Chapter 3- Double entry and the Accounting Equation Flashcards
Bank Account with capital letters means:
- a ledger account in the books of the business
- set up by the business to record bank transactions
bank account with lower case letters means:
- an account held at the bank
What are double- entry accounts?
- an accounting system which involves 2 entries for a transaction: one debit & one credit
What do double-entry accounts record?
- what is owed on credit from customers
- what is owed on credit to suppliers
- income items
- expense items
What can be double-entry accounts?
- accounts for types of income and expenses
- accounts for assets
- accounts for liabilities
Types of income:
- sales
- rent revenue
- interest revenue
- dividend revenue
- profit
- trading & non-trading activities
Types of expenses:
- purchases
- wages
- insurance
- salaries
- bills
- legal fees
- security
What is an asset?
- items owned by a business
What is a liability?
- amounts owed by a business
How is a double-entry account organised?
- double entry accounts are grouped in different ledgers (for credit sales, credit purchases, general accounts)
What is a sales ledger?
- accounts for customers who buy on credit or who owe money to the business
What is a purchases ledger?
- accounts for suppliers who supply on credit to a business or whom the business owes money to
What is a general ledger?
- accounts for assets, liabilities, capital, expenses, income
What are the 3 main principles of double- entry bookkeeping?
- separate entity concept
- ‘dual effect’
- accounting equation
What is the separate entity concept?
- the owner of a business is a completely separate entity to the business itself
What is the ‘dual effect’?
- when each and every transaction has 2 effects on the business
What is the ‘dual effect’ principle’?
- one debit and one credit entry
- one account will be debited= receiving value
- other account will be credited= giving value
Debits:
- debit= gains value, records an asset or an expense
Credits:
- credit= gives value, records liability or a income item
The IN and OUT rule for a double entry account:
- in= left side= debit
- out= right side= credit
Debits and Credits for a Bank Account differ from a business bank account as:
- banks see debit as payment out
- banks see credit as payment in
Businesses see debits and credits as:
- money paid into bank is a debit
- money paid out of bank is a credit
Rules for Debits and Credits:
Bank Account:
- money in= debit
- money out= credit
What does PEARLS stand for?
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)
Purchases (always debit) include:
- raw materials
- finished goods
Expenses (always debit) include:
- running costs
- wages
- salaries
- rent
- insurance
- advertising
Assets (always debit) include:
- fixed assets: land, buildings, fixtures and fittings etc
- current assets: bank, debtors, cash, stock, computers, vehicles
Revenue (always credit) include:
- income earned over a certain period of time
Liabilities (always credit) include:
- long term liabilities: loan, mortgage etc
- current liabilities: creditors, bank overdraft
(Money the business owes)
Sales (always credit) include:
-money received from goods sold or services provided
Capital (always credit) include:
- money paid in by the owner
What is DEAD CLIC?
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)
Debtors (debit entry) include:
- customers who owe a business money
- current asset
Drawings (debit entry) include:
- cash or goods taken from the business for personal use
Income (credit entry) include:
- money earned by the business from trading and non- trading activities
- non trading: discount received, commission received
Creditors (credit entry) include:
- creditors are a liability and people who the business owes money to
What is the difference between a cash and credit transaction?
- cash= immediate payment
- credit= payment at a later date
Credit transactions= double entry transactions because:
- the first when credit sale/purchase takes place
- the second when payment is made
Cash transactions= one double-entry transaction because:
- payment is made straight away
What will be debit entries?
- assets
- customer accounts (debtors)
- expenses
- purchases
What will be credit entries?
- liabilities
- supplier accounts (creditors)
- sales (other income)
- capital
What are the 2 financial statements that are made at the end of the accounting process?
- Statement of Profit and Loss
- Statement of Financial Position
Statement of Profit and Loss shows:
- shows how much profit or loss a business has made
Statement of Financial Position shows:
- shows how the assets of the business are financed
- this also reflects the ‘accounting equation’
What is the accounting equation?
Assets - liabilities = capital
Double entry rules for changes in assets include:
- an increase = debit entry
- a decrease = credit entry
Double entry rules for changes in liabilities includes:
- an increase = credit entry
- a decrease = debit entry
Double entry rules for changes in capital includes:
- increase = always credit
- capital increases as the business grows and makes profit
Examples of assets:
- property
- vehicles
- computers
- inventory
- money due from customers
- money in the bank & cash
Entries to asset accounts:
- asset increases= debit
- asset decreases= credit
Liability and Capital accounts:
Examples of liabilities:
- bank loans
- bank overdrafts
- loans from other sources
- money due to suppliers
Entries to the liability account:
- liability decreases = debit
- liability increases = credit
- an increase in capital= credit
What are the books of prime entry?
-the first place in the accounting records of a business where financial transactions are recorded, using details from business documents
What is the day book?
- 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)
What is a cash book?
-the book of prime entry which lists payments in and out of an account at the bank
What is a double-entry?
-an accounting system which normally involves two entries for each transaction (a debit and a credit)
What are ledger accounts?
-double entry accounts for financial transactions involving individuals (credit customers/suppliers), assets, purchases, expenses, income, liabilities and capital
What is the ledger?
- means ‘the book’ which contains the individual ledger accounts
- sales ledger (customer)
- purchases ledger (suppliers)
- general ledger (other accounts)
What is the Statement of Financial Position?
- one of the final accounts of a business
- shows the owners capital
- capital= total assets - total liabilities
Accounting Equation:
Total Assets - Total Liabilities = Capital
What is account balancing?
- the process of calculating the difference between the totals of debit and credit columns of a ledger account
