Introduction to Bookkeeping – SS1 Book Keeping Lesson Note (First Term)

Book-keeping is the systematic recording of the daily financial transactions of an organisation so that the financial position of a business can be readily ascertained at any time.

Behavioural objectives

By the end of the lesson, students should be able to:

1. Define book-keeping and accounting.
2. Explain what a business transaction is and name its two types.
3. State the differences between book-keeping and accounting.
4. Give reasons why accounting records are kept.
5. Name the users of accounting records.
6. List the stages of recording a transaction.

What is a business transaction?

A business transaction is any dealing in money or goods that affects a business, such as buying, selling or paying expenses.

• Cash transaction: payment is made at once, as when a trader sells rice and receives money immediately.
• Credit transaction: payment is made later, as when a shop buys goods today and pays the supplier next month.

• Examples of transactions: buying goods, selling goods, paying rent, paying wages and receiving a loan.

What is accounting?

Accounting is the process of recording, classifying, analysing, summarising and interpreting financial information about a business.

• Recording: writing down transactions as they happen (this part is book-keeping).
• Classifying: grouping similar items together, such as all sales in one place.
• Analysing: studying the figures to see what they mean.
• Summarising: presenting the figures briefly, for example in a profit and loss account.
• Interpreting: explaining the results so that owners and managers can act on them.

What is the difference between book-keeping and accounting?

Book-keeping is the routine recording of transactions. Accounting covers recording and also the classifying, analysing, summarising and interpreting of the records.

Why are book-keeping and accounting records kept?

Records are kept to show how a business is performing and to give reliable figures for decisions.

• Profit or loss: to determine the profit or loss made by the business during a particular trading period.
• Decision making: financial records help managers of the business to make decisions.
• Fraud prevention: financial records help in the prevention of fraud, because missing money or goods can be traced.
• Financial position: to assess and ascertain the financial position of the business at a particular date.
• Solvency and liquidity: to determine whether the business can pay its debts and has cash available.
• Tax: they serve as a basis for assessing the tax to be paid by the business.
• Assets and liabilities: to ascertain what the business owns and what it owes.
• Comparison: they are useful for comparing one business with another, and recent results with past results.
• Planning: properly kept records are used for setting targets and deciding the best ways to achieve them.

What are the key terms used in book-keeping?

Key terms are the basic words used to describe the financial state of a business.

• Asset: anything of value that a business owns, such as cash, stock, buildings and vehicles.
• Liability: an amount a business owes to others, such as a bank loan or money owed to suppliers.
• Capital: the money or assets the owner puts into the business.
• Profit: the gain made when income is greater than expenses.
• Loss: the amount by which expenses are greater than income.
• Solvency: the ability of a business to pay all its debts when they fall due.
• Liquidity: the ability of a business to meet its short-term debts from cash or items quickly turned into cash.

Who uses accounting records?

Users of accounting records are the people and bodies who need financial information about a business.

• Owners: to know whether the business is making profit.
• Managers: to plan, control and make decisions.
• Tax authorities: to assess the tax the business should pay.
• Banks and lenders: to decide whether to give a loan.
• Suppliers and creditors: to judge whether the business can pay what it owes.
• Employees: to judge the stability of the business and its ability to pay wages.

What are source documents?

Source documents are written proofs that a transaction has taken place, and they are the first step in recording it.

• Invoice: a document sent to a buyer showing goods supplied and the amount to be paid.
• Receipt: proof that money has been received.
• Cheque: a written order to a bank to pay money from an account.
• Credit note: a document issued when goods are returned or an overcharge is corrected.

What are the stages of recording a transaction?

A transaction passes through a fixed order of stages, from the document to the final report.

1. The transaction takes place and a source document is raised.
2. The transaction is entered in a book of original entry, such as the cash book or journal.
3. The entry is posted to the ledger accounts.
4. A trial balance is prepared to check the records.
5. Final accounts are prepared to show profit or loss and the financial position.

Evaluation

1. Define book-keeping.
2. State three differences between book-keeping and accounting.
3. Explain how financial records help in the prevention of fraud.
4. Give four reasons why a business keeps accounting records.
5. Name three users of accounting records and state why each needs them.

Assignment

1. List five reasons why accounting records are kept, then explain why book-keeping is described as an integral part of accounting.