2.1 The double entry system of book-keeping (3)
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1.
A business is in the process of recording its financial transactions. Explain the purpose of the division of the ledger into the Sales Ledger, the Purchases Ledger, and the Nominal (General) Ledger. For each ledger type, state the type of transactions that are recorded.
The division of the ledger into the Sales Ledger, Purchases Ledger, and Nominal (General) Ledger is a fundamental aspect of double-entry bookkeeping. This structure provides a clear and organized system for recording and summarizing financial transactions. It allows for easy tracking of different types of transactions and facilitates the preparation of accurate financial statements.
Here's a breakdown of each ledger:
- Sales Ledger: This ledger records all transactions relating to the sale of goods or services on credit. It details the amounts owed to the business by its customers (debtors). Each customer will have their own individual account within the Sales Ledger, showing the invoice number, date, amount due, and any outstanding balance.
- Purchases Ledger: This ledger records all transactions relating to the purchase of goods or services on credit. It details the amounts owed by the business to its suppliers (creditors). Each supplier will have their own individual account within the Purchases Ledger, showing the invoice number, date, amount due, and any outstanding balance.
- Nominal (General) Ledger: This is the main ledger and acts as a central repository for all financial transactions. It contains accounts for assets, liabilities, equity, revenue, and expenses. Transactions are initially recorded in the Nominal Ledger, and then posted to the appropriate subsidiary ledgers (like the Sales and Purchases Ledgers). Examples of accounts in the Nominal Ledger include Cash, Bank, Sales Revenue, Cost of Goods Sold, and Loan Received.
2.
Question 1
On 1st January 2023, ABC Ltd purchased equipment for £5,000 in cash. On 15th January 2023, the equipment was sold for £6,000. Record the transactions in the ledger using the double-entry system.
Answer 1
Journal Entry 1 (1st January 2023):
Account Name | Debit (£) | Credit (£) |
Equipment | 5,000 | |
Cash | | 5,000 |
Explanation: Equipment (an asset) increases, so it is debited. Cash (an asset) decreases, so it is credited.
Journal Entry 2 (15th January 2023):
Account Name | Debit (£) | Credit (£) |
Cash | 6,000 | |
Revenue | | 6,000 |
Explanation: Cash (an asset) increases, so it is debited. Revenue (an income account) increases, so it is credited.
3.
Question 2
The following transactions occurred at XYZ Ltd during the month of February 2023:
- 1st February: Received £2,000 from a customer for goods supplied on credit.
- 10th February: Paid £300 for office supplies in cash.
- 20th February: Received £1,500 from a customer for goods supplied on credit.
- 25th February: Paid £500 to a supplier for goods purchased on credit.
Record these transactions in the ledger using the double-entry system.
Answer 2
Journal Entry 1 (1st February 2023):
Account Name | Debit (£) | Credit (£) |
Cash | 2,000 | |
Debtors | | 2,000 |
Explanation: Cash (an asset) increases, so it is debited. Debtors (an asset) increase, so it is credited.
Journal Entry 2 (10th February 2023):
Account Name | Debit (£) | Credit (£) |
Office Supplies | 300 | |
Cash | | 300 |
Explanation: Office Supplies (an expense) increases, so it is debited. Cash (an asset) decreases, so it is credited.
Journal Entry 3 (20th February 2023):
Account Name | Debit (£) | Credit (£) |
Cash | 1,500 | |
Debtors | | 1,500 |
Explanation: Cash (an asset) increases, so it is debited. Debtors (an asset) increase, so it is credited.
Journal Entry 4 (25th February 2023):
Account Name | Debit (£) | Credit (£) |
Supplier's Due | 500 | |
Cash | | 500 |
Explanation: Supplier's Due (a liability) decreases, so it is debited. Cash (an asset) decreases, so it is credited.