Buying on credit.

Next, Tom needs to buy some stock. He approaches a supplier and selects the stock he wants to purchase. The total amount he needs to pay is £500, however the supplier says he doesn't have to pay for 30 days.

This is known as buying on credit. You order the stock, it is sent to you and then you pay for it at a later date. This is ideal as it allows the business to sell the stock which generates money to pay for it.

Here are the T Accounts:

Notice how we have debited the purchases account, but not added an entry to the bank? This is because Tom hasn't actually paid for the stock yet. He will do in 30 days time. So we need to open a new account- the purchase ledger control account.

Because Tom owes money to the supplier, it is a liability so we need to credit the purchase ledger control account.

We now know that we owe £500. We can also enter this into an individual purchase ledger for the particular supplier. It is simply another T account titled 'Purchase Ledger [Supplier Name]' where we would enter all the credit purchases from this supplier. It is only a single sided entry and is not necessary to do (It simply helps us know how much we owe each supplier). The purchase ledger control account (PLCA) is a summary of these individual purchase ledgers.

Later on, when Tom pays for the stock we will Cr the bank and Dr the PLCA, to remove the liability.

Making an instant purchase

So to get started, Tom needs to buy a domain and web hosting. He buys a domain and one month of hosting from a company for £20. He buys this via their website, entering his business card details. The money is taken from his bank and he now owns a domain and has a month of hosting.

The money for this is taken directly from his business bank account, so we simply debit the expense code and credit the bank:

We can now work out that the balance to carry down on the bank will be £980, so if we looked at his bank statement now, the balance will be £980.

Lets also take a quick look at his trial balance as it currently stands:

Nothing very exciting, but you can see it still balances because we have entered a debit and credit for each transaction. His profit and loss account will show a loss of £20 because he is yet to make a sale (poor guy).

Introducing Capital

So Tom has just started Toms Toys. He has opened a bank account but can't buy anything yet because he doesn't have any money in it!

Tom decides to pay in £1,000 of his own money. He does this on 01/01/2013.

We do the following.

It's that simple! The bank account now has a balance of £1,000 ready for Tom to make some payments to get himself up and running.

Introducing the T Account

The T Account is a key part of bookkeeping, and I need to tell you about it before we start. It's very simple. I assume you know a bit about double entry so I will not go into too much detail.

Here is an example:

You can see why it is called a T Account. On the left we have debits (Dr). On this side, we put expenses, assets and drawings. On the other side, we have credits (Cr). Here we put liabilities, income and capital.

You can remember this using DEAD CLIC - Debit: Expenses, Assets and Drawings | Credit: Liabilities, Income and Capital.

Here is an example of a T Account in use:

First off, we put the date of the transaction. Then we put the account that the other side of the transaction has gone to (hence the double entry). The the 01/01/2014 credit entry of £300? You can see the other side was a debit to Website Costs.

You can see a 'B/fwd' entry at the top of £300. This is the opening balance of the account. It's simply the balance that the account last closed at. 

You can also see we have income into the bank on the Dr side, and expenses from the bank on the Cr side. Every entry on the Dr side of our bank T account will need a corresponding Cr entry somewhere else, and the Cr entries will need a corresponding Dr entry (this is why the trial balance balances!).

Finally we need to balance the T account:

This is just a case of making the two numbers at the bottom to be the same (£750 in this case). The balancing figure is called 'Balance c/fwd' and is moved to the other side under the total for the 'b/fwd' balance. Next time we write up the bank account, the b/fwd value of £400 will appear when the b/fwd of £300 is on the 01/01/2014.

Now I will begin entering some proper transactions.

Introducing Tom.

In this blog I will use one business to show several bookkeeping techniques to help you learn. In this post I introduce the business we will be working on.

I'd like you introduce you to Tom.

Welcome to Tiny Accountant!

And thank you for coming. This is a new blog aimed at anyone who is looking to learn about bookkeeping or accounting.
I will set up a small company on Microsoft Excel and post transactions to different T-Accounts. I will take you through how you do different things, such as writing off bad debts, paying the VAT man and much more.

I will not only take you through the bookkeeping techniques, but also the year end accounts process- things from accruals and prepayments to reconciling the bank. If you follow my blog as I go you'll become a bookkeeping and accounts pro in no time!

Tiny Accountant.