Bookkeeping, journals and the subsidiary books

Cue 1 The accounting equation as a balance beam that tips when only one side is entered.

AMARA 00:00 Every bookkeeping course opens with debits and credits, and that is where most people stop.

NADIA 00:06 Because the words are badly chosen and nobody says so. A bank credits your account when money arrives, so credit reads as more. In your own books it means the opposite.

Cue 2 Debit and credit table across assets, liabilities, capital, income and expenses.

AMARA 00:18 Which of the two uses is correct?

NADIA 00:21 Both, from their own side. Your deposit is money the bank owes you. In the bank's books that is a liability, and liabilities increase on the credit side. Their entry is right and so is yours.

Cue 3 The bank's view versus your view of the same deposit, side by side.

AMARA 00:35 So what is the rule underneath it?

NADIA 00:38 One line. Assets equal liabilities plus capital. Everything a business controls was funded either by somebody it owes or by its owners, and every entry you make keeps that true.

Cue 4 Transaction flow: source document, day book, ledger, trial balance.

AMARA 00:50 And that is why the system self checks.

NADIA 00:53 It is. Record one side only and the books do not balance, so the error announces itself before anybody has to find it. That is the entire design intent of double entry.

Cue 5 Three errors a trial balance cannot detect, shown still balancing.

AMARA 01:06 Then a balanced trial balance means the accounts are right.

NADIA 01:10 It means debits equal credits. Nothing more, and the gap matters.

AMARA 01:14 Give me what it cannot see.

NADIA 01:17 Three things. An invoice never entered at all, because nothing is missing from either side. Rent posted to the insurance account, because both are expenses. And two errors of equal size in opposite directions, which cancel and leave the balance immaculate.

AMARA 01:33 So what catches those?

NADIA 01:35 Reconciliation and judgement. Cash book against the bank statement, supplier statements against the purchase ledger, and somebody asking whether the figures are plausible. The trial balance is where checking starts, not where it finishes.

Cue 1 Cash book against bank statement, timing differences separated from errors.

AMARA 01:48 Bank reconciliation. Why is it treated as the important one?

NADIA 01:52 Because it is the only control that checks your books against somebody independent. A trial balance checks you against yourself, and you will always agree with yourself.

AMARA 02:03 So what counts as a legitimate difference?

Cue 2 Suspense account growing month by month with nobody assigned to it.

NADIA 02:06 Timing, and only timing. A cheque written but not presented. A receipt banked yesterday that has not cleared. Explain all of those and whatever remains is an error, yours or theirs.

AMARA 02:18 And if something will not explain?

NADIA 02:21 Investigate it rather than posting it to suspense. Suspense accounts that grow are where error and fraud both live, precisely because everybody assumes somebody else looked at it.

Cue 3 Sales ledger control account against the sum of individual customer accounts.

AMARA 02:32 Control accounts. What are they for?

NADIA 02:34 Speed of diagnosis. The sales ledger control account holds the total owed by every customer. The individual accounts should add to exactly that.

AMARA 02:44 And when they do not agree?

Cue 4 Diagnosis table: which symptom points to which ledger.

NADIA 02:46 You have just narrowed a search through thousands of transactions down to one ledger. That is the entire value: it tells you where to look, not that something is wrong.

AMARA 02:58 VAT. When does a business have to register?

NADIA 03:01 When taxable turnover passes the threshold in any rolling twelve month period. The word rolling is the one that catches people, because they check their financial year and miss a twelve month window that straddles two of them.

Cue 5 Rolling twelve month VAT window straddling two financial years.

AMARA 03:16 And the record keeping has changed.

NADIA 03:19 Making Tax Digital. VAT records kept digitally, returns filed through compatible software. A paper cash book is no longer sufficient for a registered business, however neatly it is kept.

AMARA 03:30 Last one. We reclaim VAT on a purchase and have lost the invoice.

NADIA 03:36 Then the reclaim is disallowed on inspection. You need a valid VAT invoice to reclaim input tax, and this is the sort of thing that arrives three years later with interest on it. Keep the paperwork.