Bookkeeping is the process by which the transactions that happen in a business are formally recorded in ‘books of prime entry’ of which there are essentially six being …
1) The Sales Book
2) The Purchases Book
3) The Cash Received Book
4) The Payments Book
5) The Petty Cash Book
6) The Wages Book
Most of these are now normally included within a computerised accounting system however the same basic function is still performed whether the process in manual or computerised.
The Sales and Purchases Books record all invoices issued or received and analyses each to record (at least) the date, invoice number, customer or supplier name, value of sale or purchase, type of sale or purchase and any sales or purchase tax (VAT) included. Other data such as narrative giving more detail, customer or supplier number, sales or purchase type code etc. may also be included.
The Cash Received and Payments (sometimes called the cheque journal) Books record bank account transactions in settlement of the invoices issued or received and where the transaction doesn’t involve credit terms. This will include Customer or Supplier payments received and paid, Bank interest and charges, standing orders and direct debits, taxes paid or received (payroll taxes, sales taxes, personal and corporate taxes etc.), sundry income (such as rents, grants etc.).
The Petty Cash Book records the same information as the Cash Received and Payments books but for small cash transactions rather than for bank account transactions. The best Petty Cash systems are based around an ‘impress system’ which works as follows. Set a level of petty cash float that is appropriate to the size of business which could be £25, £50 or £100 for example. Payments are issued as required and each is represented by a receipt for the payments made. At some point the cash will need replenished and this is done by removing the receipts and cashing a cheque for the total of those. At all times therefor the petty cash is presented by the total of the cash in the box plus the total receipts held.
The Wages Book records the gross wages paid to each employee along with deductions made for taxes, pension or such other items and the net payment due.
The General or Nominal Ledger
Once the prime records are entered for the accounting period, these are then all summarised and combined in the general or nominal ledger. This sorts all the income and expenditure by type rather than by source as in the prime records. For example the general ledger will have an account for Wages which will include the gross wages from the Wages Book but may also have casual wages paid from both the Cheque Journal and the Petty Cash Book.
It was an Italian , Luca Bartolomes Pacioli who first described the principles of double entry bookkeeping in 1494 and whether the system is manual or electronic the same principles have applied ever since. Essentially such systems always have a Credit (Latin for ‘he trusts’) for every Debit (Latin for ‘he owes’) and hence the records are always said to ‘balance’.
As an example of this principle, the total bank payments as shown in the Cheque Journal would be ‘posted’ to the debit side of the Bank Account within the Nominal Ledger and would be represented by postings totalling the same amount to the credit of the specific expense accounts (such as Wages, Bank Charges, Electricity etc.)
The summary listing of all records within the Nominal Leger is called the Trial Balance and forms the basis for production of a set of accounts.
For information of Accounts Preparation, see the Nutshell Guide to Accounts Preparation.
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