Chapter 4

Question 1

What is the separate entity concept?

Answer 1

double entry bookkeeping is based on the premise that the business is a separate entity, distinct from the owner

Even if the business is owned and operated by one person

This means that if the owner puts capital into the business, the business “owes” that amount to the owner.

Question 2

What is the dual effect

Answer 2

‘duality’

The beauty of the system lies in the requirement that every transaction affects two accounts

For every entry there must be an equal and opposite entry.

Question 3

What is double entry bookkeeping?

Answer 3

Double entry bookkeeping is the recording of transactions in the nominal ledger, with two sides to every entry. There can be no single entries.

Question 4

Dual effect e.g.: Sole trader transfers $10,000 from her own account into the business bank account

Answer 4

Dual effect:
- Business cash increases by $10,000
- Capital (what the business owes the owner) increases by $10,000

Question 5

Dual effect e.g. Sole trader sells services on credit for $1,500.

Answer 5

Dual effect:
- Receivables increase by $1,500
- Sales increase by $1,500

Question 6

Double entry bookkeeping - the basics

Answer 6

all entries are classified as either debits or credits

DEAD CLIC

Question 7

DEAD CLIC: DEAD

Answer 7

Debits

Expense (e.g. rent, wages)
Asset (e.g. cash, receivables, fixtures and fittings)
Drawings (which is effectively a decrease in capital)

Decrease in liabilities (e.g. making payment to a supplier)

Question 8

DEAD CLIC: CLICL

Answer 8

Credits

Liability (e.g. payables, accruals)
Income (e.g. sales, interest receivable)
Capital (effectively a liability owed to the owners of the business

Decrease in asset (e.g. customer pays us so receivables are reduced

Question 9

What is ‘ledger’

Answer 9

Ledger is the term given to the account for each class of transaction.

Question 10

What is a ledger account

Answer 10

“A ledger account is a record of all transactions that affect a specific account within a general ledger”

They are written up manually as T-accounts. Debit entries are entered on the left and credit entries are entered on the right.

The cash ledger account represents the business’ bank account (so may be also be called the bank ledger).

Question 11

Entries D + C Example: Owner puts $100 into business

Answer 11

Asset (cash) increases
Capital increases

D - Cash $100
C - Capital $100

Question 12

Entries D + C Example: Business buys goods for $15 cash

Answer 12

Purchases (an expense) increases
Asset (cash) decreases

D - Purchases $15
C - Cash $15

Question 13

Entries D + C Example: Business buys goods for $40 on credit

Answer 13

Purchases (expense) increases
Liability (payables) increases

D - Purchases $40
C - Payables $40

Question 14

Entries D + C Example: Sell goods for $270 cash

Answer 14

Asset (cash) increases
Income (sales) increases

D-cash $270
C-sales $270

Question 15

Entries D + C Example: Sell goods for $350 on credit

Answer 15

Asset (receivables) increase
Income (sales) increase

D-receivables $350
C-sales $350

Question 16

Entries D + C Example: Buy machinery on credit for $200

Answer 16

Asset (non-current) increase
Liability (payables) increase

D - Asset - Machinery $200
C - payables $200

Question 17

Entries D + C Example: Pay wages $25 cash

Answer 17

Expense increases
Cash decreases

D - Wages $25
C - Cash $25

Question 18

Entries D + C Example: Pay rent $50 in cash

Answer 18

Expense increases
Cash decreases

D - rent $50
C - cash $50

Question 19

Entries D + C Example: Pay trade payable $40

Answer 19

Liability (payables) decreases
Asset (cash) decreases

D - payable $40
C - cash $40

Question 20

Entries D + C Example: Credit customer pays us $300

Answer 20

Asset (cash) increases
Asset (receivables decreasees

D - cash $300
C - receivables $300

Question 29

What must an accountant do to be able to proceed with producing financial statements? (having recorded the transactions)

Answer 29

The accountant has to close the books off