Double Entry Flashcards
What is double-entry accounting?
A system of book keeping where every entry into an account requires a corresponding and opposite entry into a different account.
What are the two equal and corresponding sides of double-entry?
debit and credit
What is the left-hand side?
debit
What is the right-hand side?
credit
What are some examples of a normally debited account?
An asset account or an expense account.
In a normally debited account, what happens with a debit and credit, respectively?
A debit increases the total quantity of money or value, and a credit decreases the amount/value.
What are some examples of a normally credited account?
A liability account or a revenue account
What rules must be true for every transaction?
Every transaction always affects at least two accounts, it always has at least one credit and one debit, and the total credit and total debit always are equal. This keeps the account equation in balance.
“<span>If a business takes out a bank loan for $10,000, how would you record the transaction?</span>”
Debit $10,000 from an asset account called ‘Cash’, credit $10,000 to a liability account called ‘Notes Payable’
Assets = ???
Assets = Liabilities + Equity
What does the accounting equation (Assets = Liabilities + Equity) tell us when it’s out of balance?
If the sum of all debit accounts doesn’t equal the sum of all credit accounts, an error has occurred.<br></br><br></br>However, the inverse isn’t true - even if debits are balanced with credits, there may still be errors if the wrong ledger accounts were debited or credited.
How is an audit trail preserved when entering debits and credits?
Entries that debit and credit related accounts include the same date and identifying number, so that if there’s an error, it can be traced back to a journal and transaction source document.
Does it matter which accounts and how many accounts are involved in any given transaction?
No, if done properly, the fundamental accounting equation that assets equal liability plus equity will always hold.
What are the two ways to memorize the effects of debits and credits on accounts in double-entry?
There’s the Traditional Approach, and the Accounting Equation Approach.
What’s another name for the Traditional Approach to memorizing the affects of Double Entry?
The Brittish Approach.
How are accounts classified within the traditional approach?
- Real<div>2. Personal</div><div>3. Nominal</div>
In the Traditional Approach, what are real accounts?
Accounts pertaining to assets and liabilities including the capital account of the owner.
Within the traditional approach, what are personal accounts?
Mainly debtors and creditors - people or companies with whom the business has transactions.
Within the traditional approach to double entry, what is a nominal account?
Revenue, expenses, gains and losses.
What are the golden rules of accounting within the Traditional Approach?
Real accounts - debit what comes in, credit what goes out.<div><br></br><div>Personal accounts - debit the receiver, credit the giver</div><div><br></br></div><div>Nominal accounts - debit all expenses & losses, credit all incomes and gains.</div></div>
What’s another name for the Accounting Equation Approach?
The American Approach
What are the five types the accounting equation approach classifies all accounts under?
CLEAR<div><br></br></div><div><div>1. Capital</div></div><div><div>2. Liabilities<br></br></div></div><div>3. Expenses / Losses<br></br></div><div>4. Assets<div>5. Revenues / Income</div></div>
In the Accounting Equation Approach, what is the rule for capital accounts?
Credit represents an increase in capital, debit is a decrease in capital.
In the Accounting Equation Approach, what is the rule for liability accounts?
A credit is a liability increase, a debit is a decrease.
“<div><div><div><div><span>Why does debit increase assets and decrease liabilities?</span></div></div></div></div>”
“It flows from the accounting equation: Assets = Liabilities + Capital.<br></br><br></br><div>Capital increases with credits and decreases with debits, so the other side of the equation must work opposite of that.</div><div><br></br></div><div>Let’s say you purchase an asset, say, a stapler. It’s $100 for the stapler. Those funds will come from capital, so there are zero liabilities.</div><div><br></br></div><div>Assets = Liability + Capital</div><div><span>Assets = 0 + (-100)</span></div><div><span>Assets = -100</span><br></br></div><div><span><br></br></span></div><div><span><br></br></span></div>”
What type of accounts are bank accounts normally treated as?
Generally, they’re treated as asset accounts.
What does the trial balance list?
All of the the nominal ledger account balances.
What matters more than the name of an account type?
Just its normal balance - whether that is debit or credit. The names have been taken over by marketing speak.
What type of accounts have a normal balance of debit?
Assets, expenses and drawings.
What type of accounts have a normal balance of credit?
Liability, revenue and capital accounts.
In which accounts do debits increase the balance?
Assets, Drawings and Expenses.
In which accounts do debits decrease the balance?
Liability, Revenue and Capital
Credits increase the balance of which accounts?
Liabilities, Capital and Revenue.
Credits decrease the balance of which accounts?
Assets, Drawings and Expenses.
What are debit accounts?
Accounts that usually have debit balances (the total debits usually exceed the total credits) (Assets and Expenses)
What are credit accounts?
Accounts that usually have credit balances (Capital, Revenue and LIabilities)
What is the acronym DEADCLIC?
DEAD: Debit increases Expense, Asset and Drawing accounts, CLIC: Credit increases Liability, Income, and Capital accounts.
What is the current equity?
Assets minus Liabilities
What is the sum of equity changes across time?
Owner’s investment (capital above) + Revenues - Expenses
What is a company’s Statement of Financial Position?
That’s just another word for Balance Sheet
What does a company’s balance sheet reveal?
The company’s assets, liabilities, and the owners’ equity (net worth)
What three parts make up the cornerstone of a company’s financial statements?
Their balance sheet, their income statement and their cash flow statement.
What are assets?
The means used to operate the company.
