3. Double Entry Accounting Flashcards
Define double entry accounting.
Double entry bookkeeping is the principle that each transaction has an equal but opposite effect. Every accounting event must be entered in ledger accounts both as a debit and a credit.
What method is used to record transactions in the nominal ledger accounts?
Double entry bookkeeping is the method used to record transactions in the nominal ledger accounts.
What is the dual effect principle?
The dual effect is the ide that every transaction has two effects.
If a business were to purchase a car for £1,000 cash.
The business would own a car (an asset) worth £1,000.
The business would have £1,000 less cash.
How will a debit entry affect the ledger accounts?
A debit entry will:
- Increase an asset
- Increase an expense
- Decrease a liability
- Decrease capital
- Decrease income
How will a credit entry affect the ledger accounts?
A credit entry will:
- Decrease an asset
- Decrease an expense
- Increase a liability
- Increase capital
- Increase income
What is the basic rule of double entry bookkeeping?
The basic rule, which must always be observed, is that every financial transaction gives rise to (at least) two accounting entries, one a debit and the other a credit.
The total value of debit entries in the nominal ledger must therefore always equal to the total value of credit entries. Which account receives the credit entry and which receives the debit entry depends on the nature of the transaction.
What type of entry is a a purchase of stationary or office furniture?
An increase in an expense (e.g. a purchase of stationery) or an increase in an asset (e.g. a purchase of office furniture) is a debit.
What type of entry is a sale or buying goods on credit?
An increase in income (e.g. a sale) or an increase in a liability (e.g. buying goods on credit) or capital is a credit.
What type of entry is a decrease in an asset or a decrease in an expense?
A decrease in an asset (e.g. making a cash payment) or a decrease in an expense is a credit.
What type of entry in the cash at bank account is a cash payment?
What is the matching entry?
A cash payment is a credit entry in the cash at bank account. Here cash (an asset) is decreasing.
Cash may be paid out, for example to pay an expense (such as insurance) or to purchase an asset (such as a machine). The matching debit entry is therefore made in the appropriate expense or asset account.
What type of entry in the cash at bank account is a cash receipt?
What is the matching entry?
A cash receipt is a debit entry in the cash at bank account. Here, cash (an asset) is increasing.
Cash might be received, fro exmaple, by a retailer who makes a cash sale.
Explain double entry for credit transactions, which accounts are used?
In which accounts are credit/debit entries made?
Not all transactions are settled immediately. A business can purchase goods or non-current assets on credit terms, so that balances owed to suppliers would be trade payables until settlement was made in cash at a later date. Equally, the business might grant credit terms to customers, so the balances owed by customers would then be trade receivables of the business.
No entries are made in the cash at bank account when a credit transaction occurs, because no cash has been received or paid.
Instead the receivables and payables accounts are used.
When a business acquires goods or services on credit, the credit entry is posted to the trade payables account instead of the cash account.
The debit entry is posted to the expense or asset account, exactly as in the case of cash transactions.
Similarly when a sale is made to a credit customer, the entry is a debit to the trade receivables account (instead of cash account), and a credit to the sales account.
