Double-Entry Bookkeeping Flashcards
What are the 5 categories in double-entry bookkeeping?
Assets, Liabilities, Equity, Revenue and Expenses.
The DE bookkeeping system is based on the principle that every financial transaction has 2 equal and opposite effects on the accounting equation:
Assets = liabilities + equity
Every transaction is recorded in at least 2 accounts: a debit and a credit account.
The debit entry represents the increase in one account, while the credit entry represents the decrease in another account.
Assets, liabilities and equity accounts are the main categories used in the DE system.
Eg of assets: cash, accounts receivable and inventory. Egs of Liabilities: accounts payable and loans payable. Equity: owners equity and retained earnings.
An increase in an asset account is recorded as…
A debit
An increase of a liability account is recorded as…
A credit
Decreases in liabilities and equity are recorded as
Debits
Expenses and losses are recorded as…
Debits
Dividends or withdrawals are recorded as…
Debits
Increases in liabilities and equity are recorded as…
Credits
Revenues, income and gains are recorded as…
Credits
If a business receives cash from a customer, the cash account(asset) decreases, so it is…
Debited
If a business receives cash from a customer, the accounts receivable account (asset) decreases, so it is..
Credited
If a business pays rent expenses in cash, the rent expense account (expense) increases, so it is…
Debited
If a business pays rent expenses in cash, the cash account(asset) decreases so it is….
Credited
If a business purchases inventory on credit from a supplier, the inventory account (asset) increases, so it is…
Debited
If a business purchases inventory on credit from a supplier, the accounts payable account (liability) increases, so it is..
Credited
If a business earns revenue from sales, the sales revenue account (revenue) increases, so it is..
Credited
If a business earns revenue from sales, the cash or accounts receivable (asset) increases, so it is …
Debited
4 steps of Double-Entry System
- Identify the Accounts affected
- Determine the type of Account: asset, liability, equity, revenue & expenses
- Record the Transaction
- Ensure the total Debits are Equal to the total Credits
Purchase Transactions, what is it and how is it recorded?
Purchase of goods and services from suppliers and are recorded as expenses.
Payment transactions, what are they and how are they recorded?
Payment of expenses from customers recorded as cash
What are Receipt Transactions and how are they recorded?
Receipt of payments from customers, recorded as cash
VAT paid by a customer is posted to which side of the VAT account in the general ledger, and why?
Credit! The business collects VAT from it’s customers which is then due to HMRC. So the posting on the credit side shows the liability the business has to HMRC.
Amounts owed to a business are classed as assets and are also know as
Trade receivables
Amounts owed to suppliers are classed as Liabilities and are also known as….
Trade Payables
