 |  | Improve Your Business: Handbook (ILO, 1986, 144 p.) | |||
 |  | 3. BOOKKEEPING | |||
|  | (introduction...) | |||
| | The ledger | |||
| | The subsidiary books | |||
| | (introduction...) | |||
| | The invoice book | |||
| | The purchase journal | |||
| | The wages book | |||
| | The business notebook | |||
| | The stock book | |||
| | The inventory book | |||
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Bookkeeping is writing down all the transactions arising from your business activities which can be expressed in money.
To run your business well you must know what money you have received, how much money you have spent and, most important of all, how you spent it. A bookkeeping system can provide you with that information. Good information removes the guesswork from business.
This section provides you with all the information you need to set up a simple, useful system of keeping records.
The books used for keeping records consist of a ledger and subsidiary books.
The ledger is the general book in which you enter almost all the figures arising from your business activities.
The subsidiary books are used to record information which will help you to remember important things about your business, e.g. the bills you have to pay or the wages you pay. The number of subsidiary books varies depending on the size and the kind of business you are in.
THE LEDGER IS THE MAIN BOOK
THE SUBSIDIARY BOOKS HELP YOU TO
REMEMBER IMPORTANT
THINGS
Every business transaction consists of two parts, one part that gives and one part that receives-one part that goes out of the business and in exchange one part that comes into the business. For example, if you sell goods, goods go out and cash comes in. Therefore you must make two entries for each business transaction.
If you sell goods, the goods go out of the business. Therefore you make an "Out" entry in the ledger. In place of what has gone out of the business, something else goes in. In this particular case money comes in for what is sold. You also make the "In" entry in the ledger.
Figure
REMEMBER: ALWAYS ONE IN AND ONE OUT ENTRY FOR EACH TRANSACTION
A ledger consists of a number of accounts. An account is a column in the ledger that has been given a specific name, e.g. Cash, Bank, Sales and so on. In some ledgers a whole page is used as one account. Here we will use the type of ledger where a page is divided into several columns, each column regarded as one account.
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CASH |
BANK |
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CASH |
BANK |
SALES |
RAW MAT.* | ||||||||||||
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page 1 |
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page 2 |
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One account on each page |
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Several accounts on each page |
* RAW MAT. = raw materials | |||||||||||||||
STEP 1
The carpenter sells a chair to a customer. We need two accounts to record that transaction: one account to record the money that goes into the business (the Cash account) and one account to record the value of the chair that goes out of the business (the Sales account).
Our ledger now has two accounts, one called "Cash" and one called "Sales". The Cash account has three columns. One column is marked "In". This is used for entries when money comes into the business. The next column is marked "Out". This is used when money goes out of the business. The third column is for the Balance, or "Bal." for short.
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CASH |
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SALES |
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In |
Out |
Bal. |
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In |
Out |
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Look at the Cash account below.
Suppose the carpenter gets 100 NU for the chair. Assume that there was 300 NU in the cash box before the sale of the chair. The entries step by step will be as follows:
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CASH |
CASH |
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In |
Out |
Bal. |
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300 |
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1 Before the sale of the chair. The balance in the cash box is 300 NU
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CASH | ||
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In |
Out |
Bal. |
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300 |
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100 |
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2 100 NU has gone into the business as a result of the sale of the chair
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CASH | ||
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In |
Out |
Bal. |
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300 |
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100 |
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400 |
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3 The addition of 100 NU to the 300 NU already in the cash box makes 400 NU
The Cash account and the account showing what we have in our bank account are the only accounts where this "Balance" column is used. All other accounts are divided into two columns, one "In" and one "Out". The reason why there is a Balance column in the Cash and the Bank accounts is that we want to know instantly how much money is present in the business.
STEP 2
Let us enter the sale of the chair in the Sales account. The value of the chair was 100 NU and the chair has now gone out of the business. The entry of 100 NU will be made in the "Out" column of the Sales account, and 100 NU goes into the "In "column of the Cash account.
In the ledger below we have now entered all the figures arising from the sale of the chair.
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SALES |
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CASH |
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SALES | ||||||
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In |
Out |
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In |
Out |
Bal. |
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In |
Out |
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300 |
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100 |
® |
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100 |
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400 |
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100 |
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There are two accounts in the ledger. We must add more accounts, but first let us look at the space to the left of the Cash account. There we make some remarks concerning each transaction. We write the date of the sale and also write that it was a chair that was sold.
