chapt 4: double entry book-keeping

Question 1

what is the concept of duality

Answer 1

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

Question 2

what are the three main books of prime entry (source books)

Answer 2

1. cash book
2. sales day book
3. purchases day book

Question 3

why are the books of prime entry important

Answer 3

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

Question 4

what are the 2 ledgers most businesses keep

Answer 4

1. sales (or receivables) ledger
2. purchases (or payables) ledger

Question 5

what are ledgers

Answer 5

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

Question 6

what is the cash book

Answer 6

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)

Question 7

what are sales day books

Answer 7

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

Question 8

what is a purchases day book

Answer 8

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

Question 9

why is it important to include the date and name of customer/ supplier for each transaction

Answer 9

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)

Question 10

what is an audit trail

Answer 10

some businesses keep an audit trail = keeping records of info which allows the business to retrace its steps and check its records

Question 11

how are goods returned recorded

Answer 11

they are recorded on a credit note which is much like a negative invoice

Question 12

how are sales credit and purchase credit notes recorded

Answer 12

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

Question 13

how do ledgers work

Answer 13

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

Question 14

how do you record the 2 effects of items in the SOFP

Answer 14

1. debit the “T” account for an asset if it increased and credit it if it decreased
2. we debit the “T” account for a liability (or part of owners’ equity) if it decreased and credit it if it increased

Question 15

how do we record the 2 effects of items in the IS

Answer 15

1. credit the “T” account for a type of income when income is earned and debit it if it decreased
2. we debit the “T” account for an expense when expense is incurred but credit it if it decreased

Question 16

how do the day books and ledgers work best together

Answer 16

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

Question 17

what is a general ledger

Answer 17

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

Question 18

what are journal entries and why are they important

Answer 18

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

Question 19

in what situation is can the opening balance of an account go on either side

Answer 19

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

Question 20

what is the difference between closing “T” accounts in SOFP and IS

Answer 20

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

Question 21

how do we close off a “T” account

Answer 21

1. calculate the totals of the debit and credit entries in the “T” account
2. one total is usually greater than the other; calculate the difference between the 2 totals to give the closing balance
3. 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