
N Opening stock
N Purchases
N Carriage in
N - Purchases returns
N - Closing stock
N Cost oI sales
Gross profit - to calculate gross proIit you do as Iollows:
N $,08
N - Sales returns
N 098,08
N - Cost oI goods sold
N Gross proIit
II the cost oI sales is more than the net sales then the business has made a Gross Loss
Carriage in - is the expense that the business incurs due to having the
purchases delivered. The carriage in is added to the purchases
098,08the net sales is the turnover and is calculated by doing the
Iollowing:
N $,08
N - Sales returns
N 098,08
Net purchases - to calculate the net purchases you do the Iollowing:
N Purchases
N Carriage in
N - Purchases returns
N Net purchases
Profit and Loss Account
In the proIit and loss account the running expenses oI the company are listed these are
then taken away Irom the gross proIit to give the net proIit. The net proIit then shows
how proIitable the business has been that particular year.
Balance Sheet
A balance sheet is used to show the Iinancial state oI the business at any one time. It
lists the assets and liabilities oI the business at a particular time. The balance sheet
however is not a part oI the double-entry system.
Notes on balance sheet
88098an asset is an item or an amount that is owned by the business. There
two types oI assets Iixed and current. Fixed assets are material assets such as
premises or vehicles. Current assets are short-term assets, which change in
value every day.
Liabilities - a liability is an item or amount owned by the business. There are
tow types oI liabilities current and long-term. Current liabilities are ones that
are due to be repaid within 12 months or less. A long-term liability is a
something like a loan that can be paid later than 12 months.
Capital and working capital - capital is money that is owed to the owner by
the business. Working capital is the capital leIt aIter the current liabilities have
been subtracted Irom the current assets. II the business does not have any
working capital the business will not be able to continue to operate.
Significance of the balance sheet
The balance sheet shows how the business has been Iinanced. For he sole trader the
balance sheet can be shown as a Iormula, which is:
Fixed assets
Working capital
- Long-term liabilities
NET assets
The final Accounts for a Partnership Accounts
Definition of a Partnership
The Partnership Act oI 1890 deIines a partnership as:
The relation which subsists between persons carrving on a business in common with a
view of profit
#0807;08
A limited company will very rarely disburse all its proIits between its shareholders, it
will instead keep back a certain amount as a reserve. There are two types oI reserve:
Capital reserves which are created because not all the capital that has been
taken was used Ior trading
Revenue reserves these are the retained proIits Irom the proIit and loss
account
Capital reserves
Examples oI capital reserves which cannot be used to Iund dividends payments
include:
Revaluation reserve - this takes place when a Iixed asset is revalued in the
balance sheet, this revaluation is then placed in a revaluation reserve, it then
serves to increase the shareholders investment in the company
Share premium account - a company may wish to issue extra shares to be
available to the general public at a price over that oI the nominal price. The
nominal value oI the shares is input into the share capital account and the
extra money on top oI the shares laced into the share premium account.
Revenue reserves
This is very oIten leIt as the balance oI the appropriation account oI the proIit and loss
account, it is most commonly known as the proIit and loss account balance. On the
other hand they may choose to put this revenue into a separate account oI its own.
This transIer to and Irom these accounts will in recorded in the appropriation account.
The regulatory framework of accounting
When talking about the regulatory Iramework oI accounting you are simply talking
about the rules that are to be Iollowed when preparing Iinal accounts. There are two
Iorms these rules take the Iorm oI these are:
Accounting concepts
Accounting standards
Accounting concepts
Below are the basic accounting concepts that are to be Iollowed when preparing Iinal
accounts:
Business entity
Money measurement
Historical cost
:,9
Materiality
Going concern
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Consistency
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Business entity concept
This concept outlines that the Iinal accounts and records oI a business are that oI the
business and that no personal assets oI the owner`s are included within these records.
The main links that are disclosed between the business and the owner(s) is the capital
accounts and drawings.
Money measurement concept
This concept means that all items that are within the Iinal accounts are expressed as
money, this means all the values can be added together to come up with the net proIit,
gross proIit and so on. The problem with this is that things that cannot be recorded as
money such as good management will not be valued and all companies will be seen to
be managed the same way, only in time will the good management become apparent.
Historical cost concept
This is an extension oI the money measurement concept, it basically means that a
transaction should be recorded at the value it was historically recorded or initially
recorded, so iI a vehicle cost 20,000 at purchase it should be entered Ior that amount.
This concept brings with it advantages which are as Iollows:
Verifiable - there is a prime document that conIirms that this transaction has
occurred
Objective - there are no new valuations oI the vehicle which will make it
easier to price when it comes to sale
This concept also brings with it disadvantages which are as Iollows:
The change of value - all items change in value over time and this wont be
recorded the value may have went up or down
The effects of inflation
Duality concept
This concept ensures that all transactions are entered into the double-entry system
twice one on the credit side and one on the debit side.
Materiality concept
This concept sets out that some items within accounts are so low in monetary value
there would be no point in recording them separately. Some examples oI these types
oI items are listed below:
The likes oI donations to charities, the purchasing oI plants Ior the oIIice and
other small expenses such as these are seen not to justiIy their own expense
account, so they are grouped together in a sundry expenses account
The end oI year stocks oI stationary such as paper Ior printers, paper clips,
pens etc are not seen to be material due to the Iact they don`t aIIect the
business earnings however they are placed within the proIit and loss account
The low cost Iixed expenses such as bins, staplers etc are not classed as capital
expenditure, they are instead classiIied as expenses within the proIit and loss
account. Technically they should be placed within the Iixed assets account oI
the balance sheet and be depreciated every year oI their liIe span, but it would
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not be worth the eIIort due to them being immaterial in that they wouldn`t
cause any real aIIect to Iinal Iigures.
