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Bookkeeping Transactions Level 2 > Chapter 3- Double entry and the Accounting Equation > Flashcards

Chapter 3- Double entry and the Accounting Equation Flashcards

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1
Q

Bank Account with capital letters means:

A
  • a ledger account in the books of the business

- set up by the business to record bank transactions

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2
Q

bank account with lower case letters means:

A
  • an account held at the bank
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3
Q

What are double- entry accounts?

A
  • an accounting system which involves 2 entries for a transaction: one debit & one credit
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4
Q

What do double-entry accounts record?

A
  • what is owed on credit from customers
  • what is owed on credit to suppliers
  • income items
  • expense items
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5
Q

What can be double-entry accounts?

A
  • accounts for types of income and expenses
  • accounts for assets
  • accounts for liabilities
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6
Q

Types of income:

A
  • sales
  • rent revenue
  • interest revenue
  • dividend revenue
  • profit
  • trading & non-trading activities
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7
Q

Types of expenses:

A
  • purchases
  • wages
  • insurance
  • salaries
  • bills
  • legal fees
  • security
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8
Q

What is an asset?

A
  • items owned by a business
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9
Q

What is a liability?

A
  • amounts owed by a business
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10
Q

How is a double-entry account organised?

A
  • double entry accounts are grouped in different ledgers (for credit sales, credit purchases, general accounts)
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11
Q

What is a sales ledger?

A
  • accounts for customers who buy on credit or who owe money to the business
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12
Q

What is a purchases ledger?

A
  • accounts for suppliers who supply on credit to a business or whom the business owes money to
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13
Q

What is a general ledger?

A
  • accounts for assets, liabilities, capital, expenses, income
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14
Q

What are the 3 main principles of double- entry bookkeeping?

A
  • separate entity concept
  • ‘dual effect’
  • accounting equation
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15
Q

What is the separate entity concept?

A
  • the owner of a business is a completely separate entity to the business itself
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16
Q

What is the ‘dual effect’?

A
  • when each and every transaction has 2 effects on the business
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17
Q

What is the ‘dual effect’ principle’?

A
  • one debit and one credit entry
  • one account will be debited= receiving value
  • other account will be credited= giving value
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18
Q

Debits:

A
  • debit= gains value, records an asset or an expense
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19
Q

Credits:

A
  • credit= gives value, records liability or a income item
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20
Q

The IN and OUT rule for a double entry account:

A
  • in= left side= debit

- out= right side= credit

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21
Q

Debits and Credits for a Bank Account differ from a business bank account as:

A
  • banks see debit as payment out

- banks see credit as payment in

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22
Q

Businesses see debits and credits as:

A
  • money paid into bank is a debit

- money paid out of bank is a credit

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23
Q

Rules for Debits and Credits:

A

Bank Account:

  • money in= debit
  • money out= credit
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24
Q

What does PEARLS stand for?

A 
P= purchases (always debit entry)
E= expenses  (always debit entry)
A= assets        (always debit entry)
R= revenue (always credit entry)
L= liability   (always credit entry)
S= sales       (always credit entry)
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25
Q

Purchases (always debit) include:

A
  • raw materials

- finished goods

26
Q

Expenses (always debit) include:

A
  • running costs
  • wages
  • salaries
  • rent
  • insurance
  • advertising
27
Q

Assets (always debit) include:

A
  • fixed assets: land, buildings, fixtures and fittings etc

- current assets: bank, debtors, cash, stock, computers, vehicles

28
Q

Revenue (always credit) include:

A
  • income earned over a certain period of time
29
Q

Liabilities (always credit) include:

A
  • long term liabilities: loan, mortgage etc
  • current liabilities: creditors, bank overdraft

(Money the business owes)

30
Q

Sales (always credit) include:

A

-money received from goods sold or services provided

31
Q

Capital (always credit) include:

A
  • money paid in by the owner
32
Q

What is DEAD CLIC?

A 
D= debtors (debit entry)
E= expenses (debit entry)
A= assets (debit entry)
D= drawings (debit entry)
C= capital (credit entry)
L= liability (credit entry)
I= income (credit entry)
C= creditors (credit entry)
33
Q

Debtors (debit entry) include:

A
  • customers who owe a business money

- current asset

34
Q

Drawings (debit entry) include:

A
  • cash or goods taken from the business for personal use
35
Q

Income (credit entry) include:

A
  • money earned by the business from trading and non- trading activities
  • non trading: discount received, commission received
36
Q

Creditors (credit entry) include:

A
  • creditors are a liability and people who the business owes money to
37
Q

What is the difference between a cash and credit transaction?

A
  • cash= immediate payment

- credit= payment at a later date

38
Q

Credit transactions= double entry transactions because:

A
  • the first when credit sale/purchase takes place

- the second when payment is made

39
Q

Cash transactions= one double-entry transaction because:

A
  • payment is made straight away
40
Q

What will be debit entries?

A
  • assets
  • customer accounts (debtors)
  • expenses
  • purchases
41
Q

What will be credit entries?

A
  • liabilities
  • supplier accounts (creditors)
  • sales (other income)
  • capital
42
Q

What are the 2 financial statements that are made at the end of the accounting process?

A
  • Statement of Profit and Loss

- Statement of Financial Position

43
Q

Statement of Profit and Loss shows:

A
  • shows how much profit or loss a business has made
44
Q

Statement of Financial Position shows:

A
  • shows how the assets of the business are financed

- this also reflects the ‘accounting equation’

45
Q

What is the accounting equation?

A

Assets - liabilities = capital

46
Q

Double entry rules for changes in assets include:

A
  • an increase = debit entry

- a decrease = credit entry

47
Q

Double entry rules for changes in liabilities includes:

A
  • an increase = credit entry

- a decrease = debit entry

48
Q

Double entry rules for changes in capital includes:

A
  • increase = always credit

- capital increases as the business grows and makes profit

49
Q

Examples of assets:

A
  • property
  • vehicles
  • computers
  • inventory
  • money due from customers
  • money in the bank & cash
50
Q

Entries to asset accounts:

A
  • asset increases= debit

- asset decreases= credit

51
Q

Liability and Capital accounts:

Examples of liabilities:

A
  • bank loans
  • bank overdrafts
  • loans from other sources
  • money due to suppliers
52
Q

Entries to the liability account:

A
  • liability decreases = debit
  • liability increases = credit
  • an increase in capital= credit
53
Q

What are the books of prime entry?

A

-the first place in the accounting records of a business where financial transactions are recorded, using details from business documents

54
Q

What is the day book?

A
  • a book of prime entry which lists the details of various financial transactions
  • sales day book (list of sales invoice)
  • cash book (compiled from bank transactions)
55
Q

What is a cash book?

A

-the book of prime entry which lists payments in and out of an account at the bank

56
Q

What is a double-entry?

A

-an accounting system which normally involves two entries for each transaction (a debit and a credit)

57
Q

What are ledger accounts?

A

-double entry accounts for financial transactions involving individuals (credit customers/suppliers), assets, purchases, expenses, income, liabilities and capital

58
Q

What is the ledger?

A
  • means ‘the book’ which contains the individual ledger accounts
  • sales ledger (customer)
  • purchases ledger (suppliers)
  • general ledger (other accounts)
59
Q

What is the Statement of Financial Position?

A
  • one of the final accounts of a business
  • shows the owners capital
  • capital= total assets - total liabilities
60
Q

Accounting Equation:

A

Total Assets - Total Liabilities = Capital

61
Q

What is account balancing?

A
  • the process of calculating the difference between the totals of debit and credit columns of a ledger account

Bookkeeping Transactions Level 2 (11 decks)

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