Accounting System: Stages, Transactions & Equations

Learning Outcomes

• Learners will be able to recall the stages of an accounting system.
• Learners will be able to explain the dual effect of transactions on the accounting equation.
• Learners will be able to apply the accounting equation.
• Learners will be able to record cash transactions using double entry.

The Five Stage Accounting System

• The accounting system has five stages: financial transactions; financial documents; books of prime entry; ledger accounts; and trial balance.
• The statement of profit or loss shows Income minus Expenses equals Profit.
• The statement of financial position shows Assets minus Liabilities equals Capital.
• Assets represent what a business owns.
• Liabilities represent what a business owes to others.
• Capital is the owner's investment and profits.

Key Definitions

• A financial transaction is an event or activity that affects the accounts of a business.
• In cash transactions, a customer pays for goods and receives them on the same day.
• The customer can pay using notes, coins, a cheque, debit card, or credit card for cash transactions.
• In credit transactions, a customer receives goods or services and pays at a later date, often via cheque or bank transfer.

Double Entry Bookkeeping

• When a business pays a supplier, assets and liabilities decrease by the amount of the payment, while capital remains unchanged.
• When a business purchases a computer, total assets remain constant as value is transferred from bank to computer.
• When the owner introduces new capital by paying a cheque into the bank, the cash assets and the capital invested both increase.

The Accounting Equation

• The Double Entry Golden Rule is that for every transaction there should be a debit and credit entry.
• DEAD = Debit Expenses, Assets, Drawings.
• CLIC = Credit Liabilities, Income, Capital.

Ledgers and Control Accounts

• Control accounts are “totals” of accounts.
• The Sales Ledger represents credit customers' accounts.
• Includes accounts like Mr Jones A/C (£20), Mrs Smith A/C (£5), Mohammed Ali A/C (£5) and Morrisons (£10).
• The Purchases Ledger shows credit suppliers' accounts.
• Includes accounts like Econet (£10), Mr Murray (£3), Mr McDonald (£4), Microsoft (£3), and Apple (£20).
• Total of the accounts equals £40.
• The General Ledger has all other accounts.
• Includes the following accounts; Sales A/C, Purchases A/C, Motor Vehicles, Capital A/C, Drawings A/C, and PLCA/Payables A/C for £40, SLCA/RECEIVABLES A/C for £50.
• Accounts in the sales and purchases ledgers are called real accounts because they are accounts of real people and businesses.
• The sales ledger and the purchases ledger are often referred to as real ledgers.
• The general ledger is often referred to as the nominal ledger or subsidiary ledger.
• Accounts are nominal or subsidiary or are not real accounts.

Debit or Credit Balances

• Debit = Purchases, Sales Returns, Vehicles, Discounts Allowed.
• Credit = Bank (overdraft), Payable ledger control, Rent Received, and Capital.

Explore the 5 stages of accounting: transactions, documents, prime entry books, ledger accounts, and trial balance. Learn about the dual effect of transactions on the accounting equation. Understand assets, liabilities, and capital.