ICB Level II Certificate in Book-keeping TRAINING MANUAL 1

ICB Level II Certificate in Book-keeping TRAINING MANUAL 1

Published by ICB Direct Ltd ICB Direct Ltd 2013 All rights reserved. No part of this publication may be reproduced, sorted in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopy, recording, or otherwise, without the prior written consent of the publishers. This book may not be lent, re-sold, hired out or otherwise disposed of by way of trade in any form without the prior permission of the publishers. The content of this pack is frequently updated but on occasion, changes to legislation or accounting standards may not be reflected until some time after implementation. Printed under licence by Mycourse Limited 2014 Mycourse Limited Wards Road, Elgin IV30 1NL www.mycourse.co.uk Tel. 0845 862 0608 ICB Direct Ltd 2014 1-2

CONTENTS BOOK 1 UNIT TOPIC PAGE 1 The role of the bookkeeper Types of businesses The concepts of Business Entity and Historic Cost Setting up the Bank Account The Analysed Cash Book 1-1 2 An Introduction to Double Entry Bookkeeping The concept of Duality 2-37 3 Correction of Errors The Journal The Cash Account Two Column Cash Book Debit and Credit Cards Payroll Transactions 3-59 4 Credit Transactions 4-89 5 6 An Introduction to Value Added Tax Business Documents Calculating VAT Discounts VAT and the Ledgers Petty Cash 5-113 6-141 Answers to Practice Tasks A-1 Revision Pack R-1 Revision Pack Answers R-39 ICB Direct Ltd 2014 1-3

The following pages are an extract from Unit 2 of the manual ICB Direct Ltd 2014 1-4

Level 2 Unit 2 An Introduction to Double Entry Bookkeeping The concept of Duality 2. Introduction In the first Unit of this course you learnt to enter transactions into a bank account. This was a single entry that recorded money coming in or money going out of a business. For example a cheque paid out for 250 for purchases would be entered in the credit column (right hand side) of the Bank Account, as the money went out of the account. You also learned how to analyse the expenditure into columns this gave an idea of the second half of the transaction the in part. In this Unit you will extend the concept of the analysis column into a full double entry system, by making the second entry in its own account instead of simply in a column in the analysed bank account. This enables the owner of the business to have a full picture of everything that is going on at any time. Learning Objectives This Unit aims to: Explain the nature of a double entry system Explain the term duality Show the use of the capital account Demonstrate a set of double entry accounts for bank transactions Balance accounts that have a variety of formats Introduce the trial balance to enable the checking of account entries ICB Direct Ltd 2014 2-41

The Double Entry System As explained above, double entry bookkeeping records both halves of the transaction and every transaction will now have two entries in the books of account. The Concept of Duality Here is where you meet the third and final concept for this level of your studies. The double entry system by its very nature meets this concept each transaction has a dual effect on the accounts of a business something comes in and something goes out. The Ledger All bookkeeping transactions are entered into a Ledger (the book of account). In this lesson the ledger you will be dealing with is called the Nominal or General Ledger. The ledger is split into different Accounts. Accounts are named for their content (i.e. bank account, rent account, sales account etc.) The typical ledger account has the same format as the Bank Account that you met in Unit 1. If we work through the example given earlier in Unit 1, we can see how the full double-entry system appears: Transaction 1: Starting up the business with 10,000 capital This transaction will be entered into the ledgers as follows: Entry 1 Bank Account (as before) Date Details Date Details 1 Capital 10,000.00 Remember in this instance the Bank Account records the money coming into the business. ICB Direct Ltd 2014 2-42