What a business will consider material depends really on the size oI the particular
business, the likes oI a large business would Iind anything under 1,000 immaterial
and not worth putting into their own account whereas a small company would
consider these items material and have them in their own account.
Going concern concept
This concept is presuming that the business to which the Iinal accounts relate will
continue to trade Ior the Ioreseeable Iuture. The Iinal accounts are prepared on the
basis that the business has no intention oI signiIicantly down sizing or liquidating its
assets. II the business was going to down size and where to sell a purpose built Iactory
this Iactory would be a going concern to the business but would be oI limited use to
other industries Ior this reason the building would command less value. This instead
oI being described as a going concern would instead be described as a gone concern.
In a gone concern extra depreciation would be added to the proIit and loss account to
account Ior the reduction in Iixed assets.
Accruals concept
This concept is concerned with the expenses and revenues being matched so that they
will concern the same goods/services and the same time period. In the proIit and loss
account expenses should always be entered whether they have been paid Ior or not.
This is where the principle oI income and expenditure accounting came Irom. Below
are Iurther examples oI the accruals concept:
0-9478
Creditors
Depreciation
,//0-98
Provision Ior bad debts
Opening and closing stock adjustments in proIit and loss account
Consistency concept
This concept is concerned that when a company adopts a particular method Ior
accounting they should continue to use that method in a constant Iashion. When a
business has adopted a particular practice Ior accounts they may at times wish to
make some changes, this is acceptable as long as there is a good reason Ior it, this
change is to be noted on the Iinal accounts to explain what has happened. With the
consistency oI the accounts the business can make comparisons between diIIerent
years.
Prudence concept
This concept is also known as the conservatism in accounting. This concept requires
where there is any doubt as to the value oI an item report a conservative Iigure to be
entered within the Iinal accounts. Although this does not mean that proIits are to be
anticipated and should only be recognised iI there is a distinct possibility they will be
realised, as well as this all known liabilities should be provided Ior. A good example
oI this process is the provision Ior bad debts this is so any debt that maybe written oII
may be accounted Ior. The theory behind this concept is that it prevents the business
Irom being to over optimistic with its presentation oI Iinal accounts.
All of the above concepts apply to the final accounts of a sole trader, a
partnership and a limited company. With relation to the limited companies the
Companies Act 1985 gives legal force to the following concepts:
Going concern
..7:,8
4388903.
Prudence
If the company does not apply these concepts will receive a qualified report from
its auditors.
Accounting Standards
The Iramework Ior accounting is represented by the Statements of Standard
Accounting Practice (SSAP) and Financial Reporting Standards (FRS).
The Statements oI Standard Accounting Practice are no longer issued, but they still
come under the control oI the Accounting Standards Board. The Accounting
Standards Board requires that accountants adhere to all applicable accounting
standards and are able to disclose and explain deviations Irom the standards that may
occur. To try and reduce the number oI permissible accounting treatments, a number
oI Statements oI Standard Accounting Practice have been replaced by Financial
Reporting Standards.
The main accounting standards are:
SSAP 5 Accounting for Value Added Tax
SSAP 9 Stocks and long-term contracts
FRS 15 Tangible fixed assets
FRS 18 Accounting policies
SSAP 5 Accounting for Value Added Tax
VAT is a tax on the supply oI goods and services. Business with a turnover oI over a
certain Iigure will be registered Ior VAT.
At regular intervals the business that are registered will pay VAT Authorities such as
HM Customs and Excise on the Iollowing:
The amount oI output tax collected on sales made
Less the amount oI input tax on goods and services purchased
The business can claim a reIund Irom the HM Customs and Excise department iI the
input tax is greater than the output tax. This claim will be made on the diIIerence.
A business that is VAT-registered does not normally include the VAT in the income
and expenditure oI the business whether Ior capital or revenue reasons.
There are goods and services that are exempt Irom VAT these are things such as the
loaning oI money and letting oI land, VAT cannot be charged by the charge so no
output tax is received, they can only clam back an agreed proportion oI the input tax
that has been pre agreed with the VAT authorities.
Irrecoverable VAT occurs when a business that has been registered cannot reclaim
VAT on input tax, this means the VAT is entered into the accounts as an expense.
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A business that is not registered Ior VAT will include VAT within its input Iinancial
statements.
SSAP 9 Stocks and long-term contracts
This sets out the broad rule that stock should be valued at cost or, where lower, selling
price.
FRS 15 Tangible fixed assets
This sets out that a Iixed asset has a known economic liIe and must be depreciated,
this doesn`t apply to land unless it is either a quarry or mine.
As long as the depreciation method is acceptable it can be used to spread the cost oI a
Iixed asset consistently over that Iixed assets economic liIe.
A depreciation amount is most oI the time based on the cost oI the Iixed asset.
FRS 18 Accounting policies
This standard is to ensure that all material items have the Iollowing:
The particular circumstances oI the business accounting policies are Iit oI the
given purpose and give a true and Iair view
The policies that have been selected by a company are regularly reviewed to
ensure they are still appropriate, also when the circumstances change the
policies are changed to
The inIormation that is disclosed within the Iinancial statements is oI
suIIicient inIormation to enable users to understand the accounting policies
that have been adopted and how they have been implemented
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