Finally, we shall give this transaction an identification number (Id.no.). We also write the number on the copy of the receipt we give to the customer. We keep the copy in a file together with other vouchers related to entries in the ledger.
KEEP ALL YOUR VOUCHERS IN A
FILE
Look at the columns to the left of the cash account below:
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DATE |
PARTICULARS |
ID.NO. |
CASH |
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SALES |
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In |
Out |
Bal. |
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In |
Out |
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The ledger entries are now added as shown below:
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IN | |
OUT | | | ||||||
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DATE |
PARTICULARS |
ID.NO. |
CASH |
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SALES |
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MAY |
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In |
Out |
Bal. | |
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In |
Out |
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300 |
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2 |
1 CHAIR |
86 |
100 |
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400 |
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100 |
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STEP 3
Let us add more accounts into our ledger.
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OUT |
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IN |
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DATE |
PARTICULARS |
ID.NO. |
CASH |
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SALES |
RAW-MAT. |
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In |
Out |
Bal. |
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In |
Out |
In Out |
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WAY |
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500 |
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2. |
1 CHAIR |
86 |
100 |
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400 |
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100 |
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4 |
WOOD |
87 |
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150 |
250 |
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150 |
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The carpenter has to buy raw materials. A Raw material account is needed. In the ledger above this account is added and we also have the following example entered: the carpenter buys wood and pays 150 NU cash to the supplier.
The ledger tells us that on 4 May wood was bought at a price of 150 NU. The cash was paid out, and after the payment 250 NU remains in the cash box. On the receipt given by the supplier of the wood the carpenter has written "87". The receipt can easily be found in the file where all the numbered vouchers are kept.
NUMBER ALL YOUR VOUCHERS
STEP 4
We must pay wages to the workers. An account called "Wages" is added.
The carpenter pays four employees 50 NU each in cash, so 200 NU is taken from the cash box.
Look at the entry. Wages have been paid on 6 May. In total 200 NU is paid and the money is taken from the cash box (i.e. it is put into the "Out" column of the Cash account). We have 50 NU remaining in the cash box.
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OUT |
IN |
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IN |
OUT |
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DATE |
PARTICULARS |
ID.NO. |
CASH |
BANK |
SALES |
RAW MAT. |
WAGES |
LOANS |
EQUIPMENT |
INTEREST |
DRAWINGS |
OTHERS | ||||||||||||
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In |
Out |
Bal. |
In |
Out |
Bal. |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
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WAY |
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300 |
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2 |
1 CHAIR |
88 |
100 |
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400 |
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100 | |
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4 |
WOOD |
87 |
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150 |
250 |
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150 |
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STEP 4 |
6 |
WAGES |
88 |
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200 |
50 |
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200 |
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STEP 5 |
7 |
LOAN |
89 |
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6,000 |
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6,000 |
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6,000 |
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The reason why wages are entered in the " In " column of the Wages account is that the money represents the time the workers put into the business.
The vouchers in this case are the receipts signed by the workers when they receive their wages. The carpenter clips them together and notes "88 "on them before filing.
FILE YOUR WAGE RECEIPTS
STEP 5
The carpenter successfully applies for a loan at the local bank. The amount borrowed is 6,000 NU. He is requested by the bank manager to deposit the money in the bank until it is needed in the business.
In the ledger two new accounts are needed, one named "Bank" and one named "Loans".
The ledger now tells us that a loan was obtained on 7 May and that the money, 6,000 NU, was deposited in the bank. The document concerning the loan was given the identification number "89" and filed.
FILE YOUR DOCUMENTS
Remember that we said that every business transaction consisted of two parts: one part that goes into the business and one part that goes out of the business. When this loan was obtained the money went into the account named " Bank". What went out of the business was a debit to the bank-a loan which has to be repaid. Therefore the entry in the Loan account will be in the Out column.
Figure
NOTE:
· EVERY TRANSACTION TAKES ONE WHOLE ROW ACROSS THE LEDGER
· NEVER ENTER MORE THAN ONE TRANSACTION ON EACH LINE
STEP 6
The money borrowed was meant to buy a drilling machine for the business. The price the carpenter had to pay was 4,000 NU. To record that purchase we have to add an Equipment account.
On 10 May a drilling machine was bought. The price was 4,000 NU and payment was made from the bank (i.e. by cheque). The receipt has the number "90" written on it and is kept in the voucher file.
