Chapter 3 - Double-Entry and the Accounting Equation

Question 1

What are double-entry accounts?

Answer 1

They record financial transactions and are written up from the books of prime entry e.g. DAY BOOKS and CASH BOOKS.

Question 2

What are the 4 types of financial transactions that Double - Entry accounts record?

Answer 2

1. ) What is owed on credit by individual CUSTOMERS as a result of SALES.
2. ) What is owed on credit to individual SUPPLIERS as a result of PURCHASES.
3. ) Income Items.
4. ) Expense Items.

Question 3

How are double-entry accounts organised?

Answer 3

They are grouped in different ledgers ( for CREDIT SALES, CREDIT PURCHASES and general accounts ).

Sales Ledger, Purchases Ledger and General Ledger.

Question 4

What is a ‘T’ account?

Answer 4

It is a way of setting out a double-entry account. There are two sides: (DEBIT on the LEFT), (CREDIT on the right).

Question 5

What is a bank account?

Answer 5

A separate record of the money paid into and out of the bank.

Question 6

BANK

How are DEBIT and CREDIT used when dealing with a bank statement?

Answer 6

Debit - Payment OUT of a customer’s account

Credit - Payment INTO a customer’s account

Question 7

BUSINESS

How are DEBIT and CREDIT used when dealing with a bank statement?

Answer 7

Debit - Money paid INTO the bank

Credit - Money paid OUT of the bank

Question 8

What 3 entries are always DEBITs?

Other account entry is CREDIT side of Bank Account

Answer 8

1. ) Purchases
2. ) Expenses
3. ) Assets Bought

Question 9

What 3 entries are always CREDITs?

Other account entry is DEBIT side of Bank Account

Answer 9

1. ) Sales
2. ) Capital
3. ) Loans

Question 10

What is the difference between paying for cash sales and sales made on CREDIT terms?

Answer 10

Cash Payment - Paying STRAIGHTAWAY

Credit Terms - Paying at a LATER date

Question 11

What are the double-entry rules for changes in ASSETS, LIABILITIES and CAPITAL?

( Debit and Credit )

Answer 11

DEBIT

• An increase in asset
• A decrease in a liability

CREDIT

• A decrease in asset
• A increase in a liability
• An increase in capital

Question 12

What 4 pieces of information is provided when balancing accounts?

Answer 12

1. ) Amount owing to each supplier ( Trade Payable ) - CREDITORS
2. ) Amount owed by each customer ( Trade Receivable ) - DEBTORS
3. ) Amount of sales and purchases and expenses
4. ) Amount of VAT due to, or from HM Revenue and Customs

Question 13

BALANCING ACCOUNTS

How are the accounts set out on the purchase ledger, sales ledger and general ledger?

Answer 13

Purchase Ledger - Suppliers who have supplied on credit - ‘TRADE PAYABLES’.

Sales Ledger - Customers who have bought on credit - ‘TRADE RECEIVABLES’.

General Ledger - Other accounts including SALES, PURCHASES, VAT, ASSETS , LOANS and EXPENSES.

Question 14

What are the 3 steps to balancing a Sales Ledger account?