Entry 2 We now have to introduce a Capital Account which records the money which the business owes to the owner. In Unit 1 we introduced the idea of the right hand side of the account being used to record a liability. In the case of the bank account, the credit balance showed a liability to the bank, in the capital account, the credit entry is used to record the liability to the owner. Anyone who is owed money by a business is called a creditor, hence the reason for the out column being called the Credit (or Cr for short) column. Capital Account Date Details Date Details 1 Bank 10,000.00 The Capital Account therefore has a credit balance, often identified by the letters Cr after the amount. As the number of accounts grows, it is useful to introduce a numbering system for ease of identification, although this is completely optional. Folio Numbers We are now going to use an additional column called the Folio column (headed fo). Each account will be allocated a different number and these will often be grouped for ease of recognition. For now we will give the following numbers to the accounts: Bank Account 1 Capital Account 2 Equipment Account 3 Purchases Account 4 Sales Account 5 Drawings Account 6 ICB Direct Ltd 2014 2-43

Transaction 2: Purchase of equipment The bank entry will be on the credit side of the account, as money has gone, out of the business. Entry 1 Bank Account (1) 1 Capital 2 10,000.00 2 Equipment 3 800.00 The second entry will be in an equipment account and will be a debit entry to record that the equipment has come into the business. Entry 2 Equipment Account (3) 2 Bank 1 800.00 Equipment which is kept in the business for a long time and used in the running of the business is called an asset. Other assets of a business could be premises, fixtures and fittings, motor vehicles, computers. All asset accounts will have debit balances. If you are not sure on which side to make the entries, ask yourself the following questions Did money change hands? Yes or No No will be dealt with later If the answer is yes, then ask yourself did money come in or go out of the business? ICB Direct Ltd 2014 2-44

If money came in then the bank entry is in the debit column. The detail of the transaction then becomes the name of the second account and that transaction will be in the credit column. If money went out then the bank entry is in the credit column. The detail of the transaction then becomes the name of the second account and that transaction will be in the debit column. Transaction 3: Purchase of goods for resale Bank Account (1) 1 Capital 2 10,000.00 2 Equipment 3 800.00 4 Purchases 4 100.00 Purchases Account (4) 4 Bank 1 100.00 Money has gone out and Purchases (goods for resale) have come in. Note: the Purchases account is used exclusively for goods for resale. Other items purchased by the business are housed in different and separate accounts. An example is the previous purchase of equipment the equipment concerned is not for resale so appears in its own account, not in the purchases account. ICB Direct Ltd 2014 2-45

Transaction 4: Sale of goods If money has come into the business, after a sale for example, the entries would be as follows: Bank Account (1) 1 Capital 2 10,000.00 2 Equipment 3 800.00 6 Sales 5 175.00 4 Purchases 4 100.00 Sales Account (5) 6 Bank 1 175.00 Money has come in and sales (goods sold) have gone out. REMEMBER The IN part of the transaction is entered on the DEBIT column of the bank account (the left hand side) The OUT part of the transaction is entered on the CREDIT column of the sales account (the right hand side) ICB Direct Ltd 2014 2-46

Transaction 5: Drawings The final transaction recorded the withdrawal of funds from the bank for personal use (i.e. Drawings). Bank Account (1) 1 Capital 2 10,000.00 2 Equipment 3 800.00 6 Sales 5 175.00 4 Purchases 4 100.00 6 Drawings 6 100.00 Drawings Account (6) 6 Bank 1 100.00 The Drawings Account is a difficult one to understand. Remember the credit entry is in the Bank Account (to record the money going out). Following the rules of double entry, the Drawings Account will always have debit entries. In order to explain the reason for this fully, it is necessary to look again at the Capital Account. Remember the Capital Account shows the amount which the business owes to the owner and hence it has a credit balance. When the owner draws money from the business, they are actually reducing the amount that the business owes them. It would have been possible to make the entry directly into the capital account as follows: ICB Direct Ltd 2014 2-47

Capital Account (2) 6 Bank 1 100.00 1 Bank 1 10,000.00 i.e. if you balance the account you will see that the business now only owes Amanda 9,900 However, in order to preserve as much detail in the accounts as possible, the Capital Account is left untouched so that it is possible to see how much money was put in to start the business. The two accounts will therefore appear as follows: Capital Account (2) 1 Bank 1 10,000.00 Drawings Account (6) 6 Bank 1 100.00 The net results of these two methods will be the same. ICB Direct Ltd 2014 2-48