STEP 7
To complete the carpenter's ledger we shall add just three more accounts. The first one we call "Interest" It is to be used when interest is to be paid on the loan which was obtained from the bank.
The second account we call "Drawings". It is to be used when the owner, the carpenter, withdraws money or goods from the business for his private use.
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DATE |
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PARTICULARS |
ID.NO. |
CASH |
BANK |
SALES |
RAW MAT. |
WAGES |
LOANS |
EQUIPMENT |
INTEREST |
DRAWINGS |
OTHERS | ||||||||||||
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In |
Out |
Bal. |
In |
Out |
Bal. |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
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WAY |
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300 |
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2 |
1 CHAIR |
86 |
100 |
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400 |
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100 |
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4 |
WOOD |
87 |
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150 |
250 |
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150 |
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6 |
WAGES |
88 |
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50 |
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7 |
LOAN |
89 |
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6,000 |
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6,000 |
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STEP 6 | |
10 |
DRILLING MACHINE |
90 |
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4,000 |
2,000 |
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4,000 |
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STEP 7 | |
13 |
INTEREST |
91 |
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200 |
1.800 |
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200 |
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STEP 7 | |
13 |
OWN SALDRY |
92 |
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400 |
1,400 |
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400 |
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STEP 7 | |
13 |
ELECTRICITY |
93 |
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150 |
1,250 |
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160 |
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MAKE IT A RULE
ALWAYS START BY MAKING THE ENTRY IN THE
CASH OR BANK ACCOUNT FIRST
The last account we call "Others". This account is used only when none of the others can be used.
Look at the examples given as entries in each of the three accounts.
If you are ever in doubt whether to use the " In " or "Out" column for a particular entry, start by making the entry in the Cash or Bank account first. If it is an " In " entry in the Cash or Bank account, the other entry has to be an "Out" entry.
STEP 8
There are only three more things left to remember:
· When you are starting up your ledger you must enter some details about the assets and liabilities of your business.· When one page is full you must add up the columns and carry the totals to the next page in the ledger. These are called "Balances forward" (B/f).
· At the end of each month you must summarise each account.
Entering assets and
liabilities
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DATE |
PARTICULARS |
ID. NO. |
CASH |
BANK |
SALES |
RAW MAT. |
WAGES |
LOANS |
EQUIPMENT |
INTEREST |
DRAWINGS |
OTHERS | ||||||||||||
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In |
Out |
Bal. |
In |
Out |
Bal. |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
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WAY |
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B/f |
4,600 |
3,200 |
1,600 |
8,000 |
6,300 |
1,700 |
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5,200 |
1,400 |
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600 |
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6,000 |
9,000 |
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200 |
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1,000 |
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800 |
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24 |
GLUE |
121 |
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40 |
1,560 |
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40 |
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25 |
CHAIR |
122 |
100 |
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1,660 |
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100 |
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15 |
WAGES |
113 |
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400 |
1.260 |
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400 |
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29 |
LOAN REPAYMENT |
124 |
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300 |
1,400 |
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300 |
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31 |
WATER |
125 |
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60 |
1,200 |
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60 |
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4,900 |
3,700 |
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8,000 |
6.600 |
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300 |
6,000 |
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1,200 |
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1,400 |
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5.300 |
1,440 |
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1,000 |
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5,700 |
9.000 |
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200 |
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1,000 |
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860 |
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Summarising at the end of a month
At the end of a month you must add up each column and carry forward the balance of each account to a new page in the ledger. See how it is done in the example above.
As you can see, it is only the net balance on each account which we carry forward to the next month (i.e. the next page). On the Cash and Bank accounts it is very easy as we have noted the net balance after each entry. But look at the Loans account. An installment payment of 300 NU was made and we have to subtract that figure from the loan to find out the net balance.
As you have seen on most of the accounts, only one column is used, either the "In" or the "Out" column.
|
DATE |
PARTICULARS |
ID.NO. |
CASH |
BANK |
SALES |
RAW MAT. |
WAGES |
LOANS |
EQUIPMENT |
INTEREST |
DRAWINGS |
OTHERS | ||||||||||||
| | | |
In |
Out |
Bal. |
In |
Out |
Bal. |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
In |
Out |
|
JUNE |
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B/f |
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1,200 |
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1,200 |
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5.300 |
1,440 |
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1,000 |
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5.700 |
9.000 |
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100 |
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1,000 |
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860 |
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1 |
1 SOFA |
126 |
1,000 |
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2,200 | |
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1,000 |
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1 |
A NEW LEDGER |
127 |
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50 |
2,150 |
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50 |
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IN EQUALS DEBIT OUT EQUALS CREDIT
But occasionally the other column is used: for example, when a customer returns a commodity and gets his money back, then you have to use the " in " column of the Sales account. Finally, have a look at the page for the new month below, with the balances brought forward.
