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

What is the process of closing off the books

Answer 11

1) Add the debit and credit sides separately and put the larger

Question 12

What is a debit balance?

Answer 12

debit> credits

Question 13

What is a credit balance?

Answer 13

credit> debit

Question 14

What is balance c/f?

Answer 14

Balance carried forward
- always on the smaller side

Question 15

What is balance b/f

Answer 15

balance brought forward
-always on the larger side

Question 16

What is the difference between expenses vs assets

Answer 16

expense = consumed quickly
e.g. fuel servicing and repairs

assets = used long term
e.g. the car

Question 17

What is the double entry for topping up petty cash?

Answer 17

Dr Petty Cash
Cr Cash

Question 18

DE for ‘return of faulty goods’ originally purchased on credit to a supplier

Answer 18

Dr Payables
Cr Purchases (400)

Question 19

DE for return of goods by unhappy credit customer

Answer 19

Dr Sales
Cr Receivables

Question 20

DE for bank interest received

Answer 20

Dr Cash
Cr Interest Income

Question 21

DE purchase replacement goods on credit

Answer 21

Dr Purchases
Cr Payables

Question 22

DE Refund customer who paid twice

Answer 22

Dr Receivables
Cr Cash