These terms are commonly used in business to describe different financial items. Knowing them helps you understand business transactions and how they are recorded.
Journal: The journal is where all financial transactions of a business are first recorded in the order they happen (chronological order). It includes details like the date, description, accounts involved, and amounts. Think of it as a diary where you write down everything that happens, like when you spend money on lunch or receive pocket money.
Ledger: The ledger is where transactions from the journal are sorted and grouped into specific accounts. It helps to see the total amount of sales, expenses, etc., over a period. Think of it as a notebook where you keep separate sections for different types of spending (e.g., food, clothes).
Cash Book: A special book used to record all cash transactions, both cash received and paid out. It acts like both a journal and a ledger. Example: When a business receives cash from customers or pays cash to suppliers, these are recorded in the cash book.
Sales Book (Sales Journal): Records all credit sales (sales where customers will pay later). Example: If a store sells items on credit, this is recorded in the sales book.
Purchases Book (Purchases Journal): Records all credit purchases (goods bought where payment will be made later). Example: If a business buys supplies on credit, this is recorded in the purchases book.
Trade Receivables: Money owed to the business by customers who bought on credit. Example: If a friend buys something from your lemonade stand and promises to pay later, that amount is a trade receivable.
Trade Payables: Money the business owes to its suppliers. Example: If you borrow money from a friend to buy ingredients for your lemonade stand, you owe them, and that is a trade payable.
Capital: Money or assets the owner invests in the business. Example: If you use your saved pocket money to buy supplies for a craft stall, that money is your capital.
Drawings: Money taken out by the owner for personal use. Example: If you take some of the earnings from your craft stall to buy a video game, that is a drawing.