Now you have learned how to set up a ledger and how to conduct what is called double-entry bookkeeping.
We have used "In" and "Out" as headings for each account. Professional bookkeepers will instead of" In " use the word "Debit", and instead. of "Out" use the word "Credit". When you have become familiar with making entries in your ledger, you can do what the professionals do and use "Debit" and "Credit".
A complete bookkeeping system consists of the ledger and a set of subsidiary books. The number of subsidiary books used depends on the size and kind of business you are in. These books help you to remember important things about your business. Here are some examples of subsidiary books and how to use them.
The invoice book helps you to remember who owes the business money for goods or services you have sold but have not been paid for. When you have delivered a commodity or provided a service, you send an invoice to the customer. You keep a copy of the invoice in the invoice book.
Figure
When the customer pays his debt, you enter the amount in the ledger, take the copy of the invoice from the invoice book, mark it" Paid " and file it in the voucher file.
If the customer only partly pays the invoice, the copy of the invoice remains in the invoice book until it is fully paid. Just note on the copy how much is paid. For each part-payment you give the customer a receipt. Enter what is paid in the ledger and put the copy of the receipt into the voucher file. When the customer makes the last part-payment you remove the invoice copy from the book and mark it" Paid ". File it in the voucher file.
The customer receives the chair
and an invoice
The customer pays half of the
invoice amount and gets a receipt
The customer pays the other half
of the invoice amount and gets a second receipt
Ready-to-use invoice books and a pad of receipts can be bought in any stationery shop.
The purchase journal is used to write down details of goods and services bought on credit which are not yet paid for.
Figure
The invoice you receive from the supplier is kept in the purchase journal until it is fully paid. If you are making part-payments to the supplier, write into the journal how much you pay. Each time you pay, also enter the amount in the ledger. File the receipts you receive for each part-payment in the voucher file. When you make the last payment you also file the invoice in the voucher file.
Figure
Buy the journal in a stationery shop or use an exercise book and make the columns yourself.
In this book you make notes about your employees: names, wages, advance payments and so on. Wages books can be bought from a stationery shop. When you pay your employees' wages, ask them to sign a receipt. Keep the receipts in the voucher file.
Figure
Keep a separate book, a simple notebook for everything that happens between you and your business. Write down every sum of money you put into the business and everything you draw out, your salary and so on.
Figure
The stock book is used to enter the figures arising from your stock-taking. Once or twice a year you must take stock. This means that you write down for each article the number of them you have, and also the value.
Figure
Stock-taking serves two main purposes:
· to see whether there are too many or too few articles in your stock;· to be able to see if you have made a profit or loss during a certain period. Read more about this in the management accounting section of Improve your business.
A stock book can consist of sheets laid out as shown below or just an exercise book in which you write down the items.
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Stock-taking List Date: | |||
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Article |
Qty. |
Price |
Total |
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Total stock value |
| ||
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Stock-taking List | |||
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Article |
Qty. |
Price |
Total |
|
Wood 12 x 5cm |
10m |
16 |
100 |
|
Wood 10 x 5cm |
20m |
20 |
400 |
|
Glue |
5 l |
60 |
300 |
|
Nails |
8 kg |
25 |
200 |
|
Unfinished products |
|
|
400 |
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Chairs |
6 |
100 |
800 |
|
Tables |
3 |
200 |
600 |
|
Total stock value |
2.800 | ||
It is advisable to keep records of your machines and equipment in a book. The main purpose is to give you information you need for management accounting. The inventory book provides you with information about the present value of your machines and equipment. Each year you should subtract some money from the value because the equipment wears out. Subtract one-fifth of the value each year. After five years of use the value in your inventory book will be nil. This reduction in value each year is called "depreciation" (seethe management accounting section of Improve your business).
Figure
Figure
An inventory book can consist of sheets laid out as shown, or just an exercise book.
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