Double entry bookkeeping Flashcards
Explain the separate entity concept
Double entry bookkeeping is based on the premise that the business owner is a separate entity, distinct from the owner (even in the case of a sole trader) - this means that if the owner puts capital into the business, the business ‘owes’ that amount to the owner.
Explain the duality concept
Each transaction has an equal but opposite effect
What is double entry bookkeeping?
The method used to transfer totals from the books of original entry to the nominal ledger. Every accounting event must be entered both as a debit and a credit.
DEAD CLIC
Debits increase
Expenses
Assets
Drawings
Credits increase
Liabilities
Income
Capital
What are drawings?
Where the owner of a business takes cash out of the business
A debit can reduce what?
Liabilities, income and capital
A credit can reduce what?
Expenses, assets and drawings
How are ledgers typically written up?
As T-accounts with debit entries on the left and credit entries on the right
What does the cash ledger account represent?
The business’ bank account (why it is also known as the bank ledger).
What must be done after recording transactions before an accountant is able to produce financial statements?
The accountant has to close the books off.
What method do accountants use to close the books?
1) Add up debit and credit sides separately and put the larger sum in the total box on both sides.
2) The difference between the debit and credit sides of the account is the balance.
What is a debit balance?
Debits > Credits
(carried forward on the credit side but brought forward on the debit side)
What is a credit balance?
Credits > Debits
(carried forward on the debit side but brought forward on the credit side)
Difference between expenses and assets
Both are considered as debits BUT expenses represent things that are used up immediately WHILST an asset is generally used over a year or longer.
What are example of expenses and revenue with a company car?
The car itself is an asset as it will be used for many years to come (the cost of the car can be classed as capital expenditure) WHILST all the things you spend on to run the car are expenses (e.g., petrol, servicing, repairs) as these tings do not last and have no long term value (these costs can be classed as revenue expenditure).
