CHAPTER 5 – RECORDING ACTUAL INCOME AND EXPENDITURE
A record of actual income and expenditure is called an account. Therefore, the practice of recording income and expenditure is called accounting.
Cash Accounts and Bank Accounts
A transaction is a financial event that is recorded as an entry in an account. There are two types of transactions: cash transactions and bank transactions.
• A cash transaction involves incoming or outgoing amounts of cash (notes and coins). For example, receiving a €10 note as pocket money or buying lunch in the canteen with change. Cash transactions are recorded in a cash account.
• A bank transaction involves the movement of money in and out of a bank account. For example, the payment of wages into a bank account or a mortgage payment being taken out of a bank account.
CREDIT AND DEBIT To record financial transactions, an account is divided into two sides: debit (DR) and credit (CR).
• Debit is the left-hand side of an account. This is where any money coming into the account (income) is recorded.
• Credit is the right-hand side of the account. This is where any money going out of the account (expenditure) is recorded.
Look at the following simple cash account layout. CASH ACCOUNT
Date Example
Prepare a simple cash account for Tara Hynes for the week beginning 3 October 2016, using the following information: 3/10 Bought lunch
5/10 Received pocket money 6/10 Bought a dress 7/10 Paid for bus ticket 8/10 Bought magazine
€10 €20 €25 €5 €4
9/10 Received birthday money €40 CASH ACCOUNT
Date
5/10 9/10
Debit side (money in) Details
Pocket money Birthday money
€ Date
20 3/10 40 6/10 7/10 8/10
Credit side (money out) Details
Lunch Dress
Bus ticket Magazine
€
10 25 5 4
The money Tara receives is recorded in the debit side of the account. The money Tara spends is recorded in the credit side of the account.
