Bookkeeping Study Guide

📖 Core Concepts Bookkeeping – Systematic recording of every financial transaction (purchases, sales, receipts, payments). Double‑Entry – Each transaction creates at least one debit and one credit; total debits = total credits. Source Document – Original proof (invoice, receipt, deposit slip) that triggers a bookkeeping entry. Daybook / Journal – Chronological “book of original entry” where transactions are first recorded. Ledger – Permanent, account‑by‑account summary of all journal entries; feeds the financial statements. Trial Balance – List of all ledger balances; debit and credit columns must match. Adjusted Trial Balance – After posting adjusting entries (e.g., depreciation, prepaid expenses). Cash‑Based vs. Accrual Accounting – Cash records when cash moves; accrual records when revenue is earned or expense incurred. Chart of Accounts – Organized list of every account code used in the general ledger, grouped by assets, liabilities, equity, income, expenses. --- 📌 Must Remember Double‑Entry Rule: Every transaction = ≥1 debit + ≥1 credit; debits = credits. Debit (Dr) = left side of a T‑account; Credit (Cr) = right side. Unadjusted Trial Balance must balance before any adjustments. Adjusting Entries are required for: inventory counts, depreciation, prepaid items, accrued revenues/expenses. Cash‑Based Accounting → recognize revenue/expense only on cash receipt/payment. Accrual Accounting → recognize revenue when earned, expense when incurred (GAAP requirement). Petty Cash Imprest System – Fixed cash float; replenish when spent, balance stays constant. Key Abbreviations: A/R (Accounts Receivable), A/P (Accounts Payable), B/S (Balance Sheet), Dr, Cr, G/L, PL/Income Statement, TB (Trial Balance). --- 🔄 Key Processes Collect Source Document → invoice, receipt, etc. Record in Appropriate Daybook/Journal (sales, purchases, cash, general). Post to Ledger – Transfer totals to individual accounts, applying debit/credit rules. Prepare Unadjusted Trial Balance – List all ledger balances; verify equality. Make Adjusting Entries – Record accruals, depreciation, prepayments. Prepare Adjusted Trial Balance – Used for income statement & balance sheet. --- 🔍 Key Comparisons Double‑Entry vs. Single‑Entry Double‑Entry: Every transaction affects ≥2 accounts (debit & credit). Single‑Entry: One‑column cash book; limited to cash inflows/outflows. Cash‑Based vs. Accrual Accounting Cash: Recognizes only cash movements → good for liquidity view. Accrual: Recognizes earned/revenue and incurred/expenses → true profitability. Sales Daybook vs. Purchases Daybook Sales: Records invoices issued to customers (A/R). Purchases: Records invoices received from suppliers (A/P). --- ⚠️ Common Misunderstandings “Debits are always expenses.” – False; assets and expense accounts are debited, while liabilities, equity, and revenue are credited. Trial balance proves correctness. – It only proves that debits equal credits; errors of omission or mis‑classification can still exist. Single‑entry is “simpler” for all businesses. – It lacks the internal control and accuracy of double‑entry; not suitable for larger entities or GAAP reporting. Petty cash balance is a liability. – It is an asset (cash on hand). --- 🧠 Mental Models / Intuition “T‑account balance = left (Dr) – right (Cr).” Visualize each account as a T; the side with the larger total shows the account’s normal balance. “Every transaction is a see‑saw.” If you push down on the debit side, the credit side must rise equally – keeps the books level. “Source → Journal → Ledger → Trial Balance → Financial Statements.” Think of it as a production line; skipping a step creates gaps. --- 🚩 Exceptions & Edge Cases Imprest Petty Cash: Replenish only after expenses are documented; the cash balance stays constant, unlike a regular cash account. Prepaid Expenses & Unearned Revenue: Require adjusting entries to move amounts from assets (prepaid) or liabilities (unearned) to expense/revenue over time. Depreciation: Non‑cash expense; recorded via adjusting entry, does not affect cash flow. --- 📍 When to Use Which Choose Double‑Entry for any business that needs accurate financial statements, external reporting, or GAAP compliance. Use Cash‑Based Accounting only for very small, cash‑only operations where simplicity outweighs reporting needs. Select Single‑Entry for personal finances or tiny sole‑proprietor setups with no need for formal statements. Pick Specific Daybooks (sales, purchases, cash) when transaction volume is high enough to benefit from categorised original entries. --- 👀 Patterns to Recognize “Invoice → Sales Daybook → Receivable Ledger → Income Statement.” “Purchase → Purchases Daybook → Payable Ledger → Expense on Income Statement.” When a trial balance doesn’t balance → look for a missing or double‑entered journal entry. Adjusting entry patterns: Prepaid expense → Debit expense, Credit asset. Accrued revenue → Debit asset, Credit revenue. Depreciation → Debit expense, Credit accumulated depreciation (contra‑asset). --- 🗂️ Exam Traps Distractor: “All debits increase assets.” – Wrong because debits also increase expenses and decrease liabilities/equity. Trap: “Petty cash is recorded in the cash daybook as a liability.” – It’s an asset; the imprest system keeps the balance constant. Misleading choice: “A single‑entry system can produce a trial balance.” – Trial balances rely on double‑entry; single‑entry typically doesn’t generate one. Near‑miss: “Accrual accounting records cash when received.” – Confuses cash vs. accrual; accrual ignores cash timing. ---