The definition of accounting records is all of the documents and records in connection with running a business and recording any transactions in order to compile a set of financial statements that meet the relevant necessary requirement of that business at the end of its financial year.
A full set of accounting records would be as follows: –
Cash Book – used to record bank receipts and payments.
Sales Day Book – used to record sales from sales invoices raised by the business
Sales Ledger – used to record sales invoices from the sales day book and receipts from the cash book in order to show the balance of invoices outstanding analyzed by customer
Purchase Day Book – used to record purchases from purchase invoices raised by suppliers relating to goods for re-sale and any expenses incurred in running the business.
Purchase Ledger – used to record purchase invoices from the purchase day book and payments from the cash book in order to show the balance of invoices outstanding analyzed by supplier
Petty Cash Book – used to record out of pocket cash receipts and expenses
Nominal Ledgers – used to analyze the totals from the day books into nominal account headings in order to construct a trial balance.
So lets Simplify which accounting records are required for various types of business
Business 1
I am a sole trader I buy goods that are paid for at the time of purchase
I sell the goods and cash is received at the point of sale
This person will be required to file a Self Assessment Tax Return which will show his total income and expenditure to give a net income for tax purposes.
Necessary records: –
A Cash Book to record all receipts : –
Receipts will comprise of
- Any capital introduced to fund the business on initial start up.
- All receptions relating to the sale of goods
- Any other receipts such as Bank Interest Received.
A Cash Book to record all payments
Payments will comprise of the following: –
- Any payments of a fixed asset nature such as the purchase of a vehicle or equipment required for the running of the business.
- A record of Drawings- money taken out of the business for personal use.
- A record of all purchases of goods for resale
- A record of any expenses such as rent, telephone insurance etc. relating to the running of the business.
Business 2
I am a sole trader.
I sell goods and allow customers to pay for those goods on a 30 day credit term.
I buy goods and am allowed 30 days before I have to pay for the goods.
This person will need a cash book to record receipts and payment as above together with the following records: –
A Sales Day Book to record all sales invoices relating to goods sold.
Some sort of record to record to show balances outstanding for those goods sold.
This can either be by way of a Sales Ledger – The best way
Or by having additional columns in the sales day book to record the date of receipt and the amount received.
In our Cash Book we would have a heading for Sales Ledger Receipts that replaces the sales heading for a cash based only business as described above.
A Purchase Day Book to record all purchase invoices relating to goods purchased for resale, and in addition it can also record all invoices relating to expenses of running the business. Especially required if we are VAT registered.
A record to record all money outstanding for purchases: –
A Purchase Ledger
Or additional columns in our purchase day book to record date of payment and amount paid.
These entries coming from our cash books so that instead of analyzing all our expenses in the cash book because we have done it here we would have just one heading in the cash book called purchase Ledger Payments.
In addition to this if we keep goods for resale for any length of time, we might consider keeping a Stock Book so that we can keep an eye on stock reorder levels at any time and also get an idea of any slow moving items.
If we employ staff we will need wages records – For this is purpose we would have to register our business with HM Revenue and Customs as an employee and they will send an information pack together with a free CD ROM which contains all the necessary information required.
Until we start putting all the information together to compile our Financial Statements these are really all the records that any business requires.
Remember to file in separate folders all Sales and Purchase Invoices and any other documentation relating to the business.
Sales and purchase invoices are best kept in date order and numbered as you enter them into the relative day books for easy reference at a later date.