chapt 4: double entry book-keeping Flashcards
what is the concept of duality
there are 2 effects from any economic event
1. debit effect
2. equal credit effect
because of the SOFP, the effect should work in opposite directions and cancel each other out = net assets remain the same
but when IS is affected, the overall result is that net assets has either increased or decreased
cuz the IS is linked to SOFP through retained profit reserve
what are the three main books of prime entry (source books)
- cash book
- sales day book
- purchases day book
why are the books of prime entry important
all accounting transactions need to be recorded in such a way that the chances of making an error when preparing the financial statements are small
so to identify the errors, transactions are recorded in several places at the same time, so that the records can be compared later to make sure they are equal
the transactions are recorded in a document, all the documents are recorded, listed and analysed in a book of prime entry
what are the 2 ledgers most businesses keep
- sales (or receivables) ledger
- purchases (or payables) ledger
what are ledgers
records of all the individual amounts owed by or to the business’s different customers and suppliers
- from them we can extract lists of all individual amounts owed or owing at any point in time
what is the cash book
used to record every cash payments that the business makes, and every cash receipt
- businesses can keep separate cash books for cash at bank, and cash in hand (petty cash)
- cash payments recorded separately from cash receipts (receipts left and payments on the right)
what are sales day books
used to record every sale that the business makes
when a sale is made, the
1. date
2. invoice number
3. amount of the sale appearing on each sales invoice
are recorded in the sale book tgth with the name of the customer
what is a purchases day book
records every purchase that the business makes
when a purchase is made, the
1. date
2. invoice number
3. amount of the purchase
are included in the purchases day book tgth with the name of the supplier
why is it important to include the date and name of customer/ supplier for each transaction
eventually when all financial statements are prepared, all and only the transactions for the particular accounting period in question are included
name: so that the records in the day book can be compared to the records in the receivables and payables listing (ledgers)
what is an audit trail
some businesses keep an audit trail = keeping records of info which allows the business to retrace its steps and check its records
how are goods returned recorded
they are recorded on a credit note which is much like a negative invoice
how are sales credit and purchase credit notes recorded
sales credit notes: recorded in the sales day book as a minus figure
purchase credit notes: recorded in the purchase day book as a minus figure
how do ledgers work
the ledgers record all the transactions recorded in the day books,
- each ledger divided with a page for each individual customer/ supplier
- also records the cash receipts and cash payments related to each individual customer/ supplier
how do you record the 2 effects of items in the SOFP
- debit the “T” account for an asset if it increased and credit it if it decreased
- we debit the “T” account for a liability (or part of owners’ equity) if it decreased and credit it if it increased
how do we record the 2 effects of items in the IS
- credit the “T” account for a type of income when income is earned and debit it if it decreased
- we debit the “T” account for an expense when expense is incurred but credit it if it decreased
how do the day books and ledgers work best together
at any point in time, the 2 ledgers can be used to provide a list of all outstanding balances
1. owed to the business by receivables, separately by each customer
2. owed to payables to each supplier
because each individual cash payments and receipts are also recorded in the ledgers, the ledger entries are also related to the cash books
what is a general ledger
records are kept for all sorts of items (revenues and expenses, assets and liabilities and equity) in the account
records kept in the form of “T” accounts
what are journal entries and why are they important
a quick way to write down the 2 sides (debit and credit) of each double-entry
it is important to record as much info as possible in a journal in case u need to go back and check the details at a future date
they should include the date on which the entries were made in the T accounts, the names of the T accounts and the value of each entry
in what situation is can the opening balance of an account go on either side
the “T” account for cash at bank
if the business has money in the bank (+ve bank balance) then the opening balance is a debit because the cash is an asset
if negative bank balance = overdraft , this is a liability = balance is credit
what is the difference between closing “T” accounts in SOFP and IS
SOFP : the closing balance for such “T” accounts will be carried forward/ carried down to become the next period’s opening balances
IS: the balances dont get carried forward, they get transferred to the income statement, and eventually to retained profit reserve (SOFP “T” account)
- dont need to make entries to transfer IS items to the SOFP
how do we close off a “T” account
- calculate the totals of the debit and credit entries in the “T” account
- one total is usually greater than the other; calculate the difference between the 2 totals to give the closing balance
- add the closing balance to the side with the lowest total in order to make the totals in order to make the totals of the 2 sides agree
what happens to the accounting equation when a company buys a new asset on credit
e.g comouters
Dr computers
Cr acc payables
the asset account is increased by a debit and the liability is increased by a credit - keeps the accounting equation in balance
what happens to the accounting equation when a company depreciates an asset
Dr depreciation expense
Cr accumulated depreciation
the expense account is increased by a debit and the accumulated depreciation account is increased by a credit
what happens to the accounting equation when a company pays for an insurance policy
- Dr prepayment
Cr cash at bank - Dr insurance
Cr payments
