3: Double Entry Bookkeeping

Question 1

How can you remember what is a debit and what is a credit account?

Answer 1

DEALER

Dividends/Drawings
Expenses
Assets

Liabilities
Equity
Revenue/Income

Question 2

How to record inventory throughout the year?

Answer 2

Adjust inventory at the end of the year - so leave it alone!

All purchases are recorded as:
Dr Purchases (expenses)
Cr Cash or Trade Payables

All sales of inventory are:
Dr Cash or Trade Recievables
Cr Sales or Income

Question 3

The four steps to balance off a ledger account?

Answer 3

1. Add up the debit and credit side of the ledger account to see which is higher
2. Take the higher total and include as the total for both sides of the account
3. On the side with the smaller total, insert the figure needed to make it add up, and call this figure ‘balance c/f’
4. On the opposite side of the ledger, below the total figure, insert the amount of the balance c/f figure and call it the ‘balance b/f’.

This balance b/f is put on the trial balance, and carried forward to next year if an SFP account.

Question 4

What is a trial balance?

Answer 4

A list of all of the closing balances (balance b/f) on the ledger accounts according to whether the balance b/f is on the debit or credit side.

Total debits should equal total credits!

Question 5

What happens to the P&L accounts at the end of the financial year?

What about the SFP accounts?

Answer 5

P&L - they start at nil again. (the overall net profit is carried to retained earnings)

SFP - the closing c/f balance becomes the opening b/f balance for the next period.