Chapter 3 - Double Entry Bookkeeping

Question 1

What is a sales order?

Answer 1

A customer writes out or signs an order for goods or services he/she requires

Question 2

What is a purchase order?

Answer 2

A business orders from another business goods or services, such as material supplies

Question 3

What is a ‘goods received’ note? where are they usually kept/used for?

Answer 3

A list of goods that a business has received from a supplier. usually used in the warehouse to confirm that goods have in fact been received before payment to the supplier

Question 4

What is a ‘goods despatched note’?

Answer 4

A list of goods that the business has sent out to a customer.

Question 5

What is a ‘statement’?

Answer 5

A document sent out by a supplier to a customer listing all invoices, credit noted and payments received from the customer.

Question 6

What is a ‘credit note’?

Answer 6

A document sent by a supplier to a customer in respect of goods returned or overpayments made by the customer. it is a ‘negative’ invoice.

Question 7

What is a ‘debit note’?

Answer 7

A document sent by a customer in respect of goods returned or an overpayment made. It is a formal request for the supplier to issue a credit note.

Question 8

What is a ‘receipt’?

Answer 8

A written confirmation that money has been paid. This is usually in respect of cash sales such as a till receipt from a cash register.

Question 9

What is a ‘bank statement’?

Answer 9

1. also a form of a source document.
2. may be received in hard copy or electronic
3. allow a business to check its bank balance

Question 10

Define invoice

Answer 10

Relates to a sale or purchase order

Question 11

What are the two types of invoice?

Answer 11

1. when a goods/services are sold on credit to a customer it is a formal request for payment
2. when a business receives or purchases good or services on credit the supplier sends them an invoice.

Question 12

What does an invoice show? (7)

Answer 12

1. name and address of seller & purchaser
2. date of sale
3. description of sale
4. quantity and unit price of what has been sold eg. 20 pairs of show at $25 a pair
5. details of any discounts.eg. 10% off when 100 shoes are bought
6. Total amount of invoice with details of the sales tax/GST/VAT
7. date payment is due and other terms of sale

Question 13

What are the uses for the different parts of a multipart invoice? (4)

Answer 13

1. top copy to customer as request for payment
2. second copy to accounts department to match eventual payment
3. third copy to warehouse to generate the despatch of goods (evidence = good despatch note)
4. fourth copy stapeled to sale order and kept in sales department as a record of sales.

Question 14

Fill in the blanks:
China supplies sends out a ………to a credit customer in order to correct an error where a customer has been overcharged on an ………..

Answer 14

credit note; invoice

Question 15

What are the main types of business transactions and what happens when they occur? (8)

Answer 15

1. Cash sales - receipt issued
2. Credit sales - invoice
3. Sales returns - credit note
4. Cash purchase - receipt recieved
5. Credit purchases - Invoice received
6. Purchases returns - credit note received
7. Receipts - either receipts for cash sale or credit sales
8. Payments - either payments for cash payments or payments to credit suppliers

Question 16

What are ledger accounts/general ledger used for?

Answer 16

to record all transactions that a business makes

Question 17

How should records of transactions, assets, and liabilities?

Answer 17

In chronological order and dated, cumulative totals (day by day, week by week, month by month, year by year).

Question 18

Define the general ledger

Answer 18

an accounting record which summarises the financial affairs of a business. all principle ledger accounts are kept in the general ledger.

Question 19

What does the general ledger usually contains the details of? (7)

Answer 19

assets, liabilities, capital, income, expenditure, profit and loss

Question 20

What are some examples of accounts in the general ledger?

Answer 20

Machinery at cost (non-current asset), machinery, provision for depreciation (liability), inventories - raw materials (current asset), wages and salaries (expense item), bank charges (expense item)

Question 21

Which types of accounts contribute to which sections of the financial statements? (2)

Answer 21

1. income and expense = profit and loss

2. Asset and liability = statement of financial position

Question 22

What is the structure of a ‘T’ account?

Answer 22

top = account name, left = debit, right = credit

Question 23

Define double entry bookkeeping

Answer 23

is base on the idea that each transaction has an equal but opposite effect. Every accounting event must be entered in ledger accounts both as a debit and as an equal but opposite credit.

Question 24

What is meant by the dual effect?

Answer 24

every transaction has two effects. eg if you buy a car for $1000 you have a car worth $1000 and $1000 less cash.

Question 25

What are the two rules of double entry bookkeeping?

Answer 25

1. a debit entry will increase an asset, decrease a liability and increase an expense whereas
2. a credit entry will decrease an asset, increase a liability and increase an income.

Question 26

What general rule of double entry bookkeeping must be observed at all times?

Answer 26

every financial transaction gives rise to two accounting entries, one a debit and the other a credit. therefore value of debits = value of credits.

Question 27

True or false. a decrease in expense or an increase in an asset is a debit entry

Answer 27

false. INCREASE in expense and INCREASE in asset = debit.

Question 28

True or false. an increase in revenue or an increase in a liability is a credit entry.

Answer 28

True.

Question 29

True or false. an increase in an asset is a credit

Answer 29

False a DECREASE in an asset is a credit

Question 30

True or false. a decrease in a liability is a debit

Answer 30

True

Question 31

decreasing cash = decreasing Asset =

Answer 31

CREDIT

Question 32

Increasing Asset =

Answer 32

DEBIT

Question 33

Increasing liability =

Answer 33

CREDIT

Question 34

What must accompany all journal entries for audit purposes?

Answer 34

a narrative explanation indicating purpose and authority of every journal entry

Question 35

A debit entry will…

Answer 35

• increase an asset
• decrease a liability
• increase an expense

Question 36

A credit entry will…

Answer 36

• decrease an asset
• increase a liability
• increase income