double entry book keeping Flashcards
what is double entry accounting?
it is the idea that for every transactions have two effects and you always record a debit and a credit
what is the accounting equation?
Assets = liabilities + equity
whats another word for equity?
capital
what side are debits and credits always on?
debits on the left credits on the right
who is the founder of double entry accounting?
luca pacioli
what is the sign for credits?
cr
what is the sign for debits?
dr
what is economic benefit?
the potential for an asset to contribute directly or indirectly to an entity’s flow of cash
what are the debits?
assets (SOFP)
expenses (SOPL)
Dividends
Expenses
Assets
what are the credits?
liabilities (SOFP)
equity (SOFP)
income (SOPL)
how do you remember debits and credits?
“all little elephants eat ice cream” or DEA (debits) LER (credits)
D
E
A
L
E
R
what is the accounting equation also called?
the balance sheet equation
what is the accounting process?
transaction occurs
effect recorded in ledger account
balance ledger accounts off
year end: produce trial balances
year end: adjustments made and ledger accounts closed off
prepare financial statements
what happens to debits on increase and decrease?
when debits increase we debit them and when they decrease we credit them eg assets expenses and dividends
what happens to credit on increase and decrease?
when credits increase we credit them when they decrease we debit them eg liabilities equity revenues (income)
what is an account receivable?
money you will receive and it is labelled as an asset
what is an account payable?
money you have to pay back to someone and it is seen as a liability
what happens to debits and credits when a customer pays?
assets are rising in the form of cash so we debit and trade receivables are falling as the money has been paid so we also credit as it is an asset
what are purchases listed as?
an expense
what happens when you pay a phone bill?
expenses rise meaning we debit and assets fall due to a loss of cash and therefore we credit
what is a ledger?
an account in which transactions are recorded
what form can ledger accounts be in?
t accounts or three column ruling
what do we put in the description of t accounts and three column ruling?
the opposite account so if we have cash and expenses we will put expenses in the cash description and cash in the expenses description
what happens when u open an account and it happens again?
dont open a new account use the same one
what does a trial balance do?
shows the totals of all ledger accounts and whether they are debits or credits making sure the two side are equal
what do we put in a purchases account?
goods purchased with the intention of resale
what is in a three column ruling at the top?
date, description, cr, dr, balance
in a three column ruling what do we do to credits in the balance or total part
we put credits in brackets
what is accrual accounting?
transactions and expenses recorded at the time they happen and not when the cash changes hands, it must be reported in the accounting period it took place
what happens to debits and credits when you sell on credit?
you sell with the intention of getting money in the future therefore trade receivables rise and assets go up meaning you debit it and as well as this revenues go up so you credit it
in the final publishing do you use customer names or keep all trade receivables together?
keep together for security reasons
what are receipts?
when a customer pays you back
how should we recognise costs?
you account for all costs including costs it takes for you to get the asset in working condition, to the location of work or a useable state which you then capitalise
what does capitalise mean?
to count something as an asset
if there is further improvements or repairs to the asset what happens?
if it adds to the life or benefit to the asset you treat this as an asset however if it only maintains and keeps it at the sam standard this is then an expense
what is cash accounting?
you recognise income when cash is received and expenses when payment is made to suppliers
what is share capital?
ordinary share price x number of shares sold
what is Equity capital?
funds paid into a business by investors in exchange for common stock or preferred stock it includes share capital and premium
what is share premium?
how much more you make from selling shares than share capital
what is an initial public offering?
first time shares are issued to the public
does investors selling stocks to other investors get recorded?
no
what is interaction between shares determined by?
demand and supply
does the trial balance mean everything has been accounted correctly?
no
what is insurance premium?
the amount of money you pay for an insurance policy and is an expenseA`
