Double entry bookkeeping

Question 1

What is the four step route for financial statements?

Answer 1

1. daily transactions occur
2. these are recorded in ledgers
3. at the end of the year, ledgers are closed off and a trial balance is extracted
4. financial statement is produced

Question 2

Duel effect

Answer 2

every transaction has two effects

Question 3

Why is the dual effect there?

Answer 3

So balance sheet balances and accounting eq. equates

Question 4

Separate entity

Answer 4

owner of business and business itself are distinct - we only look at transactions from the business point of view

Question 5

accounting equation definition

Answer 5

the dual effect and separate entity lead to this as balance sheet is based on accounting equation

Question 6

main way to show accounting equation

break down of accounting equation

Answer 6

net assets = proprietor’s (business owners) funds

assets - liabilities = opening capital + profit - drawings
OR
assets - liabilities = capital –> assets = liabilities + capital

Question 7

what is the injection of capital

Answer 7

any funds injected into business ONLY by owner

Question 8

what are drawings?

Answer 8

when you withdraw money from business

we don’t take this from profits because we want to show as profit or loss the result of TLC’s trade (ignoring transactions between owner and business)

Question 9

what does double entry bookkeeping show?

Answer 9

a balance sheet