Chapter 2 - Double Entry Bookkeeping

Question 1

Cash book

Answer 1

Money in is recorded on the debit side

Money out is recorded on the credit side

Question 2

Capital account

Answer 2

Capital is the amount of money invested in the business by the owner. The amount is owed by the business back to the owner, however it is unlikely to be repaid as the business would not exist.

Capital introduced - debit bank account, credit capital account

Question 3

Non current assets

Answer 3

When a business buys non current assets, the expenditure is referred to as capital expenditure. Revenue expenditure is where the items bought will be used by the business quite quickly.

Debit non current asset account

Credit bank account or cash account

Question 4

Owners drawings

Answer 4

Drawings is the term used when the owner takes money out of the business for personal use.

Debit drawings account

Credit bank account

Question 5

Loans

Answer 5

When a business or organisation receives a loan it is the cash account or bank account which gains value while the loan account records the liability.

Debit bank account

Credit loan account

Question 6

Further transactions

Answer 6

Loan repayment:

Debit loan account, Credit bank account

Sale of a non current asset:

Debit bank account, credit non current asset account

Withdrawal of cash from the bank for use in the business:

Debit cash account, credit bank account

Payment of cash held by the business into the bank:

Debit bank account, credit cash account

Question 7

Credit transactions

Answer 7

Businesses usually record credit transactions in appropriate books of prime entry:

Credit purchases are entered in the purchases day book

Credit sales are entered in the sales day book

Question 8

Credit purchases

Answer 8

Debit purchases account, credit trade payables account

When payment is made to the supplier the bookkeeping entries are:

Debit trade payables account, credit bank account or cash account

Question 9

Credit sales

Answer 9

Debit trade receivables account, credit sales account

When payment is received from the customer the bookkeeping entries are:

Debit bank account or cash account, credit trade receivables account

Question 10

Non current assets bought on credit

Answer 10

Debit non current asset account, credit trade payables account

When payment is made to the supplier the bookkeeping entries are:

Debit trade payables account, credit bank account

Question 11

Purchase returns

Answer 11

A business returns goods to a supplier. The bookkeeping entries are:

Debit trade payables account, credit purchases returns account

Question 12

Sales returns

Answer 12

Customer returns goods to the business.
The bookkeeping entries are:

Debit sales returns, credit trade receivables

Question 13

Carriage inwards

Answer 13

The buyer pays the carriage cost of purchases

Debit carriage in account

Credit trade payables account or bank/ cash account

Question 14

Carriage outwards

Answer 14

The seller pays the carriage charge, eg an item is sold to the customer and described as post/ delivery free

Debit carriage out account

Credit bank/ cash account

Question 15

Prompt payment discount in bookkeeping

Answer 15

PPD is an allowance off the invoice amount for quick settlement, eg 2% discount for settlement within seven days. Where as a trade discount is a reduction in price when goods are supplied to other businesses or with bulk discount.

A business can be involved with prompt payment discount in two ways:

Discount allowed to customers

Discount received from suppliers

Question 16

Vat and double entry accounts

Answer 16

Businesses can claim back VAT paid on purchases of goods, non current assets and expenses which is known as input tax. A business must also charge VAT whenever it supplies goods or services which is known as output VAT.

When a business buys good the VAT is devoted to a separate account

When the business sells goods the VAT on the sale is credited to a different account.