Simulation Quarter 1: Cash

This level introduces transactions in the form of cash income and expenditure, and shows how to process them into a book-keeping system.

Before you can start processing you need to have working software which is set with a year-end 30 September 2011. See Book-keeping Systems for more information.

Cash Receipts	Trial Balance	General Ledger
Cash Payments	Balance Sheet	Journal
Cash Statement	Profit & Loss

After doing some garden maintenance for a neighbour, Alex Baker decides to go into business as a freelance gardener. His first sales are for cash doing garden chores, although he also puts to good use his knowledge of engines to help one customer with his lawnmowers.

For each sale he completes a sales receipt from a duplicate book, and he gives one copy to the customer and keeps the other copy for his records. He realises fairly quickly that his business is service based, and although he has some costs, his 'trade' is mainly his time in return for money. He tries to put this knowledge to good use: to make his time more valuable by educating himself about the ins and outs of his business.

Whenever he incurs a business cost he keeps the receipt as proof of the expense. He has to travel to visit his customers and he either goes in his car and pays parking charges, or on public transport.

He also buys some work wear and reference material about his chosen career.

He doesn't have a computer, or a business telephone line, so he manages to make do with top-up cards for his mobile, and a flashcard for storing files, which he can use when he has access to a computer.

He realises that the best way to promote his business is by word of mouth, and decides that every time a customer recommends him to another customer he will buy them a garden gnome as a token of his appreciation.

His last insight is to realise that he should focus on what he is good at - gardens and lawnmowers - and get help with the other parts of the business, and so he hires a book-keeper.

He provides the book-keeper with all the paperwork and one other piece of information: that he has counted the cash he has in hand, and it comes to £505.56

In whatever system you are using you will need to create a Cash account, and all the transactions in this level will affect this account.

Different software handles cash income in different ways and you will need to check with the manufacturer's instructions how to set this up. If you are not sure about what software to use, read the previous section on Book-keeping Systems.

Enter the transactions from the document sheets into your system. Take care with the dates and values. You will also have to set up sales accounts, items and customer names, either in advance or as you go along. All the simulated transactions show a reference number in the bottom left hand corner, for example tx-121. These references are used in the notes to identify individual transactions.

There are 16 cash sales transactions. Enter them in the same order as the reference numbers 1-16.

The sales are in two categories:

o Garden maintenance;

o Machinery maintenance

Create income accounts for each in the Chart of Accounts so the Trial Balance will show these two types of sale.

The expenses transactions are not presented in any particular order and have been marked with incrementing numbers. Process them in this order and use these numbers as the reference for each transaction.

Enter the transactions using the accounts below. Make a judgement and match the transactions up with the most appropriate account as you enter them.

o Workwear & Materials

o Promotion

o Stationery

o Telephone & Communications

o Reference & Subscriptions

o Travel

o Parking

As a rule it's easier to add two accounts together then separate them out, so without going overboard, don't be afraid to create as many as you need to give a meaningful picture of an organisation. It helps to keep travel and expenses costs separate as they may need to be declared to HMRC on form P11D.

Run the Trial Balance report in your system. Make sure the date range of the report covers the period you are using.

Compare it to the Trial Balance provided and check the balance of the Cash account. It should be the same as the statement provided by Alex Baker and show a balance of £505.56. This check is the first 'reconciliation' - making sure the records are aligned with reality.

If the balance isn't the same then something has gone wrong and you'll need to check your work to find out what.

To do this you may need to find out how to run a listing or 'ledger' report of the cash account. Some software lets you 'drill down' by double-clicking on a balance in the Trial Balance. Maybe a date is wrong or a value has been entered incorrectly. It may be a transaction has been entered twice, or not at all.

If the overall cash balance is correct, but the balances on the other lines are different, then your judgement of the different categories to use may not be faulty - allocation can sometimes be subjective. The object is to give a true and fair view, and even if the account categories chosen turn out to be less than ideal, being consistent about the allocation process is itself half of the battle. It is far better to be consistently wrong than inconsistently wrong (because the former is easier to discover and put right).

The most comprehensive report, showing all the transactions, is the General Ledger, and a copy of this report is provided for this level. Use this to see which transactions should be in which accounts.

Run the Balance Sheet and the Profit and Loss reports and make yourself familiar with the layouts and compare them to the ones provided. Notice that the net profit appears in both reports but not on the Trial Balance.

Alex Baker is not yet registered for VAT, and only traders that are registered can charge VAT to customers or claim back the VAT they are charged by suppliers.