Unit 2 - Sources and Recording of Data
2.1 Double Entry system
Double entry system - for every transaction, an entry will be recorded in two accounts as debit or credit.
Debits are recorded on the left side of a journal entry.
Credits are recorded on the right side of a journal entry.
Increase in debit shows the gain in expenses & assets, and the loss of revenue & liabilities.
Increase in credit shows the gain in revenue & liabilities, and the loss of expenses & assets.
Sales ledger - contains the accounts of trade receivables.
Purchases ledger - contains the account of trade payables.
General (nominal ledger) - Contains the accounts of everything else.
2.2 Business Documents
Business documents:
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Invoice - A business document issued to the customer when the business sells goods on credit.
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Debit note - A document sent to a supplier asking for allowance for something unsatisfactory.
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Credit note - A document sent to the customer to show allowance.
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Statement of account - A document that shows all transactions that took place between the business and a particular customer over a period of time.
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Cheque - A bill of exchange where one party orders the bank to transfer the money to the bank account of another party.
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Receipt - Evidence that a payment is received.
Business documents that are sources of information
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Invoice
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Credit note
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Cheque counterfoil - Contains information related to cheques issued by the business.
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Paying-in slip - A document used when depositing cash or cheques into a bank account.
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Receipt
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Bank statement - A document that summarises transactions of money going in and out of your bank account.
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2.3. Books of prime entry
Cashbook - records transactions of large amounts of cash and bank.
Petty cash book - records translations of small quantities of cash and bank.
Sales journal - records credit sales.
Purchases journal - records credit purchases.
Sales returns journal - records return inwards.
Purchases returns journal - records return outwards.
General journal - records everything else.
Trade discounts
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Discounts given when they purchase in bulk.
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Encourages people to buy in large quantities.
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Not recorded in any books of account, but is shown on invoices.
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The amount recorded on the books is after deducting trade discounts.
Cash discounts
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Discounts given when payments are made before a given time.
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Encourages quick payment of trade receivables.
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Recorded in the cashbook.
Imprest system of petty cash - a fixed maximum amount for small transactions monthly. Every month, money is added to reset it back to the fixed amount.